Lead and Lag Industries
Among the industries, there are some as lead sectors and others as lag sectors. The savings and investment flowing into the lead sectors result in accelerated growth while those in the lag sectors may have less dynamic effects. Some of the lead sectors also called "sun-rise industries" are electronics, computers, chemicals, communications and hi-technology industries.
The future growth prospects of the economy depend on these industries, some of which have high capital-output ratios. The secondary market trends, the share prices and market capitalisation would depend more upon these industries in future.
Shifts within Industrial Sector
Growth process involves structural shifts in the economy as between agricul¬ture and industry and in favour of the latter, which was reported earlier. More importantly, within the industrial sector, there have been shifts over the long run in favour of the organised manufacturing activity and from consumer goods to capital goods and durable goods. The base of industrial structure has been widened and many new industries have been added in ***** after the initiation of the planned process.
Among the various industries, production in mining, oil exploration and gas products, etc. has been increased significantly both in quantitative terms and relative terms in *****. The unregistered manufacturing sector, particularly small-scale sector accounted for about 8% of the NDP while registered manufacturing activity constituted 13% of the NDP. It is no doubt true that the growth of modern large-scale industry under the planned process has reduced the importance of the unorganised small sector. But even so the unorganised small sector now accounted for around one-third of the total industrial production. This shows that this sector still occupies an important position in the *****n Industry.
The other main features in the structure of the *****n economy are a larger rise in the shares of transport, communications, energy, banks and insurance, which shows that the role of infrastructural industries in the economy has increased significantly. Besides, the share of public administration and defence has also grown over the past few decades, partly due to the increase in the role of the public sector in the economy and partly due to the expansion of the government activities in providing infrastructure and other services.
Savings Rate
The Central Statistical Organisation (CSO) has defined savings as the excess of current expenditure over income and is a balancing item on the income and outlay accounts of producing enterprises and households, government administration and other final consumers. In simple words, savings are the excess income over expen¬diture of the economic units. For the purpose of estimating domestic savings, the economy in a closed set up has been divided into three sectors: household sector, private corporate sector and public sector.
The savings at household sector, which account for the bulk of savings, are measured by the total of financial savings and savings in physical assets. The savings in financial form include savings in currency, bank deposits, non-bank deposits, life insurance funds, provident and pension funds, claims on government, shares and debentures, units of UTI and trade debts. Of these, currency and deposits are voluntary savings and motivated by transactions and precautionary motives and are governed by interest income and other incentives. The savings in life insurance, provident and pension funds are contractual savings governed by precautionary and contingency motives. The claims on government are compulsory deposits, tax credits and investments in government bonds, etc.
The savings in the form of units, shares and debentures etc. are all voluntary savings and are used for investment in the business sector, directly or indirectly. The above are the gross savings against which should be set off the financial liabilities such as borrowings by them from the government, business sector and other sectors of the economy. The flow of net savings in financial form is a relevant variable for influencing the growth process in the economy. The foreign sector is the fourth sector in an open economy contributing net savings
The gross savings of the household sector constituted around in 20% of the GDP in recent years. Of these more than two-fifths is in physical assets and three-fifth in financial form. The savings in physical form include agricultural implements, tools, tractors, consumer durables, gold, silver etc. among the rural households, and such items as real estate, buildings, durable goods, gold, silver etc. among all households. The savings in physical form are less productive, while savings in financial form are more productive in various degrees depending on the efficiency of their use.
Structure of the Economy
The Economy has undergone vast changes since planned development was initiated in 1951. Early in the fifties total domestic savings as a percentage of GDP was hardly 5% and rate of growth of GDP was around 3%.
The structure of *****n Economy in 1951-52 showed that the shares of the primary sector, secondary sector and tertiary sector were 56%, 17%, and 27% respectively. The primary sector consists of Agriculture, Forestry, Fishing, Mining and Quarrying. The secondary sector comprises Manufacturing, Construction, Elec¬tricity etc. The tertiary sector encompasses the rest of the economy, viz., Transport, Communication, Trade, Finance, Real Estate, and Other Services. By the end of the Seventh Plan (1990-91), after four decades of planning, agriculture accounted for 35% and manufacture and construction sector for 26% and the tertiary sector accounted for the rest (39%). By 1998, the importance of the services sector has gone up further to around 49%.
It would thus be seen that the importance of agriculture has gone down from 56% to 27% while the significance of manufacturing and services has gone up significantly over the planned period mainly due to shifts of resources from the primary sector to other sectors of the economy and in particular the services sector. The saving rate continued to be 22 to 24% of the GDP during the eighties and nineties while the same in fifties was only 10%. In 1997-98, savings rate is estimated at 26.5% and Investment rate at 27.8%.
from 15 days to 3 years. The interest rates will vary from bank to bank but the ceiling rates are fixed by the RBI upto one year deposits at present. These deposits are also insured with the Deposit Insurance and Credit Guarantee Corporation. Besides the operation of the banks, being regulated and inspected by RBI, the deposits kept with them are supposed to be safer and risk free. Although the returns are lower, the risk is also lower and risk averse investors will prefer investrncnts in these avenues.
