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Savings and investment rates in the financial year (FY) 2021-22 were 30.2 per cent and 29.6 per cent, respectively
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The Indian economy needs both savings and investment rates closer to 35 per cent on a sustained basis to get back to over 8 per cent GDP growth Year-on-Year (YoY), India Ratings & Research said in a report on Thursday.
Savings and investment rates in the financial year (FY) 2021-22 were 30.2 per cent and 29.6 per cent, respectively.
According to the rating agency, the current growth rate levels are not enough for India to reap the benefits of demographic dividends.
“The age structure of India’s population is such that the labour force will keep growing over the next 20–25 years and therefore, to gainfully employ them, the country would require a sustained Gross Domestic Product (GDP) growth rate of over 8 per cent over the next two to three decades,” it added.
The rating agency said that large part of the investments will have to be in infrastructure, which will help revive private investments by easing supply constraints and offset the weakening of external demand caused by global headwinds.
“While the current focus of the government to step up its capital expenditure on infrastructure appears to be the right step and is geared towards augmenting the investment rate, commensurate steps to encourage savings in the economy are not visible,” it added.
It noted that the combined investment rate of public sector and general government is unlikely to change much from what has been witnessed in the past as the government has simultaneously reduced the capex of central public sector enterprises while stepping up its capital spend at 3.3 per cent of GDP in the union budget 2023-24.
The investment rate remained above 35 per cent for nine consecutive financial years starting FY05.
The agency highlighted that the fall in investment rate after FY11 was due to the difficulties faced in implementing projects and stagnation in capacity utilisation of the manufacturing sector, triggered by weak domestic/external demand.
“As the decline in rate of investment in recent years is concomitant with the decline in the rate of savings, the rate of investment cannot be increased without an increase in the rate of savings or else it has to be financed with the help of foreign capital,” it added.
The growth potential of an economy although depends upon a number of factors, the ratio of gross capital formation to GDP also known as the investment rate is widely regarded as critical for achieving sustained high GDP growth.
“When the economy grew rapidly after FY04 and up to FY08, was the period when the investment rate increased significantly. The investment rate rose after FY04 and was 39.8 per cent in FY11,” it said.