Current Economic Statistics and Review For the Week Ended September 15

Report of the Working Group on Savings for the
Eleventh Five-Year Plan (2007-08 to 2011-12) *

As the Indian economy was stepping into the 11^th Five-Year Plan (FYP) period, the Planning Commission, Government of India, had set up a Working Group on Savings (WGS) to assess the likely resources that could be generated to achieve the targets set for the Plan period for various macro-economic spheres, in particular GDP, savings and investment. The WGS, chaired by Dr. Rakesh Mohan, Deputy Governor, Reserve Banking of India (RBI), assessed the likely resources and submitted its report to the Government of India in December 2006. Subsequently, the RBI published the Report in its monthly Bulletin (May 2007). An attempt is made in this paper to summarise the Report of Working Group with a brief review of the targets set and achieved for the 10^th FYP period.

The target for real GDP growth rate for 10^th FYP had been set at 8 per cent, alongside setting growth targets for different economic activities, as given in Table 1. As shown in the same table, the target for GDP growth has been more of less attained. However, considering different economic activities, the targets have been achieved more than the set rates in some sectors [like mining and quarrying, construction] while in a few others actual growth rates have been lower than the targets [like (i) agriculture and allied activities, (ii) manufacturing (iii) electricity, gas and water supply, (iv) finance, etc.] Individual components of services sector, except finance, insurance, etc., could not be compared for want of the targets for the each of the combined sub-sectors. Apart from the non-achievement of the near 4 per cent growth in agriculture, there have been wide inter-year fluctuatations in growth in the sector.

It may be seen from Table 2 that the gross domestic saving (GDS) as percentage of GDP at current market prices has increased from 26.4 per cent in 2002-03 to 32.4 per cent in 2005-06 (data for 2006-07 are not available yet), thus resulting in an average rate of 29.9 per cent (4-year average); this shows that the target saving rate of 26.8 per cent for the tenth plan period has been exceeded. It appears from the investment rate for 2006-07 released by the CSO, that the saving rate for the same year could be slightly lower than that in 2005-06 assuming a current account deficit (CAD) of at least 1.3 per cent. In any case, the actual saving rate for the X^thPlan period works out to be higher than the target rate.

	Table 1: Sectoral Growth Rates of GDP: Tenth Plan Period

						(Amount in Rs. Crore)
Economic Activity	2006-07	2005-06	2004-05	2003-04	2002-03	Tenth Plan	Target
	(RE)	(QE)				Average	Growth
Agriculture,Forestry	525875	512147	483080	483274	439321
and Fishing	2.68	6.02	-0.04	10.00	-7.22	2.29	3.97
Industry	757641	683028	623327	567949	528926
	10.92	9.58	9.75	7.38	7.06	8.94	9.40
Mining and Quarrying	56912	54128	52250	48626	47168
	5.14	3.59	7.45	3.09	8.85	5.63	4.30
Manufacturing	442503	393956	361115	332363	311685
	12.32	9.09	8.65	6.63	6.81	8.70	9.82
Electricity,Gas and	61671	57401	54531	50735	48423
Water Supply	7.44	5.26	7.48	4.77	4.75	5.94	7.99
Construction	196555	177543	155431	136225	121650
	10.71	14.23	14.10	11.98	7.95	11.79	8.34
Services	1564640	1409356	1283253	1171368	1079486		9.44
	11.02	9.83	9.55	8.51	7.38	9.26	*
Trade,Hotels, Transport,	768578	680237	616024	555303	495494
Storage, etc.	12.99	10.42	10.93	12.07	9.24	11.13	*
Financing,Insurance,Real	396394	358535	323187	297326	281611
Estate & Busin's Services	10.56	10.94	8.70	5.58	7.98	8.75	11.69
Community, Social and	399668	370584	344042	318739	302381
Personal Services	7.85	7.71	7.94	5.41	3.93	6.57	*

Gross Domestic Product	2848157	2604532	2389660	2222591	2047733
at Factor Cost	9.35	8.99	7.52	8.54	3.79	7.64	7.93

*: target rates are set separately: Trade: 9.44 per cent,Communication: 15 per cent, Rail transport: 5.40 per cent;
Other Transport services: 7.54 per cent; Public Adm: 6.43 per cent;Others: 9.26 per cent.
Sources: Tenth Five Year Plan, 2003-2007,- Dimensions and Strategies, Planning Commission, Govt. of India ,
National Accounts Statistics, Central Statistical Organisation, Govt. of India .

