Economic growth rate and its relationship to Gross domestic capital formation and Gross domestic savings


Dec 2013

One important question that needs to be answered is whether the current account deficit has an impact on the GDP growth rate. India had a high economic growth rate in the mid-2000s. During this period our current account deficit was only around 1% of GDP. The rupee actually appreciated from around 50 to a dollar to 39 Rs. Then came the sub-prime of 2008 which created a global economic crisis. The current account deficit started moving up to reach above 5% of GDP. The rupee rapidly fell in the value from Rs. 44. In 2011 to the current level of 54-55 rupees. Normally one would have expected that with the depreciation of the rupee export should have picked up growth along with the decline of imports. Strangely this did not take place. In fact our trade deficit was 130 billion dollars in 2010-2011, increased to 185 billion dollars in 2011-12 and likely to be around 200 billion $ for the FY 2012-13.

Rupee depreciation did not boost exports but the cost of imports went up. We can conclude that demand for oil and gold is in elastic and the depreciation of Indian currency didn’t help.

What then is the reason for increasing CAD, Could it be the Gross domestic capital formation and gross domestic savings rate. Let us look at the data.

As a percentage of GDP

Year

Gross Domestic Capital formation

Gross Domestic Savings

Current Account Deficit

2001-02

24.32

24.93

-0.70

2002-03

24.81

25.93

-1.21

2003-04

26.87

29.03

-2.25

2004-05

32.82

32.41

0.38

2005-06

34.65

33.44

1.13

2006-07

35.66

34.60

1.03

2007-08

38.11

36.82

1.27

2008-09

34.30

32.02

2.27

2009-10

36.48

33.69

2.77

2010-11

36.84

34.02

2.82

2011-12

35.00

30.81

4.19

2012-13

34.00

29.50

4.50

*Estimate

Observation:

For the year 2007-2008, Grosss Domestic Capital formation was 38.11 percent and Gross Domestic Savings was 36.82. For the year 2012-13, it is 34 and 29.50 percent respectively. The current account deficit increased from 1.27% GDP to nearly 5% of GDP.

Also the Indian government should strive to reduce the current inflation rate from WPI 7 percent to 5 percent and the important consumer price index from 10.3 percent to say 7 percent. Timely action is necessary to

a)     Reduce the inflation rate

b)    Encourage gross domestic savings

c)     Oncourage gross formulation and

d)    Reduce the trade deficit substantially to achieve an higher level of economic growth.

This entry was posted in Bobby Srinivasan. Bookmark the permalink.

One Response to Economic growth rate and its relationship to Gross domestic capital formation and Gross domestic savings

  1. Pingback: Weak demand, a concern for IT sector – Can impact the Indian GDP | Kalyan's Lab

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