Indian economy presents a paradox of high savings rate with low-income and high savings rate with low growth rate. Analyse.

Published: July 11, 2019

Economy requires capital formation for its growth. Indian economic growth has been slow due to lack of capital formation. Capital formation is achieved through savings (domestic or individual), loans and debts. For higher rate of capital formation, a country requires to raise saving rate as it cannot depend upon loans or debs.

In India per capita income is low. But public makes saving out of that low income by not spending a part over the consumer goods. This habitual saving has become a social phenomenon which has led to high savings rate even with low income. At the time of independence, there was 10.2% domestic capital formation which rose to 27.3% in 1997-98. India has targeted 30% rate of capital formation for the achievement of growth targets.

The growth rate of Indian economy has been slow since Independence. Indian economy has not achieved targeted growth rate during most of the Five Year Plans. Mr. Jagdish Bhagwati presented this paradox of higher savings rate with low growth rate.

Reasons forwarded for this are:

  • Factors like lack of enough productivity, misdirected investment, inefficient work
  • Indian economic policies till 1990s have been without much flexibility which had adverse effects on Indian growth rate.
  • Slow productivity tops the list of factors responsible for economic slow growth.

India has higher savings rate. While the higher savings rate has lead to higher capital formation but it has not resulted into high growth rate, due to some economical and administrative lacuna. The growth rate in accordance with the savings has not been achieved.

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