Next to keeping in cash most savings generally flow into some form of the bank deposits. The average Households in ***** keep about 10-15% of their savings in financial form in cash and nearly 36-42% in bank deposits of various forms. But these avenues of investment give a return which is zero in the case of cash or a return less than or equal to the inflation rate a about 10 to 12 per cent per annum from the financial system and promote production of goods and services in the real sector, leading to a rise in output and incomes of the people.
The role of the financial system is thus to promote savings and investment in the economy and to enlarge these resources flowing into the financial assets, which are more productive than the physical assets. Even among financial assets, some are more productive than others and a proper financial intermediation and sophistication in financial services would promote larger production of goods and services in the economy. The financial system thus has an important role to play in the productive process and in the mobilisation of savings and their distribution among the various productive activi¬ties. The stock and capital markets have thus a significant role to play in this context because they are part of the financial system.
They promote inter alia a larger mobilisation of savings by facilitating investment in financial assets such as shares, debentures, securities, etc., and a greater degree of liquidity is imparted to the existing investments by facilitating the purchase and sale of existing securities through the secondary market (viz., stock market). They also provide encourage¬ment to the listing of the shares of companies which facilitates their trading and the valuation of their assets by virtue of a quotation on the stock exchange, and help them to raise further resources, if need be.
These institutions promote the expansion of the new issues and in the raising of larger resources in the capital market through widening the base of trading, increase in the number of instruments for savings and investment and through widening the base of trading, increase in the number of instruments for savings and investment and through widening the network of saving moblisation efforts. The recent increase in the financial institutions such as leasing and hire purchase and Housing Finance companies, merchant banks and mutual funds also helped to increase the degree of specialisation in the financial structure. New instruments of trading such as participation certificates, certificates of deposits, commercial paper are being experimented in the money and capital markets which have widened the scope of financial services and sophistication in *****.
MACRO ASPECTS OF SAVINGS AND INVESTMENTS
Savings and Investment which are promoted by the capital market are the basis of capital formation and economic growth in the country.
As such it is necessary to present at the outset the inter-relation between savings and investment and growth in relation to the financial system in the process.
Bank Deposits
Commercial and cooperative banks accept deposits from public in the form of current account which bears no interest, savings Accounts which bear interest varying from 4.5% to 5.5% per annum, and fixed deposits of varying maturities
Financial Investments vs Physical Investment
Many savers will have their first preference for physical investments which are less productive and rarely income earning. Such investments are in consumer goods — non-durables or durables, gold, silver, cars and antiques and 'Curios.' These are satisfying the immediate consumer needs, for comfort, luxuries, social status, ego satisfaction, etc. Some investments of physical nature are more in real estate, land, buildings etc. Some of them if rented out to others give income and sometimes capital appreciation also, if the location is at good places or commercial areas. Similarly, gold, silver and other metals, diamonds, and antiques may present capital appreciation, without giving any regular income. Some investments are for social status and prestige as gold, diamonds, jewellery etc.
Investment Opportunities
Investment avenues are multifold and each has it own risk-return characteris¬tics. Riskless investments in the common parlance are bank deposits, Govt. securi¬ties, bonds of Govt. and semi Govt. bodies, post office savings schemes, P.O. deposits etc., Provident funds and pension fund schemes, Insurance for life, endownment, accident, etc. The details are discussed in another chapter.
Investment and Speculation
Purchase of assets like shares and securities can be for either investment or speculation or for bo2th. Investment is long-term in nature.
While speculation is short-term. Investment aims at income and normal long-term capital growth while speculation aims only at short-term trade-gains through buying and selling. Investment is less risky and speculation is more risky.
Basically, both aim at income and capital appreciation. But the difference is in motives and objectives. All investments are risky to some extent but speculation is most risky as it involves short-term trading, buying and selling which may lead to profits sometimes and losses at other times.
Investment for Consumption and Business
Investment for Consumption and Business: The income is divided into two components, namely, consumption and investment. The amounts not consumed are saved and invested.
But investments are also useful for present and future consumption in the case of consumer durables, cars, gold and silver etc. But investments generally promote larger consumption in future as they lead to more income and larger capital appreciation in the years to come.
Some investments in business are used in trade and transport and other services. Thus, doctors, lawyers, traders etc. spend money for making investments for their business, which lead to further consumption or income.