An economy different from US

Posted on August 16, 2010


The rule of economics that says if interest rates are low, people spend more and save less, does not operate in India as it does in the US. Here, the growth in spend is always less than the rise in income. Yet, our policy-makers tend to see India as US policy-makers see America, overlooking behavioural differences, says S. GURUMURTHY.

Most Indian intellectuals, including the media, often love to draw a contrast between ‘India’ — meaning the urban — and Bharat — meaning the rural; the former as ‘modern’ and the latter as distanced from ‘modernity’. This comparison, long settled in Indian discourse, pretends that today’s India is more like the West, and today’s Bharat is more like yesterday’s India.

But a deeper look suggests that this analogy seems superficial. In appearance, urban India — particularly, the metros — does look like the West, but the similarity ends there. A closer scrutiny reveals that even the metro Indian is, in his economic behaviour, unlike his counterpart in the West, and not very different from his rural Indian cousins. .

Chapter I (Page 3) of the Economic Survey 2007-08 tells us something about the average Indian’s economic behaviour. It correlates India’s “Per Capita Income and Consumption” for the period 1980-81 to 2007-08. For the 12 years from 1980-81 to 1991-92 per capita income grew by 3.1 per cent per annum and per capita spend by 2.2 per cent.

And in the next 11 years from 1992-93 to 2002-03, per capita income grew by 3.7 per cent and per capita spend by 2.6 per cent. In the subsequent five years to 2007-08 the annual per capita income growth doubled to 7.2 per cent; the spend moved to 5.1 per cent. An unwavering pattern for 28 years — long enough to fix the character of a people — is self-evident. The growth in spend is always less – yes, less — than the rise in income.


Indian policies were socialist up to 1992 and increasingly liberal thereafter. The per capita income of Indians rose sharply from 2002-03 but their spend did not rise as much. Instead, their savings rose in greater proportion. Household savings rose from 22.9 per cent to 24.3 per cent of the GDP between 2002-03 and 2007-08. Says the Survey: “The average growth of consumption is less than the average growth of income, mainly because of rising saving rates.”

This sets the Indians, in India and Bharat, apart from the West. When, in the early 1990s, the Indian government asked for his counsel on how to promote growth, Dr Jagdish Bhagwati, the Indian-born US economist advised: Indians should spend more and avoid saving which, he said, was — believe it or not — wasteful!

Despite the transition from socialism to liberal economics promoting consumption-friendly policies, Indians do not seem to have drastically changed their lifestyle. Anglo-Saxon countries could, by policy , make their households spend more than their current income even if that meant risking household bankruptcy. Even the marginal household savings in Anglo-Saxon economies are mostly of a risky nature .


Over half the US households are hooked to stocks. The US household economy went into the red in 2005, with their spend topping income. To maintain growth, the US Fed encouraged Americans to spend based on unrealised asset values, of stocks and homes.

Homes became like stocks; and both stocks and homes finally became like ATMs for them to borrow and spend. This was not seen as risk, but promoted as a virtue. Alan Greenspan, who headed the US Fed for almost two decades, saw no virtue in savings as developed economies provided social security; he viewed spend beyond current income as growth-friendly.

He repeatedly cut the interest rates to help the Americans spend more and save less. They obliged by spending more when the interest rates came down and saved less. But, finally, they stopped saving altogether and began spending beyond their income. The US now realises, but only now, that persisting with that model has been the cause of today’s global crisis .

See, as a contrast and as an example, how non-Anglo Saxon India, Japan and Germany behave. They do save a lot but mostly through banks, rather than stocks. More than 51 per cent of Japanese savings, about $7 trillion, lies deposited in banks at less than 1 per cent return; about 26 per cent is placed in insurance and only 11 per cent % in stocks.

The Germans and the French also prefer banks and insurance — with over 51 per cent of their savings in banking and insurance instruments. Stocks are not high up in their list of preference: only 7 per cent German households have stocks. In India less than 8 per cent of annual household savings gets into stocks. In Japan and India, cuts in interest rates do not result in private spend. In Japan, money was almost free of interest till 2005; now it costs 0.5 per cent Yet that hardly altered Japanese frugality. Indian bank deposit rates came down from 12-13 per cent in 1995-96 to 4-5.25 per cent in 2001-02 and to 7.5-9 per cent in 2007-08. In 1995-96, inflation was 8 per cent, in 2001-02, 3.6 per cent and in 2007-08, 4.7 per cent As a result, real interest was 4-5 per cent in 1995-96, less than half of it at 2 per cent in 2001-02 and below 3 per cent in 2007-08. Yet the household saving rose instead of falling.

From 18.5 per cent of GDP in 1995-96, it rose to 22.1 per cent in 2001-02 and further to 24.3 per cent in 2007-08. So the rule of economics, which says that if interest rates are low, the people spend more and save less, does not operate in Japan or India the way it does in US.


Interest rate influences business but not people. It means that economic behaviour, in India or Bharat, is akin to Japan , and quite unlike America .

Yet, Indian policy makers tend to see India like US policy makers see America. For example, there was a sharp deceleration in the growth of per capita income in India in 2008-09, hence the per capita spend decelerated even more.

But, the Economic Survey 2008-09 speculates, like a US policy maker would, that the deceleration in spend may be due to fall in stock and property prices ; cut back in consumer credit; uncertainty in labour market; and consumer deferring buying or choosing unbranded low quality alternatives! Obviously those who wrote the 2008-09 Survey did not look at the earlier one.

As a direct consequence of the behavioural difference, the economic model that operates in non-Anglo Saxon nations also differs from the Anglo American model. The core of any economic model is the rule and the mechanism of distribution of resources, particularly money. In the socialist model, the budget is the core; in the Anglo Saxon model, the market is the core.

But in the non-Anglo Saxon model, the bank is the core. In the first model, the government is the key; in the second, it is the market; in the third, it is the household. While the government and the household can absorb shock; the market can only distribute money, like it distributes wealth, in both cases, admittedly, unevenly.

In a paper published by the Bank of International Settlements (BIS paper no 46) titled “A note on Japanese household debt: international comparison and implications for financial stability” the authors, who are officials of the Bank of Japan, conclude thus: Japanese households prefer bank deposits over other risky financial assets; this is despite all well-developed financial instruments being heavily traded in Japan. The conservative approach of the Japanese has mitigated the effect of the decade-long economic slump in Japan; their households absorbed the shock of the burst after the boom.

See the contrast in the US. Households in the US were first bankrupted by policies to create the economic boom; later the inevitable bankruptcy of households became the cause of the burst. That is, the US households were used to the trigger the boom,but when the burst came, the US households became its first victim.


While Japan is clear that making market the core will not work when the people prefer safety in savings, India is not clear. It is because the Indian discourse does not look at India; instead it looks at the West and particularly the US, to copy. Japan has constantly looked at the Japanese and did what largely suited them, despite being abused as a crony economy. Today they stand vindicated; and the US stands repudiated.

It needs no seer to say that India is different and unlike the US. And in the first budget after the global crisis broke out, the finance minister had the opportunity to tell this truth to India and Indians; and also to the world, like the Japanese, Germans and French have repeatedly done. He has missed that opportunity. For this, the entire Indian discourse, including the media, is to be blamed, and not just the Finance Minister.

Posted in: Indian Economy