Household savings have been on a downward trend for more than two decades and currently represent 19% of the economy. [I am taking a median number and not the pandemic induced crisis number.].
Of this total, about 60% are in bank deposits, mutual funds and other financial instruments that enter the economy and are available as a source of investable funds for the private sector and government. The balance 40% are fixed assets as Gold and immovable, which represent the end use, & are no longer in circulation. Thus, households provide 11.4% of GDP in the form of money for investment to the private sector and government.
The private sector “saves” [its plowed-back profits plus depreciation etc.] 11% of GDP, while it invests around 21% of GDP. It must therefore borrow around 11% of GDP in order to be able to invest what it takes to produce a GDP growth rate of 6%. As household savings represent 11.4% of GDP, all household savings are already completely exhausted by private sector demand.
What about the public sector and / or the government? As you can see from the table, the government. “Saves” around 1.5% of GDP and claims to “invest” 7% of GDP. [The claimed “investment” of 7% of GDP is bogus as it includes borrowings to pay everything from babu salaries, interest on Govt., debt, and even subsidies to corporates and the poor. The investment is fiction except for 2 to 3% of GDP on infrastructure, but borrowing is real.]
So the government. must borrow at least 5.5-6% of GDP in a market where there is no excess financial savings to be obtained. You could say that the 40% of household savings in physical assets could be monetized, but then why should households borrow against these assets to lend to the government. at a rate well below the cost of their loan?
In summary, even the alpha of 6% that we calculated here is not sustainable at the current gross savings rate of 30% of GDP. If left unchecked, even a continuation of existing policies would only drop Alpha back at the age of 3-4% Hindu growth rate from the seventies and eighties. The future under the current political regime is very bleak.
National Champions unable to help us grow faster
Indian Polity economic law thinkers believe in “mark of thief-baron of capitalismWhich they believe would produce the first spoonfuls of capital needed to grow rapidly.
This myth refuses to die even in the face of modern macroeconomics, where the Gross Domestic Savings figure captures all the savings produced in the economy from which Capital for investment comes. Thief barons do not produce additional savings beyond that number from scratch for investment.
Modi, on the other hand, rekindled the traditional king-merchant alliance that has prevailed in past centuries. In this model, political and economic powers combine to create a large pool of cheap labor at the bottom of the income pyramid, [that was the economic function of the caste system, and still is] to allow the elites to live in relative luxury, even as the gullible continue their mythical karma following their delirium dharma.
Anyway, the first thing to note is that national champions does not bring more to the savings rate of 30%. This savings reserve includes everything that can be saved. They just borrow it. Or anticipate savings from overseas as Reliance did recently, by seizing what was previously intended for a stand-alone refinery in a joint venture with KSA. So, champions or not, the 6% alpha cap remains, even if the government. remains solvent, which it cannot.
So what is the fatal attraction of the Domestic Champion model? Especially for right-wing politicians and their supporters?
Remember that if you are a privileged Adani or Ambani, or X or Y, Govt. favors mean that you grow up at the expense of others. So during Savings can remain at 30% of GDP, ICOR to 5 and alpha at 6%, your share of the 30% savings grows much faster than that of your competitors, and therefore, your Alpha possible is well above 6%.
You grow much, much faster than the rest of your competition, and as long as the favors keep coming, some can be used safely and profitably to keep your favorite politician in power through Anonymous electoral obligations. What was once good old corruption becomes a legitimate social norm of producing an orderly society by paying election funds to a political party. The knot that Pratap Bhanu Mehta called “structural corruption”.
This is the true nature of Alliance Kautilyan Roi-Marchand who used to put eminent merchants as nobles in the king’s most intimate private council.
But like I said, argue your way, National Champions only produce incremental growth for themselves, at the expense of their competition, but don’t add any extra to Alpha for the economy as a whole, that alone determines whether you catch up with China. or not.
So, under what circumstances, or policy mix, can national champions contribute to Alpha in order to beat the 6% per year imperative?
This can only happen when national champions become world champions and start exporting 40% of their total production on a net basis. [meaning their exports minus imports should be at least 40% of their turnover].
But oddly enough, none of the merchants chosen is a significant exporter on a net basis; not even Reliance when you deduct the cost of imported crude from its diesel and gasoline exports to get the net exports.
And remember the GDP equation. Only net exports contribute to GDP.
It is not a coincidence. A net exporter, and even a world champion, would not need any favors from the government. They could dictate their terms of engagement. Thus, merchants eager to Govt. favors generally do not have significant exports.
This is why the exporting community is not lining up to donate to Anonymous electoral obligations.
(The writer is a freelance trader. Views are personal)