The High Level Committee on the Estimation of Savings and Investment that was constituted in 2007 and submitted its report in 2009 was the third such group to be formed to recommend improvement in the quality of the estimates of these important economic variables. This article discusses and critiques the report of the Committee.

K G K Subba Rao (kgksubbarao@gmail.com) was formerly Adviser, Department of Statistical Analysis and Computer Services, Reserve Bank of India, Mumbai.

In

making events in the annals of the

I ndian Statistical System are the appointment of the National Statistical Commission (NSC) (2000), and in 2007, the High Level Committee (HLC) on the Estimation of Savings and Investment (report submitted in 2009), appointed by the government. Both the committees were under the chairmanship of C Rangarajan.

The NSC Report is comprehensively covering the entire gamut of official statistics in the Indian economy, which, inter alia, covered the estimates of savings and investment in the fold of National Accounts. Prior to HLC, two committees examined the problems on the subject, the first one in 1982 (chairman: K N Raj) and the second one in 1996 (chairman: Raja J Chelliah). Apart from the recommendations on the methodological aspects of savings and investment, a distinguishing feature of the HLC Report is the recommendation of launching integrated household income and expenditure surveys, which together with the enterprises surveys of the household sector, are expected to be useful in generating the estimates of savings of the household sector, so as to serve as a crosscheck with those available from the National Accounts Statistics (NAS). Another important addition is the coverage of the flow of funds accounts, which are designed to have a link with the estimates of savings and investment. There are also a few studies of interest included in the report as separate chapters, which have a bearing on the above estimates. Thus, the HLC Report covers a wide spectrum of r elated areas, in addition to the methodological aspects of savings and investment.

The Reserve Bank of India (RBI), which is a partner in the compilations of savings along with the Central Statistical Organisation (CSO), has been closely associated in all these committees. The RBI is also the primary compiling agency for the flow of funds accounts, which are an adjunct to the estimates of savings and investment emanating from the non-financial side. Thus, any suggestions or recommendations on the estimates of savings and investment should be viewed from this perspective. The existing methodology with regard to the estimates of savings and investment, is described in the CSO publication (CSO 2007). The developments in information technology and communication systems since the early 1990s have enabled the statistical organisations like the CSO and RBI to provide important data and reports on line in their respective web sites, and reports are generated with minimum time lag, in contrast to the environment and infrastructure in the previous two decades, when the first two reports were released. Despite several suggestions from time to time to revamp the statistical systems and procedures, an ideal statistical system cannot be realised due to several constraints. Even so, data improvement is an ongoing exercise and an introspection on the methods and procedures is certainly a welcome step in this direction, even though it is difficult to implement some suggestions in view of the resource crunch and other organisational problems. Against this background, we may examine the important recommendations of the HLC, which is yet another effort to tone up the compilations of savings and investment.

The terms of reference of the HLC committee encompass all problem areas in the estimation of savings and investment for the three sectors, viz, (1) household sector,

(2) private corporate sector, and (3) public sector. These are discussed seriatim in the following paragraphs.

Household Sector

The share of the household sector in d omestic savings/investment is predominant. In the absence of a complete set of current and capital accounts of this sector, savings and investment are derived indirectly through the residual approach: financial savings are derived as a residual as a byproduct in the flow of funds accounts and investment in physical assets is derived through the commodity flow approach. The household sector covers, besides consuming entities, the households engaged in farm and non-farm business (manufacturing, trade, etc), private non-profit institutions

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serving households (PNPISH), and other entities not elsewhere classified. The disaggregation of the savings of the household sector had been the topic for discussion by the previous committees as well. Taking note of the practices prevalent in the United States and the United Kingdom, the HLC examined the feasibility of estimating the household savings through income and expenditure surveys, which are expected to provide direct estimate of savings of the households.

A perusal of the US National Accounts presented in the report (p 85) revealed wide differences in the estimates of personal savings obtained through surveys, in comparison with the estimates derived from the flow of funds accounts. The reports of the pilot surveys on income, consumption and savings brought out by the National Sample Survey Organisation (NSSO) with reference year 1983-84 based on a thin sample, pointed out several deficiencies in the survey results, in particular under-reporting of incomes and unreliable data on inventory holdings. The pilot surveys of this type need to be streamlined to obtain reliable data from the respondents.

The problems are compounded in the case of self-employed households, whose i ncomes cannot be assessed properly. U npaid family labour is employed in this business; it is necessary to impute the wage component for such labour to make a realistic assessment of savings of this category. Based on the deliberations of the HLC with the NSSO, a pilot survey is contemplated in the year 2010-11. These pilot surveys, based on a thin sample, should be of a repetitive type, so as to streamline the schedules, based on the field experience with the respondents, and thereafter, launch a nationwide survey with a much larger sample size.