	Table 2: Composition of Gross Domestic Savings - Tenth Plan Period
			(at current prices)
						(Amount in Rs. Crore)

Sector	2006-07	2005-06	2004-05	2003-04	2002-03	Plan total	Plan Target
	(RE)	(QE)				/ average	% to gdpmp

Public Sector		71262	74682	31822	-14057
% to GDPCMP		2.00	2.39	1.15	-0.57	1.24	-2.41
Government Adm.		-68270	-60904	-83233	-113394		2.85
Pub. Enterprises		139352	135586	115055	99337		0.44

Private Corpor.Sector		288430	223512	131355	103965
% to GDPCMP		8.09	7.15	4.75	4.23	6.05	6.1
Household Sector		797117	674834	657327	559074
% to GDPCMP		22.35	21.58	23.77	22.74	22.61	20.3
Gross Domestic		1156809	973028	820504	648982
Savings (GDS)
GDS Rate #		32.4	31.1	29.7	26.4	29.9	26.84
CAD,		47665	13338	-45380	-28486
% to GDPCMP		1.34	0.43	-1.64	-1.16	-0.26	1.57
Investment rate @ #	32.41	30.97	28.36	28	25.2	28.99	28.41
Note: Estimates of gross domestic savings and its sectoral composition and CAD are not available for 2006-07.
@: excludes valuables
#: As per cent ot GDPCMP		GDPCMP: Gross domestic product at current market prices.
Sources: As given in Table 1.

The Working Group has been set up by the Planning Commission to undertake objective and scientific estimation of the magnitude of savings during the Eleventh FYP period, under the chairmanship of Dr. Rakesh Mohan, Deputy Governor, RBI. The composition and the terms of reference of the group are given in Annexure 1. The Report of the Group has been organised into four sections. Section I presents the composition and terms of reference of the Group, as also the rationale for the setting up of sub-groups and their proceedings. Recent trends in savings in the Indian economy, along the elaboration of certain conceptual issues, are presented in Section II. Section III discusses the projection procedure and presents the estimates of savings prepared by the five sub-groups along with the assumptions made in such estimations. Overall savings for the Eleventh Plan period are presented in the last section.

To complete the tasks set before it, the Working Group has set up five sub-groups for estimation of (i) Household Sector Savings, (ii) Private Corporate Sector Savings, (iii) Public Sector Savings, (iv) Foreign Savings and (v) Flow of resources for Private Investment for SME and Agricultural Sector. The Group took cognizance of the broad transformation that has been taking place in the behaviour of savings over decades in general, as suggested by the Chairman, with a specific focus on the trends in the past five years and the possible impact of such beahaviour on the future quantum and composition of savings, besides other assumptions/factors, for estimation of savings of different sectors and the flow of resources for private investment for SMEs and agriculture sector.

The Working Group reviewed the recent trends in savings in Indian economy is next section, besides discussing the theoretical underpinnings of importance of savings in emerging market economies, like India . The estimates of savings both at overall and sectoral levels viz., public sector, private corporate sector and households, are disseminated by Central Statistical Organisaiton (CSO). At sectoral level, estimates of saving for the public sector, and households saving in physical assets and compiled by CSO while those for private corporate sector and households saving in financial assets are compiled by RBI1.

