According to Nomura, savings rate in India can be improved if fiscal consolidation continues and if inflation moderates, which will pave the way for higher income growth over time
There is stabilisation in the domestic savings rate in India and it is a positive, says Nomura in a research note. Looking ahead, the savings rate can be improved if fiscal consolidation continues and if inflation moderates, paving the way for higher income growth over time. Only then will India be able to finance its investment needs domestically without depending excessively on foreign capital, it added.
According to the national income identity, the current account balance is the gap between domestic savings and domestic investments. The deterioration in India's current account deficit over the last four years can be explained, says Nomura, by the sharper fall in domestic savings (36.8% of GDP in FY08 to 30.1% in FY13) relative to investments (38.1% to 34.8%). This is shown in the chart below:
During FY14, Nomura expects the current account deficit (CAD) to moderate to less than 2% of GDP from 4.7% in FY13. Advanced GDP estimates suggest that investments have continued to moderate, partly explaining the narrower current account deficit, but a stabilisation in the savings rate has also played a role, argues Nomura. The savings rate has stabilised due to ongoing fiscal consolidation (i.e., better public savings), concludes the research note.
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