Domestic Savings and the Indian Perspective

Topics: Investment, Economics, Capital accumulation Pages: 6 (1925 words) Published: August 23, 2013
Savings is the difference between Income and Expenditure.A high level of savings helps the economy to progress on a continuous growth path since Investment is mainly financed out of savings. Given the importance of savings there have been extensive studies on the behavioral and other factors, which influence savings. Savings is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan saving also includes reducing expenditures, such as recurring costs. In terms of personal finance, saving specifies low-risk preservation of money, as in a account, versus investment, wherein risk is higher.Saving represents the excess of current income over current expenditure and it is the balancing item of the income and expenditure accounts and use of disposable income account of producing enterprises and households, government administration and other final consumers. For preparation of the estimates of domestic saving, the economy has been divided into three broad institutional sectors, which are:- 1. Public Sector

2. Private Corporate sector
3. Household Sector.

The Former Patterns of Indian Household Savings
Gross Domestic Savings in India has shown a steady and substantial rise from the 1950s along with the rise in income. As per Indian National Accounts, Gross Domestic Savings includes current transfers from Indian emigrants and net factor income from abroad. The overall savings period in India is roughly divided into five phases based on the careful identification of the distinctive phases starting from the year 1950.The household sector which is comprised of the pure households, non corporate enterprises in agriculture, trade and industry and private non profit making trusts, has retained a high savings rate in comparison to public sector savings and private corporate sector savings in all the phases. The savings rate overall and the household savings rate took a sharp upturn in the 1970s, marginally increased thereafter, and then again took an upturn from the 1980s. A thought suggests that the rapid expansion of banks, after their nationalization in 1969, contributed to increased savings of people by lowering the transaction costs of saving. Another contributing factor was the remittances from the Indian expatriates from the Gulf countries. Moreover, the Green Revolution in the late 1960s substantially contributed to increase in rural incomes. The second expansion from the mid 1980s to present can be attributed to the Economic Reforms initiated in 1985 and thereafter accentuated from 1991. 1984-85 to 1995-96 was a remarkable phase of growth of the Indian economy. The jump in savings rate only substantiated the hypotheses that, economic liberalization did promote savings through economic growth. Factors Affecting The Indian Household Savings

The Keynesian theory explains that the prime determinant of saving is income that has withstood the test of time, while empirical evidence does not corroborate the ability of other variables like interest rates, inflation and tax rates to influence savings. A. Income

Gross Domestic Savings in India has shown a steady and substantial rise from the 1950s along with the rise in income (GDP). There is a correlation between the rise in income and the rise in national savings. This proves that the Keynesian theory of income being the primary determinant of saving holds true in India also. Moreover, it was permanent income, which was the critical determining factor rather than transitory income. In the initial stages of development, the level of income is an important determinant of the capacity to save. B. Economic Liberalization GDP Growth and Savings Rate

Economic liberalization measures initiated in mid 1980s (accentuated from 1991) had contributed to GDP growth rate (average growth rate 5.6%) and the savings rate (17%),we observe that the GDP has continued...
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