Savings-investment conundrum

For growth to be sustainable, it must be financed by higher gross domestic savings because there is not much space to do so through external borrowing

- NIKHIL GUPTA

India's (nominal) investment was about 33 per cent of gross domestic product (GDP) in the past two years and is likely to be at similar levels in 2024-25 (FY25) as well (it was 33.8 per cent of GDP in H1FY25, the same as in H1FY24), better than the 31 per cent of GDP in the pre-pandemic years. More importantly, India's current account deficit (CAD) was only 0.7 per cent of GDP in FY24 and likely at 1.6 per cent of GDP in H1FY25, compared to 1.2 per cent in H1FY24. With the CAD at around 1 per cent of GDP in FY25, India's savings would be 32 per cent of GDP during the year, similar to its pre-pandemic average. India's real GDP growth stood at 8.2 per cent in FY24 and averaged 8.3 per cent in the past three years. Why, then, do I keep worrying about savings and investment?

Well, since the CAD is the difference between investment and gross domestic savings (GDS), it is interesting to analyse the share of each domestic participant in India's external deficit (or the CAD). There are three participants in an economy – the corporate sector (including private and public financial and non-financial companies), the government (the Centre and the states), and the household sector (ie the residual, everything else). The CAD, thus, can be effectively analysed as the difference between the investment and savings of each of these three domestic participants.