The most crucial recipe for growth is investment, which could be either mobilized by domestic savings (public and/or private) or obtained in the form of foreign direct investment (FDI). A cause of concern for the economy is that domestic savings have stagnated in the recent years. In fact, as a percentage of GDP, the domestic savings rate has fallen from 20.3 percent in FY2005-06 to 20.1 percent in FY2007-08. This implies that consumers had to allocate the incremental share of their income toward consumption because of the increase in the rate of inflation.
Reversing the declining trend in the domestic savings rate is a major challenge for the economy. A two-pronged attack will be needed for that purpose. Public savings will need to be raised by improving government’s revenue collection as well as by cutting down recurrent expenditure. Private savings will need to be encouraged and mobilized through a mix of prudent fiscal-monetary policies that are conducive to voluntary private savings as well as to their intermediation. The presence of a network of well-functioning financial institutions and a disciplined stock market is crucially important for that purpose. To that end, the government’s responsibility shall be to secure reasonable monetary stability so as to ensure that private savings are not discouraged by inflation.
As in domestic savings, gross investment has also slowed down in the recent years. As a percentage of GDP, gross investment has declined from 24.7 percent in FY2005-06 to 24.5 percent in FY2007-08. The main reason behind this decline is the slack in public investment, which has remained historically low in this country. Worse still, as a proportion of GDP it has declined over the past decade – e.g., from 7.3 percent in FY2000-01 to 5.0 percent in FY2007-08. However, since public development expenditure on physical infrastructure and human