The surveys of unincorporated enterprises in the household sector should also be launched simultaneously with the same reference years. Using the estimates from these two sources, it should be the endeavour to build up the estimates of the household sector, comparable with those of the NAS. This is possibly the approach indicated by the HLC, which should, in the long run, provide a cross-check with the existing estimates of savings of the household sector. Due to differences in scope, sample design, coverage and estimation procedures in the two sources, the estimates derived from the NSSO surveys and the NAS will be different. Nevertheless, the recommendations may be given a fair trial.

A few suggestions merit consideration in this context. As per the indication in the report, the NSSO may undertake the pilot survey on household income and expenditure in 2010-11. Possibly, this will be based on a thin sample, and such surveys need to be experimented to ensure reliable information from the respondents, in particular, the incomes and inventory holdings. The nationwide surveys on the subject can be included in one of the rounds of the NSSO, after these repetitive pilot surveys. It may also be worthwhile to canvass a sub-sample of rural and urban households in the forthcoming decennial All-India Debt and Investment Survey (AIDIS), which is perhaps slated to be covered in 2012-13, covering the relevant schedule, in addition to the regular data on debt, investment and financial assets. It is also useful to expand the list of financial assets and liabilities in the regular schedule.

The AIDIS tabulations are presently generated for the first visit of the survey, from which the stock data at the end of June are available. If similar data are available at the end of the second visit, the financial uses for each item could be worked out. Thus, it will be useful if the stock data at the beginning and end of the reference year for the expanded list of a ssets, are tabulated. It may be advantageous to enlarge the scope of the AIDIS survey. The advantage in canvassing this schedule in the AIDIS is that the financial flows can also be worked out from the stock data at the two end points, which could possibly give a rough estimate of savings from the financial side and provide a cross-check with the data generated from the income and expenditure side. Possibly, this could be attempted after the experience gained in the proposed pilot survey. The revised formats of the AIDIS and the tabulations suggested are also expected to be useful in attempting a break-up of total savings into rural and urban categories.

In a study by Subba Rao (1994), it was found that the savings rate of the households gets reduced considerably, if the savings of the unincorporated enterprises are netted out. Though this was a preliminary study, the results do indicate that most of the savings of the household sector is attri butable to the

household enterprises in the household sector. Even if the NSSO survey results covering pure households and other household enterprises surveys become avail able for some benchmark years, the savings of the household sector thus derived will be different, when compared with those in the NAS, for the aforementioned reasons. In another paper by Subba Rao (2008), the problems in using the survey results as inputs in direct estimation of the savings of the sector were discussed in detail.

Farm Sector Savings

An allied problem studied by the HLC relates to the savings of the farm sector, which is discussed separately in the chapter entitled “Farm Sector Saving in Relation to Investment”. The estimates of savings of the farm sector are generated using the results of the Situation Assessment Survey (SAS) of the farmers and the AIDIS, for the reference year 2002-03, both covered in the 59th Round of the NSSO, each survey presenting the estimates in respect of cultivator households. The income and expenditure data are culled out from the SAS, while the data on debt and multipliers (estimated number of cultivator households) are taken from the AIDIS. The SAS will provide these estimates of debt and number of cultivators.1

It will be appropriate if the results are confined to the SAS survey for internal consistency, instead of using data from two different surveys, differing in scope and coverage. The estimated number of households and average debt per household in the two sources are presented below:

AIDIS SAS

Estimated no of households (’00) 88,22,96 8,93,504 Average debt per household (Rs) 9,261 12,585

Based on the income and expenditure data of the SAS, it is mentioned in the report that there is dissaving of farmer households, with corresponding large debt amounts to meet the requirements of investment. It would be in order, if the data on investment in productive assets are also juxtaposed with the above data, which are also available from the SAS.2 As per this report, investment in productive assets formed hardly 7% of the total i ncome of the farmers.

Highlighting the dissaving of the farmers without reference to investment in

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productive assets will give a wrong picture. It is also necessary to give a break-up of total income from various sources, viz,

(1) farm business, (2) non-farm business, and (3) other sources, as available in the report under reference.

The purpose-wise pattern of debt should also be examined in this context, and debt for productive purposes only should be the guiding criterion, as a major portion of debt is incurred for consumption expenditure. As hinted by the HLC, countrywide surveys of the farm sector should be launched at periodical intervals for generation of the savings of this sector.

There are differences in concepts, definitions, methods of data collection, sample design, etc, in the SAS and AIDIS, even though the two surveys give estimates for cultivator households. In view of this, there are wide differences in the estimates of debt derived from the two sources, not only at the all-India level, but also across the states. These are brought out in a separate study by Subba Rao (2006). A mixture of the two sets of data differing in scope and coverage, will lead to misinterpretation of results.

