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Economic Survey 2004-2005
GENERAL REVIEW
Review of Developments
b) Consumption, savings and investment
1.39 The significant improvement in the rates of savings and investment witnessed in 2002-03 continued through 2003-04. Savings rate, which is gross domestic savings as a proportion of GDP at current market prices, increased from 23.4 per cent in 2001-02 to 26.1 per cent in 2002-03. The corresponding increase in investment rate (gross domestic capital formation as a proportion of GDP) was from 22.6 per cent to 24.8 per cent. There were further improvements in savings and investment rates in 2003-04 to 28.1 per cent and 26.3 per cent, respectively. The savings rate in 2003-04 is the highest recorded so far and the investment rate in 2003-04 is the highest since 1996-97 .
1.40 The years 2002-03 and 2003-04 marked a departure from the trend of declining savings and investment rates observed in recent years. The improvement in savings rate mainly came through a reduction in public dissavings and improvement in private savings, both household and private corporate. Within household savings, there was a significant improvement in savings in physical assets from 11.4 per cent of GDP in 2001-02 to 13.0 per cent of GDP in both 2002-03 and 2003-04. In contrast, household savings in financial assets (again as a proportion of GDP), after declining from 11.2 per cent in 2001-02 to 10.3 per cent in 2002-03, improved to 11.4 per cent in 2003-04. Thus, higher savings rate was on account of improved performance in all the three sectors. A noteworthy development was the reversal in the trend of growing dissavings of the public sector, with dissavings declining from 2.7 per cent of GDP in 2001-02 to 1.1 per cent in 2002-03 and further to 0.3 per cent of GDP in 2003-04.
1.41 The improvement in the investment rate came mainly from private investment, which increased from 16.0 per cent in 2001-02 to 17.3 per cent in 2002-03 and further to 17.4 per cent in 2003-04. Public investment, after declining continuously since 2000-01, improved from 5.4 per cent in 2002-03 to 5.6 percent in 2003-04. Gross capital formation in the public sector witnessed a significant improvement. It grew by 16.8 per cent in 2003-04 in contrast to a decline of 5.8 per cent in 2002-03. While private investment continued to dominate the change in overall investment rate, and public sector investment performance improved, there was a deceleration in the growth of gross capital formation in the private sector from 17.1 per cent in 2002-03 to 13.1 per cent in 2003-04.
1.42 Gross domestic capital formation (GDCF) at constant prices grew by 13.8 per cent in 2003-04, lower than the growth of 17.4 per cent in 2002-03. The growth in both years was higher than that in GDP, but with the difference between GDP growth and GDCF growth narrowing, the increase in GDCF as a proportion of GDP at 1993-94 market prices was only 1.3 percentage points in 2003-04 compared to 3.1 percentage points in 2002-03 (Table 1.4). This improvement came mainly from the private sector. The continuous decline in capital formation of the public sector observed from 2000-01 was reversed in 2003-04.
1.43 The increasing share of investment in GDP was reflected in a decline in the share of final consumption expenditure, consisting of Government final consumption expenditure (GFCE) and private final consumption expenditure (PFCE), from 76.2 per cent in 2002-03 to 75.3 per cent. This decline in the share of final consumption expenditure in GDP was driven by corresponding declines in both GFCE and PFCE. Within consumption expenditure, with a marginal decline of 0.3 percentage points, the PFCE-GDP ratio came down to 64.0 per cent. Furthermore, within PFCE, while there was a decline in the share of food, beverages and tobacco, rent, fuel, and power, there was an improvement in the shares of transport and communication.
1.44 Consumption expenditure, particularly PFCE, has been a major contributor to GDP growth. The contribution of PFCE to GDP growth increased from 50.4 per cent in 2002-03 to 60.9 per cent in 2003-04. The contribution of GFCE also improved from 4.3 per cent to 6.9 per cent in the same period. The contribution of investment to growth has not been following any consistent pattern. Its contribution to growth varied from 8.4 per cent in 2001-02 to 50.6 per cent in 2002-03. In 2003-04, it contributed 39.3 per cent to GDP growth. Contribution of external sector remained negative at -2.2 per cent in 2002-03 and -3.8 per cent in 2003-04. For the period 1999-2000 to 2003-04, the average contribution of PFCE, GFCE, investment, and external sector to the GDP growth was 61.4 per cent, 9.8 per cent, 30.6 per cent and 0.3 per cent, respectively.
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