Economic Crisis in the west is getting murkier by the passing day. Europe is struggling with Euro. Greece seems to be the first in a series of bail-outs which might give some momentary relief but to my mind – it is not the solution to the problem.
We all know that this problem of Euro or for that matter US Dollar started because of their economies working more on consumption driven model rather than Savings. How long can one sustain on borrowed capital! The defaults are popping out and an effort to plug them is creating more of underground uneasiness, which one day will erupt like a volcano.
These western economies are resorting to more liquidity into the system to drive the consumption. What is surprising is that despite swimming in liquidity, their economies are barely moving and it is hardly being noticed by the economist and Central bankers of the respective nations. As if to top it all – the comment from the Governor of Bank of England that savers are pushing the UK economy back into recession – is quite irrational and should be questioned in terms of its wisdom.
“Savings” or “Savers” are in no way destroyers of the economy. Rather it is the other way round – that uncontrolled consumption or consuming your future pay-outs is a sure way of converging into a failed economy. And this was amply clear to even our fathers and grandfathers – then why is it not clear to economists of such caliber…Is it that they are trying to evade this reasoning for a short term answer rather than looking at the bigger picture/long term effects. They would only know.
However, there is a brilliant story set out by one of the well known Investment Banker on its website where he has borrowed the protagonist Mr. Robinson Crusoe appearing in the novel of the same name and written by Mr. Daniel Defoe. Mr. Robinson Crusoe has been depicted as an adventurist in the novel. This Investment banker – to draw his point closer assumes for a moment Mr. Robinson as an economist in addition to being an adventurist as described in the novel. On one of his adventure Mr. Crusoe gets marooned on an island and he lives by catching fishes with his bare hands. Let us assume he spends 10 hrs a day to catch 10 fishes with his bare hands. The economist in him realizes that if he spends one hour less each day catching fish and instead, utilizes the same towards building a spear, he would be able to catch more fish in the future. And lo behold, in about 10 days, he builds a spear and now manages to catch 30 fishes in the same amount of time. Then, another idea dawns on him. How about setting aside couple of hours every day and building fishing net. Another 20 days pass and out comes the fishing net, now able to catch 100 fishes in the same 10 hrs.
The economist side of Mr. Crusoe gave up some of his present consumption so that he could achieve even higher consumption in future. In other words, he saved in the present to increase his output in the future whichever way you look at it. Economies work in the same fashion.
We have limited resources (savings) – and they all have to be converted in the most economic way (the conversion equation) to achieve the output (consumption). Any mismatch in this equation has to be funded by Borrowings which in turn will lead into chaos as we see that in Western countries now.
This simple idea which seems alien to the Western world has been proved correct time and again - that it is the real savings that matter and hence, it should be encouraged and not discouraged.
We as Indians save, as a much as 35% of our annual earnings for future growth. We should take pride that we are counted among the nations boasting of the highest savings rate in the world. A rate of ~35% which is a matter of envy across the world, at least to the western world.
Should we be proud of this rate? Indeed YES. It was because of this savings rate that we could tide over this economic recession. However we also need to do some introspection and answer some serious questions to ourselves. This rate of savings has been high for the past so many years and we have also understood in the most simplistic form that it gives immense boost to the economy. The why as a nation we are a still a laggard? Why we are still counted as a developing nation and not so developed? What savings has not been able to give impetus to our economy? What are the impediments in this savings getting translated into GDP? Etc.
I am a firm believer that there is no doubt in the theory that Savings does give a boost to the economy, however for this to happen, we need to know how this savings is channelized.
Taking the example of Mr. Crusoe again. Let us continue the story and for the time being twist the story a little. We find that Mr. Crusoe is an economist and realizes the importance of investing one hour daily for a good future tomorrow. He starts working on building the spear, but he is a bit in-efficient. The output that he is able to generate in that one hour is actually equivalent to not more than 4 to 5 minutes of work. Meaning he will take more time building that spear than usual and consequently loose on the fish everyday for more number of days. There will always be a point where his time spent on building the spear to kill more number of fishes equals the number of fishes he has lost every-day. Any further delay will actually put him into a negative pay-out. Though he may go around the world talking about his savings of one hour everyday but still he doesn’t reach anywhere and finds his pay-out rather less?
Our immense savings rate is gobbled by Government of India. Most of the savings made find their way into FDR’s, NSC, GOI bonds or secured instruments. We should take pride in the fact that People of India are conservative which has prompted them to be counted as the best “Savers” in the world. But too much of conservatism has led them to invest the money with GOI or secured debt (zero risk capital). Well, on the face of it, there might be no harm in investing with Government of India – but it is unfortunate that we have a massive Elephant (read Government) sitting there to work on this economic equation. It does take our savings to convert them to output (better future) but with an elephantine speed and makes a mess out of it. Invariably the near 35% savings rate converges to almost nil in terms of its effect and output. Like Mr. Crusoe spending his one hour equivalent to practically nothing in terms of output.
Our Government takes the savings from us and uses them to subscribe to the losses of Air-India, to subsidies the Petrol and diesel, to waive farmer loans etc. And still land up in a fiscal deficit.
For us Indians, than this savings rates becomes meaningless and a mere statistical number. The amount that we SAVE goes more in wastage than actual output – so how can we say that our savings rate are good when actually it goes into wasteful output. ”High savings rate promote Economy” is like saying half truth. It gets completed by adding the proper channelizing of these the saved resources.
By: Inani BP