Economic Survey: Demonetisation led to rise of financial saving

New Delhi, Jan 29 : Demonetisation has helped share of financial saving to rise, as per the Economic Survey 2017-18.

The document, which was tabled in Lok Sabha today noted that the ratio of domestic saving to Gross Domestic Product (GDP) reached 29.2 percent in 2013 to a peak of 38.3 percent in 2007, before falling back to 29 percent in 2016.

The cumulative fall over 2007 and 2016 had been milder for investment than saving, but the investment had fallen to a lower level.

India’s unprecedented climb to historic high levels of investment and saving rates in the mid-2000s was followed by a pronounced, albeit gradual, decline. The current episode of investment and saving slowdown is still ongoing, as per the survey.

Based on the break-up of investment and saving, that is available up to 2015-16, private investment accounts for five percentage points out of the 6.3 percentage point overall investment decline over 2007-08 and 2015-16.

Asian countries faced the largest number of slowdown episodes following 1997.

Currently (after 2008), these economies are in the era of saving slowdowns.

However, in India, the investment slowdown started in 2012, subsequently intensified and was apparently still continuing as of the latest date, that for 2016.

Since investment slowdowns are more detrimental to growth than savings slowdown, so, policy priorities over the short run have focused on reviving investment by mobilizing saving, via attempts to unearth black money and encouraging the conversion of gold into financial saving.

The share of financial saving is already rising in aggregate household saving, with a clear shift visible towards market instruments, a phenomenon that has been helped by demonetisation.

The cross-country experience to study the pattern of investment and saving slowdowns has revealed that the investment slowdowns have an impact on growth but not necessarily saving.

The policy conclusion is urgent prioritisation of investment revival to arrest more lasting growth impacts, as the government has done with plans for resolution of bad debts and recapitalization of Public Sector Banks (PSB)

The survey also noted a 50 percent increase in the number of indirect taxpayers, post the introduction of Goods and Services Tax (GST).

The formal sector in India is substantially greater than currently believed, as per the pre-budget survey.

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