The HLC recognised the importance of flow of funds accounts as a feeder for generation of estimates of savings, in particular, for the household sector. The financial flows accounts depicting the sources and uses of funds of different sectors of the economy should provide the linkage to the savingsinvestment gap on the real and non-financial side of the accounts. Thus, the linkage between the current and capital accounts needs to be examined, so as to measure the discrepancies between the two sets of accounts. The accounts from the financial side may be deemed to be more credible, and attempts should be made to reduce the discrepancies between the two sides. Though this is hinted in the report, the recommendations do not cover this aspect. This exercise should be attempted in the case of the government and private corporate sectors (net deficit sectors). In the case of the rest of the world sector also, there is a need to examine how far the financial surplus corresponds to the current account deficit in the balance of payments. It is too premature to attempt such exercise in the case of the household sector, without corresponding estimates from the current account, for which exploratory surveys are envisaged.

Taking into consideration the problems faced by the RBI in compilation of flow of funds accounts and the inordinate delays in getting the data for some of the subsectors, the HLC has made a number of recommendations to enable the RBI to compile and publish the accounts with minimum time lag. Important among them are the formats designed for major financial institutions like the Securities and Exchange Board of India (SEBI), National Bank for Agriculture and Rural Development (NABARD) and Insurance Regulatory and Development Authority (IRDA).

Shares and Debentures

The formats designed for the purpose will give a sectorwise breakdown of ownership of shares and debentures in respect of private corporate sector (SEBI), a complete profile of the assets and liabilities in r espect of insurance sector (IRDA) and c ooperative banks and societies (NABARD). In these formats, the credit instruments are split up into different sectors; in the case of the household sector, the information is sought for separately for pure house holds and unincorporated enter prises. The private non-profit institutions serving households (PNPISH) are not shown separately; this will be subsumed in the household sector. The mobilisation of resources through mutual funds has been on an increase in recent years, and as such this should be treated as a separate subsector of the financial institutions in the flow of funds accounts. These are not fully captured in the flow of funds accounts. It would be desirable to have a complete statement of sources and uses of funds of the mutual funds from the SEBI or the Association of Mutual Funds in India (AMFI). There is no mention of the private placement of shares and debentures. It would be useful to collect these details from SEBI. This was mentioned in the NSC report. The “worksheet approach” with the designed formats is expected to ensure timely flow of data to the RBI. It needs to be mentioned in this context that similar breakdowns of the sectors should be available in respect of the remaining sectors/subsectors, for which the RBI is compiling the accounts. Or else, the attempted exercise will result in a partial disaggregation of the household sector, with some details left off in other sectors. A case in point is the public deposits with financial and non-financial companies, where such details are not available. Though the proposed formats are certainly a welcome step, the disaggregation of the household sector‘s financial assets will be truncated, when such details are not captured uniformly in all the sector accounts. Also separate break-up of “other assets” into different sectors shown in the IRDA format of insurance sector is not relevant.

The HLC has taken note of the weak database in respect of household deposits with non-banking companies. Briefly, these cover conduct of a census of non-banking companies (financial and non- financial) coming under the purview of department of company affairs, which would cover all items in the annual accounts of the companies, including public deposits. Another recommendation is that data in respect of financial companies registered with the RBI should be provided by the central bank and sample studies will have to be undertaken in respect of rest of the unregistered financial companies. This is perhaps construed as a supplement to the census under reference; the estimates thus arrived at will be at variance with the census figures. This is apart from conducting sample studies annually, which should cater to the requirements of flow of funds a ccounts as well. In the private corporate sector, it is recommended that MCA-21 f ormat of the Ministry of Company Affairs (MCA) should also collect data on public deposits. Thus there are multiple data sets envisaged for estimating household deposits with non-banking companies. It is desirable to have recourse to one data source, instead of capturing the same infor mation from multiple sources. As it is stated that MCA-21 formats capture data of most of the companies in the private c orporate sector, this may prove to be a promising source, and the above recommendations may be redundant in such a scenario.

