A number of consumer goods are quoted as a proof of momentum in the economy in the developed and not in developing world where economic growth is a function of an increase in investment by discouraging consumption and encouraging household savings unless a country has chosen not to exploit any further its untapped investment potential

LOW savings rates are used by our economic managers as a principal reason for relying upon foreign savings, (loans and investment) for fixed investment for achieving targeted rate of economic growth.

The Medium Term Development Framework (2005-2010) (MTDF),however, reiterates that “raising national savings and investment rates is a pre-requisite for sustainable economic development”.

And it builds up its model for achieving targeted investment of Rs7951.9 billion over a five-years period, financed by national savings to the extent of 88.3 per cent with household savings contributing 62.6 per cent of total investment. Hence, the document makes a vow that “ the MTDF will focus on improving the avenues of household savings” With household savings assigned as main source of financing of our development programme so as to attain an average growth rate of 7.6 per cent per annum over a five-years’ period, let us look at the trend in household savings.

Household savings have shown a continuous declining trend over past two years, sliding down from 16.8 per cent of GDP in 2002-03 to 10.8 per cent in 2004-05.This decline in the household savings negates the assumption of the planners to raise 62.6 per cent of household savings for financing their targeted investment and reveals serious fault lines in the economy for raising the level of household savings. A decline in household savings is the outcome of a number of factors including a deliberate policy of encouraging consumerism. An important factor contributing to lowering of household savings rate is a rising rate of poverty which is adding to the number of households living below poverty line. Obviously, this trend is impacting adversely on aggregate level of household savings. The other factor is a rising rate of inflation as given in the Table 1.

The increasing rate of inflation is continuously eroding purchasing power of income of small savers from whom bulk of household savings are mobilized.

The third factor is rate of unemployment which rose from six in 2000-01 to 7.69 per cent in 2004-05. A rising unemployment rate is impinging heavily on household money-incomes and is reducing household savings.

These factors apart, a deliberate policy of encouraging consumerism is being practised so that growth momentum is maintained through strong demand for consumer goods. This policy is motivated on account of a decline in gross fixed investment over four years as set out in the Table–II

A deliberate policy to encourage consumerism as a policy tool is evident from the statements of our economic managers who keep on claiming robustness of the economy by quoting growth in the domestic demand and increased production and supply of cars, motorcycles, fridges, air conditioners, T.V.sets, cellular telephones etc rather than quoting the demand of components that form investment goods basket.

They forget that such numbers of consumer goods are quoted as a proof of momentum in the economy in a developed and not in developing world where economic growth is a function of an increase in investment by discouraging consumption and encouraging household savings unless a country has chosen not to exploit any further its untapped investment potential.

The policy tools are supportive of encouraging consumption. There is an increased flow of credit to consumers for purchase of consumer goods from banking and non-banking financial institutions. Their consumer banking departments are engaged in offering ‘ attractive’ packages to consumers for purchase of a whole range of consumer goods from borrowed funds.

While the flow of credit to consumers continues to grow, the returns on savings by depositors have been made so low that thrift is penalized. The weighted average return to depositors as in June, 2005 was just 1.85 per cent as against weighted average lending rate of 8.41 per cent (including zero mark up).

At this level, with inflation pitched at 9.4 per cent, the return to savers/ depositors have become absolutely negative with no incentive left for people to save.

The share of corporate savings in overall national savings was 8.4 percent as compared with the share of household savings at 62.6 per cent. Yet, fiscal incentives continue to be provided to big corporates as a part of business-friendly policy by reducing corporate tax, tariffs etc while small household savers are denied tax rebates in respect of investments made in long term instruments such as life insurance, new share floatations, mutual funds, etc.

Within the contradictions inherent in current economic framework, the projections made in the MTDF for financing 62.2 per cent of targeted investment from household savings will remain an illusion unless fault lines are removed and policies attuned to rewarding thrift rather than extravagance.