Elephant wiser investor than Dragon

NEW DELHI: Big savings come in small boxes, in a tabulation of countries and savings. At least that is true of Asia, whichhas traditionally been home to good savers. However, in spite of high savings, the investment rates in some countries have exceeded the savings rates, resulting in current account deficits.

For India, over the next five years, thesavings rate is expected to be 34%, with a growth rate of 9% sustained by an investment rate of 36.1%. These are projectionsof the working group on savings in the11th Five-Year Plan under the Planning Commission. Already, the savings rate in India for 2005-06 has nearly touched 34%, according to the Reserve Bank of India.

China has much higher rates of savings and investment compared to India. However, in China, the investments are financing the manufacturing sector. “The investment ratein India is lower, but it is financing the services sector. The Indian economy is better leveraging the investment as opposed to China,”Crisil principal economist DK Joshi said.

The current account balance for Asian countries — the difference between imports and exports of goods and services, which is also a measure of the gap between investment and domestic savings — has shown a marked shift from persistent deficits to large current account surpluses.

The sharp increase in the current account deficit of the US, which is more than 6% of its GDP, has been contributed by current account surpluses of countries such as Japan and China.

“The large movements of the current account positions in the region have mainly reflected reductions in its investment GDP ratio. The change in the region’s savings has had only a small effect,” the report said.

According to the report, “global oil demand and persistence of demand and supply imbalances over the medium term may worsen the current account deficit for India”. Analysts say current account deficit will only help RBI in curbing inflation given that India already has comfortable forex reserves that can finance 13-14 months of imports.

It is expected that the region’s current account surplus will decline since the share of non-construction investment-to-GDPin east Asia is low compared to its historical level. Though critical infrastructure projects seem set to proceed in some countries, the construction investment ratio is unlikely to return to early 1990s level, the report says.

The investment in each country shows that cyclical fluctuations can be traced back to construction investment in the region. The report says the level of construction investment in the region has been fairly volatile.

Mr Joshi said a decline in construction investment in India will not have an impact on the growth rates because significant investment is finding way into sectors such as oil and gas, power and roads, which will drive the economy.