India Intelligence Report

   Higher Savings Needed for Higher Economic Growth



  • Planning Commission wants higher savings rate for higher growth

  • Higher FDI is required to achieve 8-9% GDP growth

  • Economic Reforms opposed by Government’s communist allies

The Planning Commission has warned that the present savings rate of 28-29% could merely ensure a GDP growth rate of about 7.5 per cent and higher savings and foreign direct investment (FDI) is necessary to get a growth of 8-9% in the 11th financial plan.

The Commission said that a savings rate of 32% and the “only way to push up the saving rate, will be to work out a package of fiscal incentives to get people and companies to save more.” This recommendation is in sharp contrast with the finance ministry’s efforts to raise revenue by cutting tax exemptions on savings.

Officials say that a variety of tax saving schemes is “not needed” and a mere “broad direction” “should be done, especially in the pension and insurance sectors, which primarily finance long gestation infrastructure projects.” The United Progressive Alliance (UPA) Government is planning to introduce legislation to open up the pension sector, with up to 26 per cent FDI followed by incentives in the next budget. The Government seems to be of the opinion that “Opening up the sector will bring in more funds into play” including attracting “large amounts of FDI.”

Desperate for FDI, the UPA will like to reform retail, infrastructure, mining, and power but would face considerable opposition from the communists whose support they need to stay in power. Multinationals are asking the Government to reform for 100% FDI, especially in mining. Domestic companies are opposed to export of scarce minerals and this will likely show up in the upcoming review of the National Mineral Policy. However, the export of raw materials without a policy to export manufactured goods is not good economics. China follows a policy of importing raw materials and exporting manufactured goods of higher value.

It is possible to accommodate 100% FDI in mining if the miners bring in either capital or partners that can process the mined material to valued added goods. Now, that would be good economics.