The Report presented a brief account of literature on determinants of savings. Based on the literature, major determinants of savings have been identified as: GDP growth, income and wealth, demand for liquidity, income volatility, real interest rate, level of per capita income, rate of inflation, spread of banking facilities, and age structure/dependency ratio. It also highlighted factors that could lead to the achievement of higher savings and growth in the Eleventh FYP period in India, such as (i) improvements in India’s macro-economic performance, creation of conditions that are conducive to encourage higher savings, (ii) the annual growth of more than 8 per cent in real GDP in the last three years and the likely continuance of a ‘virtuous cycle’ of growth and savings that appear already under way, (iii) a huge pool of younger population that enter into labour force and be gainfully employed in production, generating higher levels of incomes, (iv) the substantial progress made in human development over the years and the impact of National Rural Employment Guarantee Scheme, (v) the reduction in poverty providing an impetus to demand in the economy, (vi) reduction in inflationary pressures in the recent period and current stable inflationary expectations and (vii) the financial sector reforms since 1992-93 which add to a series of financial innovations.

The report discussed the trends in domestic savings since the 1950s. Importantly, the gross domestic savings (GDS) rate increased from 23.5 per cent [as per cent to gross domestic product of current market prices (GDPCMP)] in 2000-01 to 29.1 per cent in 2004-05, the highest saving rate ever achieved since 1950-51. The household sector is the major contributor whose savings rate has formed 22.0 per cent in 2004-05. The savings of the household sector comprise physical saving and financial saving, with the former being in the range of 11 to 12 per cent and the latter in the range of 10.2 to 11.5 per cent during 2001-02 to 2004-05; with physical saving having higher share than financial saving, in 2004-05. The saving of the private corporate sector formed 4.8 per cent and that of public sector at 2.2 per cent in 2004-05. The report presented briefly, the recent trends in savings and investment rates in select Asian countries (Annexure 2).

The Group considered it desirable to estimate the savings in a macro framework and compare it with aggregation of the estimates of sectoral savings obtained by the sub-groups independently. The group adopted “elasticity-based” approach with respect to GDPCMP. The regression of GDS on GDPCMP from 1995-96 to 2004-05 provided an elasticity of 1.17, and the forecasted GDS under four alternatives of GDP growth rate, are as given in Table 3:

The Report has highlighted various issues that had rendered the estimation process complex. Since the estimation of savings by the sub-groups are made in a period of rapid change, savings rate may be expected to be higher towards the end of the Eleventh Plan, based on responses to the policy measures.

The saving of household sector in the form of financial assets has shown a declining trend in recent years, whereas that in physical assets has shown an increasing trend. With financial deepening and move towards financial inclusion, financial savings (net) should improve. In this context, the working group has separately examined the issue at a disaggregated level - gross financial savings (GFS) and financial liabilities (which are netted from GFS), and physical savings to the extent that physical savings of the household sector are a residual. Secondly, according to the conventional wisdom, if corporate savings go up, household savings need to come down, to the extent that unincorporated entities get incorporated and such savings are reflected as corporate savings. An examination of data indicated a declining trend in the share of the unincorporated sector. This aspect was also considered in the estimation process.

In respect of the corporate sector, the major issues considered were: (i) higher GDP growth, productivity improvement vis-à-vis a declining role of savings, (ii) classification of corporate finance into sectors like infrastructure, services, etc., to capture regional desparities of GDP growth, (iii) lack of theoretical models on the behaviour of corporate savings, (iv) role of business cycles of the economy vis-à-vis corporate performance, (v) interest rate scenario, (vi) movements in ICOR, (vii) movements in corporate tax rate, (viii) FDI inflows, (ix) stock performance and (x) credit flow to private sector.

For public sector, the issues considered include (i) impact of the proposed sixth pay commission award, (ii) reduced surpluses of public sector enterprises, particularly in the oil sector, (iii) adherence to FRBM path by Central and State Governments, (iv) non-availability of deficits of central and state governments, which has bearing on public sector savings and (v) gross market borrowings and their impact on public sector savings. The sustainability of current account deficit (CAD) is the main issue in regard to foreign savings is considered. The sub-groups estimations have been arrived at broadly against a stable global economic environment.

