Macro/Finance Group, NIPFP

Savings and capital formation in India

Savings and capital formation in India, Ila Patnaik and Radhika Pandey. In Grasping greatness. Penguin, (forthcoming).

High levels of savings and investments are key to India's sustained and robust long-term growth. While India's saving rate has declined in recent years, a big- ger challenge facing the economy is the intermediation of savings to finance the growing requirements of industry and infrastructure. This paper describes the tra- jectory of savings and investments in India. The major source of investment in the coming decades is expected to be investment in infrastructure and in micro, small and medium enterprises. The paper highlights the issues in infrastructure and MSME financing and proposes an agenda for reforms. Reduced financial repres- sion, deep and liquid bond markets, improvement in banking regulation, improved access to bank credit to MSMEs should be the agenda for financial sector reforms. A framework for failure resolution of financial firms and a conducive environment for competition in the financial sector should be part of the strategy to promote the rate of savings and capital formation.