News: Saving grace for Indian growth

(TT 15/06/2006) New Delhi - Prime Minister Manmohan Singh’s dream of an economic growth rate of 8-9 per cent will go bust unless savings rates are heaved up to 32 per cent and FDI flows enhanced.

The Planning Commission in its draft approach paper to the 11th Five Year Plan has warned that the present savings rate of 28-29 per cent could merely ensure a GDP growth rate of about 7.5 per cent.

To touch 8-9 per cent growth, a pet theme of the Prime Minister, the savings rate requires a big push, according to the paper which will soon be circulated within the cabinet.

Plan panel advisers said, “The only way to push up the saving rate, will be to work out a package of fiscal incentives to get people and companies to save more.” This contrasts with the finance ministry’s manoeuvres to cut tax saving exemptions.

But officials said, “While multiplicity of tax saving schemes are not needed, a broad direction that it pays to save can be given by offering better incentives. We believe this should be done, especially in the pension and insurance sectors, which primarily finance long gestation infrastructure projects.”

Aware of such energisers, the UPA plans to push through a legislation to open up the pension sector, with up to 26 per cent FDI, to be followed by incentives in the next budget. “Opening up the sector will bring in more funds into play, besides attracting large amounts of FDI,” officials said.

The UPA is also likely to move ahead on FDI in retail in a limited format keeping Left sensibilities in mind. It also intends to lift the barriers before FDI in infrastructure, a sector where there are no policy differences with the Left.

A major thrust is higher FDI in mining and power. Multinationals are lobbying for 100 per cent FDI in mining, despite an upcoming review of the National Mineral Policy induced by domestic companies which are opposed to export of scarce minerals.

Steel majors like the Mittals and Posco prefer both iron ore and captive coal mining to be opened up to 100 per cent FDI. They want specialists to undertake captive mining. These units need not own the steel mills to which the ore from the captive mines will be supplied.