In economic philosophy, the role of the savings rate has always been erratic. In the 18th century, Adam Smith lauded saving as a key virtue, while in the 20th century, Sir John Maynard Keynes, regarded it as a personal virtue but a social vice.
As the 21st century progresses, we might revisit this question: Should we prioritise spending or saving?
While India’s union budget 2023 was hailed for explicitly enticing people to spend more money, the overall current global government policies too continue to adhere to this spending-over-saving paradigm that Keynesian economics pioneered.
Spending dominates the discussion because it is said to stimulate the economy; every buck spent in the economy doubles as someone else’s income, resulting in a chain of cash flow and economic course of distribution. Without consumption and demand, there can be no economic activities, industries, businesses, employment, earning, or even creation. While a constant lack of it can lead to self-reinforcing recession.
By definition, national savings refers to the average portion of total GDP that wasn’t spent on consumption, say it is the hole between a doughnut we can consume now. So how does the notion of cutting back on consumption aid in economic expansion?
Savings are vital in both recessionary and expansionary times.
During a slowdown rising consumption may stimulate essential economic forces in the short run. But in the long run, continued practice of overspending eventually leads to severe inflation, a drop in money’s purchasing power and even a reduction in the value of present savings. Further spending during a recession often calls for borrowing. This increases not only personal but in most cases also national debt, both internal and external, straining an already fragile economy for a lasting period. The cumulative effects of these occurrences lower economic activity and raise unemployment, which can swiftly trigger a cycle of recession and debt.
Therefore, though we must indeed boost domestic spending during times of crisis, the only sure way to finance this spending without plunging the country further into debt is through domestic savings. Hence, if a nation has an optimal stock of savings its citizens will withdraw them during a recession and can stimulate the economy back to normalcy. Thus ultimately savers will save the economy without indebting it or themselves.
Now we can talk about the impact of savings during expansion.
Perhaps the most prominent reason savings have been heavily emphasized in all the economic growth models over the years is their ability to be converted into investment. Savings serve as capital for investments, boosting an economy’s output, revenue, and employment. This transfer of depositors’ funds to borrowers’ investments will be made possible by a robust financial system.
A palpable problem here arises that most developing countries like India lack both a strong financial system as well face low levels of financial literacy among a good chunk of their populace.
Thus, even the meagre savings levels found in such countries may never result in investments. As seen such savings can still be of significant value during a crisis but how do they contribute to the economy’s growth during an expansionary phase?
Savings that are turned into investments are a godsend to the economy. However, even if a portion of our savings isn’t invested, their value remains intact. Savings is a gauge of a country’s financial health and a shield for its citizens. Even in a period of boom, individuals have to face the natural rate of unemployment along with general economic turbulence. A person with substantial savings can weather these storms quickly and debt-free, continuing to be a valuable resource in economic growth rather than becoming a liability to the country’s financial system. A general truth we must remember is that an economy is nothing but the interaction and integration of its individual members. As a result, a country’s overall statistics are determined by the financial backing of its discrete members. The Economic Survey of 2019 noted that there is a bigger positive relationship between savings and economic growth than there is between growth and investment, encouraging people to save more.
The year 2008 (37.82%) witnessed India’s highest recorded gross domestic savings rate in the twenty-first century, which also occurred to be the year the country experienced a significant boom in investment. While the domestic savings rate (36.02%) fell in tandem with the 2010 current account crisis. A quick review of similar historical occurrences reveals that long-term economic stability and success require a solid savings base in addition to healthy levels of domestic consumption.
Further, the demonstration effect and relatively high levels of unproductive consumption are both major issues in developing countries. Each unit of money spent in an economy does stimulate it in some way, but the precise purpose for which it is spent will decide how much and in what ways the economy is actually affected. Not all consumption is equally beneficial to the economy. Unless people’s expenditure structure is improved, a significant portion of spending, particularly by the upper-middle and higher-income groups, will continue to be largely unproductive and often unnecessary.
A quick examination of the debt data for India reveals a rapid rise in household debt over the past few years, reaching a recent peak of 14.513% of nominal GDP in the year 2021, an improvement in private non-financial corporate savings but the presence of significant debt in most Indian companies, a continuous rise in India’s external debt, and more. These circumstances have worsened as a result of the unprecedented COVID-19.
As the nation slowly recovers from the impacts of the pandemic a greater emphasis should be placed on both healthier consumption habits and greater savings stocks.
The fact that a large portion of India’s population falls into the low-income group category, where there is insufficient income to encourage saving, continues to be a serious challenge. Therefore, it is even more crucial that those with the means to save do so and do it in a way that benefits the entire economy.
This has been made feasible in recent years by active efforts to enhance the banking and financial markets, thus an improvement can be seen in the future if these efforts are continued and financial literacy among the people can be increased.
National policies and programmes are solely intended to advance specific behaviours that are advantageous to the populace and the country. The structure of every country’s economy will ultimately be determined by the collective actions of its individual residents. It is crucial to promote wiser financial decisions and to keep in mind that while consumption is a necessary condition for economic growth, it is not a sufficient one. Spending is essential but saving is an indisputable surplus; finding a balance between the two is the only lasting transit towards greater economic growth.
- Swarnim K.
