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Article

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Coming to the third structural reform: investment rates have lingered around 15 per cent of GDP in the last decade thus constraining the rate of growth. Savings rates are dismally low for a variety of reasons. Private household consumption expenditure is relatively high, and fiscal deficits are high, lowering the national savings rate by at least five percentage points. Publicsector borrowing from the banks crowds out private-sector credit for fixed capital, financial intermediation is weak and access to finance is limited. The footprint of the government has to be reduced and the tax-to-GDP ratio raised to 15 per cent of GDP by bringing in those individuals and companies who are outside the tax net. This can be done by the provinces taxing sectors such as large holdings in agriculture, urban immovable property, and services. Capital markets are shallow with very little participation of retail investors. Government securities are bought and sold only by a select number of banks. Digitalization can play a useful role in mobilizing savings from those who are outside the current banking system. By reducing fiscal deficit, strengthening capital markets and promoting inclusive banking through digitalization, the domestic savings ratio can gradually rise to 20 per cent as our neighbouring countries have shown by reaching 30 per cent of GDP. This would minimize our heavy dependence on foreign savings, particularly in the form of debt and also the recourse to the IMF would be exceptional rather than a norm.

Publication Source

The News

Publication Date

12-9-2022

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