Consumption, savings and investment

1.43 The increasing trend in gross domestic savings as a proportion of GDP observed since 2001-02 continued, according to the new series of national accounts, with the savings ratio rising from 26.5 per cent in 2002-03 to 28.9 per cent in 2003-04 and further to 29.1 per cent in 2004-05 (Table 1.3). In 2004-05, the rise in the savings rate was contributed by two of its three components: namely public and corporate savings. The third component, namely household savings, grew at 5.9 per cent – slower than the GDP growth rate – and made a negative contribution by coming down as a proportion of GDP.

1.44 The trend in public savings had reversed from negative (1998-99 to 2002-03) to positive in 2003-04. With progress in the implementation of FRBMA, this virtuous trend consolidated further with an increase in public sector savings from 1.0 per cent of GDP in 2003-04 to 2.2 per cent of GDP in 2004-05. The positive saving of Rs. 69,390 crore in 2004-05 (QE) was composed of lower dissavings of public authorities and higher savings from non-departmental enterprises.

1.45 Savings by the private corporate sector – reflecting the high retained earnings from their higher profits – grew rapidly (24.9 per cent) to increase its share in GDP from 4.4 per cent in 2003-04 to 4.8 per cent in 2004-05 (QE). There has been a continuing upward momentum in the savings of the private corporate sector for three years; as a proportion of GDP, it increased steadily from 3.6 per cent in 2001-02 to 4.8 per cent of GDP in 2004-05 (QE). The increase of 0.2 percentage points in gross domestic savings rate between 2003-04 and 2004-05 was considerably lower than the 2.4 percentage point rise in the previous year because of a decline in household savings, in both financial as well as physical assets, relative to GDP.

1.46 Private final consumption expenditure (PFCE), at current prices as a proportion of GDP, after declining from 64.6 per cent in 1999-2000 to 62.9 per cent in 2002-03, fell further to 62.4 per cent in 2003-04 and 60.6 per cent in 2004-05. Among the various components of PFCE, the share of food, beverages and tobacco in total expenditure came down from 46.8 per cent in 2000-01 to 40.6 per cent in 2004-05. The other major item of importance, namely, transport and communication, as a proportion of PFCE, rose from 14.3 per cent in 2000-01 to 18.2 per cent in 2004-05.

1.47 While consumption expenditure, when measured as a proportion of GDP, exhibited a declining trend both in public and private consumption categories, such expenditure continued to dominate the demand side of national income. As a proportion of GDP at current prices, Government final consumption expenditure (GFCE) declined from 12.9 per cent in 1999-2000 to 11.2 per cent in 2003-04. The proportion is estimated to have grown marginally to 11.3 per cent in 2004-05.

1.48 In line with the rise in the rate of gross domestic savings in 2002-03 and 2003-04, there was an increase in the rate of GDCF or investment (Table 1.3). However, the increase in GDCF was less than the increase in savings, leading to a current account surplus in BOP, as a proportion of GDP, of 1.2 per cent and 1.6 per cent, respectively. In 2004-05, reflecting the pick up in investment in the economy, GDCF increased by 2.9 percentage points of GDP, surpassing the 0.2 percentage point increase in the ratio of gross domestic savings to GDP. A current account deficit in BOP of 0.8 per cent of GDP largely bridged the savings-investment gap.

1.49 Gross domestic investment grew from 27.2 per cent in 2003-04 to 30.1 per cent in 2004-05 (Table 1.3), mainly on account of private investment growing at 19.7 per cent. In the revised series data, a new item “valuables” covering expenditure on acquisition of precious metals and stones as a store of value has been included as a component, separate from public and private, of GDCF on the basis of 1993 System of National Accounts of United Nations.

1.50 GDCF at constant prices (base: 1999-2000) as a proportion of GDP (Table 1.4) is consistently lower than the corresponding proportion at current prices (Table 1.3). But, irrespective of the choice of constant or current prices as the weights, the direction of change from year to year remains unaltered. The lower values of the change in GDCF as a proportion of GDP at constant prices, particularly in more recent years, may reflect the higher prices of capital goods relative to the general price level, with growing technological sophistication of the production processes in the economy in general and manufacturing in particular.

1.51 At constant 1999-2000 prices, the composition of GDCF for 2003-04 and 2004-05 reveals a faster growth in the public component than in the private. Furthermore, there is a faster growth in inventories and valuables in the latest two years, with gross fixed capital formation (GFCF) growing at a lower rate than gross domestic capital formation. This may partly reflect a process of adjustment to the rapid decline in the change in stocks as a proportion of GDP from 2.0 per cent in 1999-2000 to a low of 0.5 per cent in 2001-02 and the progressive liberalization of gold and silver imports.

1.52 In terms of contribution to growth of GDP at current market prices, from the demand side, there was a change in the pattern of PFCE providing the lead (Figure 1.2 and Table 1.5). PFCE contributed as much as 54.5 per cent of the growth in GDP at current market prices between 2000-01 and 2003-04. The percentage point contribution of private final consumption expenditure was as much as 7.4 out of the overall growth of 12.7 per cent in GDP in 2003-04. In the same year, the corresponding contribution of investment was 5.4. In an encouraging development, the percentage point contribution of investment at 6.8 out of 13.1 per cent growth in GDP in 2004-05 exceeded the corresponding contribution of private final consumption expenditure at 6.1 for the first time in recent years. Reflecting the higher growth of imports relative to exports, the negative contribution of external balance increased in 2004-05.