If there is one figure that encapsulates a nation’s evolving savings-investment landscape, it is the current account. It serves as a barometer of the disparity between overall domestic savings and domestic investment, indicating the extent of reliance on external savings to fund investments.
Following the taper tantrum, India has witnessed a notable decline in its current account deficit, plummeting from 4.8% of GDP in FY13 to an average deficit of 1.1% annually from FY14 to FY21.
However, since FY22, there has been a gradual uptick in investments, with Gross Fixed Capital Formation reaching 30.7% in FY23. Despite this surge in investments, the current account deficit has remained relatively contained at 2.0% of GDP in FY23. This resilience can be attributed to the concurrent rise in gross domestic savings, which climbed to 30.2% of GDP in FY23 from 29.1% in FY21.
The uptick in domestic savings since FY22 reflects a reduction in the general government deficit (including both central and state governments), or alternatively, decreased dis-saving by the government sector from -6.7% of GDP in FY21 to -2.3% of GDP in FY23. Concurrently, corporate savings (across private and public sectors) increased to 14.1% of GDP in FY23 from 13.1% in FY21, offsetting the decline in household savings from 22.7% of GDP in FY21 to 18.4% in FY23. The reduction in household savings stems from decreased financial savings, while physical savings, primarily in real estate, surged to 13.3% of GDP in FY23 from 10.9% in FY21.
In FY24, the current account deficit is projected to narrow further to 1% of GDP, driven by an improvement in domestic savings to 31.9% of GDP from 30.2% in FY23. This enhancement in domestic savings is anticipated to be propelled by further reduction in the general government fiscal deficit, particularly the central government fiscal deficit. Additionally, corporate savings are expected to rise further in FY24, while household physical savings are anticipated to remain robust, as evidenced by an uptick in household mortgage loans.
The confluence of reduced government sector dis-saving and increased corporate savings is being funneled into investments, with Gross Fixed Capital Formation estimated to rise to 31.3% of GDP in FY24 from 30.7% in FY23. This surge in investments is primarily driven by the household sector, with resources directed toward the real estate sector. Household investments surged to 12.9% of GDP in FY23 from 10.7% in FY21, while corporate investments also saw an uptick to 13.8% of GDP in FY23 from 12.8% in FY21. Moreover, the emphasis on capital expenditure by the central government has bolstered General Government investment to 4.0% of GDP in FY23 from 3.9% in FY21.
Looking ahead to FY25, these favorable dynamics are expected to persist, characterized by a healthy savings-investment environment. The current account deficit is projected to moderate to 1.3% of GDP in FY25, supported by further fiscal deficit consolidation by both the central and state governments. This consolidation is anticipated to sustain the recovery in investments, buoyed by increased household channelization of resources into real estate. Private corporate investment is also expected to improve, driven by rising capacity utilization levels and robust corporate and bank balance sheets.
Sources Of Information: The Economics Times News
