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Struggling Indian Savers Threaten Prime Minister Narendra Modi's Growth Ambition

It's a worry for Prime Minister Narendra Modi who aspires to achieve economic growth rates of 8-9 per cent - much higher than the current 7.1 per cent - not only to replicate China's growth miracle but also to create jobs for the one million people who join India's workforce every month

Photo Credit : Reuters


For India's dream of taking the baton of global growth from China, its savings rate is flashing a warning sign.

Gross national savings as a per cent of the South Asian nation's gross domestic product will slip this year to 30.2 per cent, the lowest since 2003, and fall further over the next two years, the International Monetary Fund forecasts.

Since companies use domestic savings to fund their capital spending, the fall would increase their vulnerability to external risks - such as uncertainty over the US presidential election or the prospect of monetary tightening there - that could staunch the flow of cheap investment dollars to emerging markets such as India.

It's a worry for Prime Minister Narendra Modi who aspires to achieve economic growth rates of 8-9 per cent - much higher than the current 7.1 per cent - not only to replicate China's growth miracle but also to create jobs for the one million people who join India's workforce every month.

Nearly two-thirds of India's 1.3 billion people are under 35 years old. But to fully harness the biggest youth bulge the world has ever seen, economists say its saving rate needs to be around 35 per cent.

"Raising the savings rate is one of the main pre-conditions for India's long-term sustainable growth," said Hanna Luchnikava-Schorsch, senior economist for Asia Pacific at IHS Markit.

The tiger economies of China and East Asia realised their economic potential by keeping their savings rates above 30 per cent for decades.

But India's economic travails stem from flagging investment, which as a proportion of GDP fell by about 3 percentage points to 29.6 per cent of GDP in the June quarter from a year ago.

Its infrastructure development has failed to keep up with the increasing needs of the economy. The World Bank estimates that Asia's third-largest economy needs up to $1.7 trillion to close its infrastructure gap.

Households are the main source of savings in India, but years of high inflation, weak job creation, sluggish growth in incomes and two successive droughts have left their finances under siege.

Take Manohar Lal, a 50-year-old marketing manager at an electric cable company in New Delhi, who is struggling to pay for his kids' education and mother's medical bills on his monthly income of $1,120.

While his salary has grown by an average 8 per cent in the past three years, Lal's spending on tuition fees and medicines have shot up by nearly 40 per cent, leaving him with little to save for his retirement.

Pressing him further is India's bid to stimulate consumption through low interest rates. As inflation has fallen in recent years, the Reserve Bank of India has cut its official rates by 175 basis points - and banks have cut deposit rates accordingly.

"In all, I am saving barely a fourth of what I used to," Lal said. "The way things are, I would be lucky if I just manage to provide a quality education to both the kids."

To get by, Lal has cut down spending on movies and clothing. Dining out has become a "luxury" for his family, Lal said.

Government officials say the savings rate should bottom out of its own accord thanks to an expected improvement in rural incomes after a good monsoon, better corporate profits and, most importantly, a sharp moderation in retail inflation.

The slide also poses a dilemma for the RBI, which is widely expected to respond to a decline in inflation to 4.3 per cent with further cuts in its 6.25 per cent policy rate.

Former RBI chief Raghuram Rajan advocated maintaining a real interest rate of 1.5-2 percentage points to protect savers. Still, Rajan said small savers would send him heart-rending letters, complaining about cuts in retail deposit rates.

Following his recent departure, the central bank lowered its real interest rate target - or the margin by which its policy rate exceeds inflation - to 1.25 per cent.

With the new regime at the RBI under Governor Urjit Patel sounding dovish, the odds are high the target would come down further.

Globally interest rates are on a downward trajectory, with some central banks in the developed world using negative rates to boost consumption.

"If you continue to compress real rates, savings will fall and dependence on capital inflows will rise, which can get risky if oil prices abruptly shoot up," said Sonal Varma, Chief India Economist at Nomura.

A search for higher yields by India's small savers has reduced growth in bank deposits to its lowest level in 53 years. Cash held by households has, meanwhile, surged 40 per cent from last year to $266 billion.

Low returns on bank deposits are also goading some like Madhav Narayan to resort to riskier ways to augment their incomes.

The 45-year-old school teacher in New Delhi lends a part of his $745 monthly salary in unsecured short-term loans. The return he makes is twice the rates on bank deposits, but he also runs a greater risk of losing money.

"The government, the RBI - no one cares for common people like us," Narayan said. "You have no option but to fend for yourself."