Savings and investment rates in fiscal year (FY) 2021-22 were 30.2% and 29.6%, respectively.
According to the rating agency, the current levels of the growth rate are not enough for India to reap the benefits of the demographic dividend.
“The age structure of India’s population is such that the labor force will continue to grow for the next 20 to 25 years and therefore to employ them gainfully, the country would need a sustained growth rate of Gross Domestic Product (GDP) of more than 8 percent in the next two or three decades,” he added.
The rating agency said much of the investment will need to be in infrastructure, which will help revive private investment by easing supply constraints and offsetting weakening foreign demand caused by global headwinds.
“While the current approach of the government to increase its capital spending on infrastructure seems to be the right step and is aimed at increasing the investment rate, there are no consistent steps to encourage savings in the economy,” he added.
He noted that the combined rate of investment from the public sector and general government is unlikely to change much from what has been seen in the past, as the government has simultaneously reduced capital spending by central public sector companies. while increasing its capital spending by 3.3 percent of GDP in the 2023-24 union budget.
The investment rate remained above 35 percent for nine consecutive financial years beginning with fiscal year 2005.
The agency highlighted that the drop in the investment rate after FY11 was due to the difficulties faced in project implementation and the stagnation in the capacity utilization of the manufacturing sector, caused by weak internal/external demand.
“Since the decline in the investment rate in recent years is concomitant with the decline in the savings rate, the investment rate cannot be increased without an increase in the savings rate, or else it must be financed with the help of foreign capital,” he added.
Although the growth potential of an economy depends on a number of factors, the ratio of gross capital formation to GDP, also known as the investment rate, is considered critical to achieving sustained high GDP growth.
“When the economy grew rapidly after fiscal year 2004 and into fiscal year 2008, that was the period when the investment rate increased significantly. The investment rate increased after fiscal year 2004 and was 39.8 percent in fiscal year 2011,” he said.