The Working Group built multiple scenarios for the growth rates of GDP at 7.0 per cent, 8.0 per cent, 8.5 per cent, and 9 per cent for the Eleventh FYP period although the group assumed the rate of 8.5 per cent as the working estimates for the Plan period.

It was also assumed that inflation would be in the range of 4.5 to 5.0 per cent annually during the Plan period. It has been observed that inflation based on GDP deflator has been in lower than that of WPI based inflation. For the purpose of the estimation of savings, in the absence of GDP deflator for the 11^th Plan period, the sub-groups have adopted the WPI based inflation at 5.0 per cent as outlined in the Approach Paper.

Besides the broad issues mentioned earlier, the Sub-group on Household savings had considered a plethora of issues while projecting the households savings for the Eleventh Five Year Plan period. Such issues are financial deepening and its impact on household savings, and instrument-wise issues of financial instruments based on emerging trends in preference pattern for households. In particular, these result in assuming the following:

(i) It is expected that households will increase their preference for bank deposits in the medium term, with the focus on financial inclusion and increased coverage for rural and semi-urban areas under banking facilities.

(ii) The sub-group expects to continue the upturn in households investment in shares and debentures of corporate sector in view of congenial investment climate and strong corporate profitability;

(iii) Change in provisions governing small saving instruments under ‘claims on government’ and the possible impact on households savings in medium term;

(iv) Contractual savings would continue to increase with pension reforms and several policy initiatives under way for insurance penetration;

(v) On the liabilities side, broad based strengthening of economic activities to continue, to raise the credit distribution, in particular, the agriculture and housing credit, spurred by attractive income incentives;

(vi) Considering the anticipated impact of 6^th Pay Commission, it has been estimated that one percentage point decrease in public savings is expected to increase the households saving by one percentage point.

The estimates for the 11^th FYP have been worked out based on projections of elasticities of the instrument-wise savings of household sector with respect to GDPCMP. This method has been augmented with a judgemental approach following emerging trends, on different financial instruments of savings.

Based on the above, the projections of household savings are given in Table 4, for initial and terminal years of the 11^th FYP and average for the Plan under the four alternatives2 of GDP growth. Household saving (sum of financial and physical savings) as a percentage to GDPCMP has been estimated in the range of 24.1 per cent (under scenario 1) to 24.4 per cent under scenario-4, while the saving rate stood at 22.4 per cent in 2005-06 of the Tenth FYP period.

Table 4: Projection of Household Sector Savings for the Initial and Terminal Years of the 11th Plan Period in the Four Growth Scenarios
(Per cent of GDP at CMP)
Item		Scenario 1 (Growth 7 per cent)			Scenario 2 (Growth 8 per cent)			Scenario 3 (Growth 8.5 per cent)			Scenario 4 (Growth 9 per cent)
Item		2007-08	2011-12	Avg.	2007-08	2011-12	Avg.	2007-08	2011-12	Avg.	2007-08	2011-12	Avg.
Instruments of Financial Saving
1.	Currency	1.4	1.7	1.6	1.4	1.8	1.6	1.4	1.8	1.6	1.4	1.8	1.6
2.	Bank Deposits	6.2	8.0	7.0	6.2	8.2	7.2	6.2	8.3	7.2	6.3	8.4	7.3
3.	Non-Bank Deposits	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
4.	Life Insurance Funds	2.8	3.8	3.3	2.8	3.9	3.3	2.8	4.0	3.4	2.9	4.0	3.4
5.	Provident & Pension Funds	2.1	2.5	2.3	2.1	2.5	2.3	2.1	2.5	2.3	2.1	2.5	2.3
6.	Claims on Government	3.1	2.8	3.0	3.1	2.8	3.0	3.1	2.8	3.0	3.1	2.8	2.9
7.	Shares and Debentures	0.5	1.1	0.7	0.5	1.2	0.8	0.5	1.2	0.8	0.5	1.2	0.8
8.	Units of UTI	–0.2	–0.2	–0.2	–0.2	–0.2	–0.2	–0.2	–0.2	–0.2	–0.2	–0.2	–0.2
9. Trade Debt		0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
A.	Gross Financial Saving (1 to 9)	15.9	19.7	17.7	16.0	20.2	18.0	16.1	20.4	18.1	16.1	20.6	18.3
B.	Financial Liabilities	5.3	7.8	6.5	5.3	8.1	6.7	5.4	8.3	6.7	5.4	8.5	6.8
C.	Household (Net)
	Financial Saving (A-B)	10.7	11.9	11.3	10.7	12.0	11.4	10.7	12.1	11.4	10.7	12.2	11.4
D.	Household Physical Saving	12.4	13.3	12.9	12.4	13.4	12.9	12.4	13.5	12.9	12.5	13.5	13.0
E.	Household Saving (C+D)	23.1	25.2	24.1	23.1	25.5	24.3	23.2	25.6	24.3	23.2	25.7	24.4
Avg. : Average.

