The euphoria around India’s high-growth trajectory is waning. GDP growth in the just ending financial year was down to 6.9 per cent and even an optimistic government does not expect it to be much higher in the coming year. This evidence suggests that the expectation that after transiting from the infamous “Hindu rate of growth” of 3-3.5 % to a more respectable 5-6% rate, India was set to join countries like China that cruise at 9-10%, is being belied.

India’s approach to that trajectory, which first stalled, now seems to have been reversed. This is giving rise to a tendency to look back to the previous decade to seek out the engines of growth that need to be revved to repeat the Chinese record.

The proximate reason for high growth during much of the first decade of this century is clear from the evidence. The acceleration in growth that heralded a new growth trajectory, which occurred after 2003-04, seems to have been the result of sweat rather than of dynamism. Growth spiked not because India was delivering more output from a unit of investment but because investment (according to the national accounts) rose sharply. So if the productivity of investment stagnated or even marginally declined, growth would still be high, because, despite being a poor country, India was keeping aside much more of its annual output for investment than for consumption.

What needs explaining then is the rise in savings and investment, and its recent fall. As the accompanying chart shows, India’s savings rate rose by more than 7 percentage points over a short period of two years (2002-03 to 2004-05). It then rose by two and a half percentage points over the next three years, only to return to its level in 2004-05. The behaviour of investment (gross capital formation) has been even more erratic. It also rose by 7 percentage points in the middle of the last decade. But this time in a single year (2004-05). It then rose by an additional one and a half percentage points by 2007-08. In sum, between 2001-02 and 2007-08, the savings rate rose by 11 percentage points and the investment rate by 9 percentage points. This compares with increases in the savings rate rose of less than 3 percentage points (from 25.3% to 28%) and in the investment rate of less than 2 percentage points (from 27.5% to 29.4%) during the 1990s.

Given the fluctuations in these rates, that question their robustness, it may be more appropriate to examine their decadal averages. The savings rate rose from an average of 18.8 per cent in the 1970s to 20.4 per cent in the 1980s, 25.1 per cent in the 1990s, and 32.8 per cent during the first decade of this century. The corresponding figures for the investment rate were 19.4 per cent, 24.3 per cent, 26.1 per cent and 31.6 per cent. Thus, it appears that the investment rate rose sharply in the 1980s and then in the 2000s. The saving rate rose sharply starting in the 1990s and continued rising through the 2000s. The source of savings also changed significantly, with household share falling. The corporate sector’s savings rate rose from 3.5 per cent of GDP in 2001-02 to 9.4 per cent in 2007-08.

The public sector, which recorded a negative rate of 1.7 per cent of GDP in 2001- 02, recorded and increase in savings to 5 per cent of GDP in 2007-08.

If a story has to be read into these figures it seems to be the following. India chose to prime growth with higher investment during the 1980s, which was financed largely with “foreign savings”, in the form of foreign borrowing.

Having move onto a higher growth trajectory, it sustained the process during the 1990s by keeping investment at its higher level and accelerated growth during the 2000s by raising investment even further.

The point of significance is that increased investment during the last two decades was supported with substantially higher domestic savings. This was not because India was not attracting foreign capital inflows.

It was just that after the adjustments necessitated by the balance of payments crisis of 1991, that capital has come through routes that do not finance productive investment, particularly portfolio investment in secondary markets.

If domestic savings kept pace with the much higher investment rates, especially after 2002, it must be true that the additional incomes resulting from improved growth must accrue to the sections or classes whose consumption needs have been largely satiated, encouraging them to save. In India’s case, that must be the corporate sector and the rich and upper middle households. Not surprisingly, rising inequality has been a feature associated with this kind of growth.

This does create a problem. If investment has to be high and rising there must be adequate inducement in the form of potential profit for that investment to occur. This would require either a large and growing domestic market or a rising volume of exports to foreign markets. The latter has not been a feature of India’s growth. Though liberalisation was often presented as a policy that would help producers located in India to establish a foothold in foreign markets, this has not happened in practice. India’s export performance pales when compared with that of other high-growth emerging economies, especially China’s. So, growth of the domestic market was a requirement for sustaining high investment levels.

The earlier perception was that a new middle class (primed with debt) and the rich benefiting from rising inequality would provide such a market. That was true for a while, but neither was that market large enough nor was its growth sustained to generate a vibrate industry. That explains the investment decline and the growth slowdown.