The private corporate sector comprises (i)non-government non-financial companies, (ii) commercial banks and insurance companies in private sector, (iii) cooperative banks, credit societies and non-credit societies, (iv) non-banking financial companies in the private sector and (v) quasi corporate bodies. Projections have been worked out separately for the constituents of the sector under the four growth assumptions of GDP. In the process, ratio approach has been adopted for non-financial corporate sector while past trends in growth rates and ratios have been adopted for financial sector.

The projections of the second, third and fifth constituents, stated above, of the sector have been worked out based on past trends. The assumptions made to obtain the projections of saving of these constituents, are given in Table 5.

In the case of financial and investment companies, certain growth rates are also assumed for 2005-06 and 2006-07 in the absence of data, on these companies for these two years. Assuming continued good performance in these two years, the retained profits have been estimated as 20 per cent of main income for these two years. Gross savings of these companies have been assumed to grow annually at 20 per cent and 25 per cent for GDP growth of 7-8 per cent and 8.5-9.0 per cent, respectively, during the 11^th Plan period. Corresponding growth rates in depreciation have been assumed at 5 per cent and 6 per cent, respectively, for the above two growth rate ranges of GDP.

In respect of non-financial companies, following ratio approach and trends observed in sales and certain ratios, like profit before tax (PBT) to sales, tax provision to PBT, etc., in the recent past formed the guiding factors in assuming the ratios for the private non-financial companies for the 11^th FYP period. As stated earlier, a few of the factors such as expectation for a better performance, further rationalization of corporate tax rates, business cycles have also been considered in projecting various variables of these companies.

Initially, sales of these companies have been projected based on a regression model with GDP growth and a business cycle dummy as explanatory variables, covering the period 1980-81 to 2004-05. Based on the projected sales, PBT, PAT, dividends and retained profits, have been estimated assuming PBT – sales ratio at 10 per cent, tax provision to PBT ratio at 28 per cent and dividend-payout ratio at 35 per cent for the Eleventh Plan period. The non-operating surplus has been assumed to form 0.5 per cent of sales and the depreciation sales at 5.0 per cent through out the Plan period.

Gross savings of the private corporate sector as a percentage to GDP at current market prices have been projected at 5.56 per cent, 5.56 per cent, 5.67 per cent and 5.68 per cent under the four alternatives of GDP growth rates ( 7 to 9 per cent), for the Eleventh FYP period.

The public sector comprises the central government, state governments, central public sector undertaking (CPSUs) and state level public enterprises (SLPEs). Public sector savings has been estimated under the four alternative growth rates of GDP and under the implications of FRBM legislation both at central and state levels putting limit on the borrowing of centre and states. The sub-group has adopted FRBM Act with four variants, viz.,

(i) FRBM target (of Revenue Deficit and gross fiscal deficit) to be realised by 2008-09 and the revenue-capital mix of the Plan expenditure is fixed; (ii) FRBM target to be realized by 2008-09 and the revenue-capital mix of the Plan expenditure is allowed to change on a year to year basis, and (iii) and (iv) target year to realise FRBM act by 2010-11 under the above two variants of the revenue-capital mix of Plan expenditure.

Projection of central government finances for 11^th FYP has been based on its budget estimate of 2006-07. Projection has been made separately for revenue receipts, non-debt capital receipts, and non-plan expenditure. For estimation of savings, the public sector, it is divided into: (i) government administration, (ii) departmental enterprises, and (iii) non-departmental enterprises. The savings of the central government, is basically based on its Economic and Functional Classification, which also gives net profits of and depreciation provision of DCUs. The report presents certain relationships between budget classification (revenue deficit) and the economic and functional classification for purpose of projections, which have been used in working out projection of central/state governments’ savings.

The trends in saving of the public sector indicated that savings have been negative since 1997-98 which turned positive from the year 2003-04 (Table 6). This has been essentially the result of a drop in the revenue deficits of the central and state governments.

Table 6: Public Sector Saving Rates
(Per cent of GDP)
	Public Sector	*of which:* Public Authorities	Government Administration	Departmental Enterprises	Non-departmental Enterprises
1	2 =(3+6)	3 =(4+5)	4	5	6
1997-98	1.3	–2.1	–2.8	0.7	3.4
1998-99	–1.0	–4.5	–5.1	0.6	3.5
1999-2000	–0.9	–3.8	–5.0	1.2	3.0
2000-2001	–1.8	–4.7	–5.5	0.8	2.9
2001-02	–2.0	–5.5	–6.0	0.6	3.5
Average	–0.9	–4.1	–4.9	0.8	3.3
2002-03	–0.7	–4.7	–5.2	0.5	4.0
2003-04	1.0	–3.1	–3.7	0.5	4.2
2004-05	2.2	–2.2	–2.7	0.5	4.4
2005-06	3.2	–1.2	–1.7	0.4	4.4
2006-07	3.9	–0.5	–1.0	0.3	4.4
Average	1.9	–2.3	–2.9	0.5	4.3

The projections of public sector savings for the 11^th FYP period have been worked out based as the following assumptions besides the four alternatives of GDP: (i) the centre and states would adhere to the targets set under respective fiscal responsibility legislations, (ii) considering basic difference in budget estimate of revenue deficit and economic and functional classification of governments, it is assumed that the difference between the two would be of the order of 0.2 per cent of GDP, (iii) the saving of DCUs would decline to 0.3 per cent of GDP in the 11^th FYP as BSNL has become NDPEs and (iv) there will not be any investment in new public sector projects during the 11^th Plan period and the existing public enterprises would maintain the projected savings.

Based on the above assumptions, public sector savings has been estimated at 3.7 per cent, 4.1 per cent, 4.2 per cent and 4.6 per cent, of GDPCMP respectively, under the four alternatives of GDP growth rates (from 7.0 per cent to 9 per cent). Projected savings for the constituents of public sector are given in Table 7.

Table 7: Projections of Public Sector Savings for 11th Plan: Alternate Scenarios
Year	Government Administration	Departmental Enterprises	Non-departmental Enterprises	Public Sector
1	2	3	4	5=(2+3+4)
Scenario 1 : Growth Rate 7.0 per cent
2007-08	–0.9	0.3	3.3	2.7
2008-09	0.2	0.3	3.3	3.8
2009-10	0.2	0.3	3.4	3.9
2010-11	0.2	0.3	3.6	4.1
2011-12	0.2	0.3	3.6	4.1
Average	0.0	0.3	3.4	3.7
Scenario 2 : Growth Rate 8.0 per cent
2007-08	–0.9	0.3	3.8	3.2
2008-09	0.2	0.3	3.8	4.3
2009-10	0.2	0.3	3.8	4.3
2010-11	0.2	0.3	3.8	4.3
2011-12	0.2	0.3	3.8	4.3
Average	0.0	0.3	3.8	4.1
Scenario 3: Growth Rate 8.5 per cent
2007-08	–0.9	0.3	3.9	3.3
2008-09	0.2	0.3	3.9	4.4
2009-10	0.2	0.3

Table 1: Sectoral Growth Rates of GDP: Tenth Plan Period

Table 6: Public Sector Saving Rates