Private Corporate Sector

The HLC recommended that the data available in the MCA-21 format should be used for estimation of saving in respect of this sector. The additional data required for the purpose should be included in this data source. The databases of the RBI and the MCA are compared at the instance of the HLC, which is indicative that data for most of the items are comparable. When the meta data issues are sorted out and additional data are incorporated, the HLC recommended that from

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2010-11, this data source could be advantageously used. This is certainly a welcome step in improving the estimates of savings of this sector, as most of the companies will be captured, which will pave the way for dispensing with the present methodology of using the paid-up capital blow-up factors. As the MCA source captures all the items in the annual accounts of the companies, digitised data thereof could be used by the RBI for their company finance studies dispensing with the receipt of the annual accounts from the registrars. With this development, the utility of the RBI studies on company finances will be enhanced further. As per the methodology followed by CSO, the reinvested earnings of foreign direct investment (FDI) companies are netted out from the savings of the non-government companies. The source of data for this adjustment is not mentioned in the manual on national accounts (CSO 2007). It is perhaps desirable to obtain the data on retained earnings from the MCA-21 source and attempt a break-up of such savings into domestic and foreign entities in proportion to the ownership of paid-up capital, details of which are being culled out from the format prescribed for SEBI. It is necessary to collect these details separately for FDI companies for the estimation u nder reference.

Public Sector

The HLC recommended that the CSO should build up estimates of savings of l ocal authorities, by collecting details on a census basis for urban local bodies, and on a sample basis for rural local bodies, with coordination from the states. It needs to be mentioned in this context that the RBI requirements for flow of funds compilations for this subsector should also be considered in this endeavour, as the coverage of this subsector needs to be enlarged further. Another important recommendation of the HLC is the coverage of all mutual funds by tapping the data base from the Association of Mutual Funds in India (AMFI). This will certainly be an improvement. As stated earlier, this should be shown as a separate subsector in the flow of funds accounts also, giving a complete picture of the sources and uses of funds of all the mutual funds. Another interesting recommendation is the inclusion of the public-private partnership (PPP) entities in the fold of public sector. The economic ownership of these entities is the guiding criterion, as the stake in these projects varies over a period of time. Thus a project conceived as a public sector entity could turn out to be the province of the private sector.

Estimation of Capital Formation

The HLC notes, and rightly so, that there is currently no alternative to the residual method of estimation of capital formation of the household sector, but improvements can be made in this method by updating various rates and ratios used in the capital formation in the commodity flow approach. It is also observed that estimates of capital formation of the household s ector emanating from the AIDIS and other household enterprises surveys are on the lower side. As recommended by the committee, the MCA-21 source in respect of companies under construction should be used for improving the capital formation estimates of the private corporate sector.

In retrospect, it may be stated that capital formation estimates of the household sector continue to be fragile, as errors at various stages of compilations would be carried over to this sector. Nevertheless, it is possible to bring about improvements on the financial side of this sector, which would, in turn, depend upon the quality of the accounts of the other institutional sectors. The estimates of financial savings of the household sector should be in conformity with the flow of funds framework, which is an articulated interlocking system. As such, the financial uses and sources of the household sector are transcribed from the other sector accounts. Any improvements to be done in case of household sector should be considered in this linked framework and not in isolation. The disaggregation of the financial savings of the household sector should, ipso facto, consider these aspects also. Even though formats are designed for some of the financial institutions to ensure data supply to the RBI for the flow of funds compilations with a fine break-up of credit i nstruments into different sectors (with the household sector further splits up into pure households and household enterprises), similar information is necessary for other sectors for which RBI is compiling the accounts. From the published accounts, it is indeed, difficult to get such fine split-up in the other sector accounts, which are built-up from the

balance sheet data of the respective institutions. As indicated above, PNPISH are also subsumed in the households sector. Whatever be the details sought for, there will be some credit instruments, which cannot be allocated to any sector and it may be prudent to cover them under a separate category “others not elsewhere classified’’, instead of merging under household sector. It is hoped that the estimates of savings of private corporate sector will be streamlined further with the continuous flow of data in the MCA formats, which will be a departure from the era of building up the estimates by the paid up capital blow-up factors. The RBI studies on company finances will also have a new look and orientation with enhanced utility. Even so, attempts should be made to reconcile the estimates of savings, emanating from current and capital accounts with the requisite data made available from the above source.

The HLC Report does not make a comfortable reading with errors, inconsistencies, incomplete structure of sentences and lack of clarity at some places. Nevertheless, considerable thought is bestowed on various issues on savings and investment in the economy. Viewed in this perspective, the HLC Report is yet another milestone in reorienting the present systems and procedures. The UN System of National Accounts (SNA 2008) is in the pipeline replacing the SNA, 1993, and it will provide guidelines for further discussion on the national accounts.

Notes

1 NSSO Report No 498: “Indebtedness of Farmer Households”.

2 NSSO Report No 497: “Income, Expenditure and Productive Assets of Farmers”.

References

CSO (2007): “National Accounts Statistics – Sources and Methods”, Central Statistical Organisation, Government of India.

GoI (2001): Report of the National Statistical C ommisssion (Vols 1 and 2) (Chairman: C Rangarajan), Government of India.

– (2009): “Report of the High Level Committee on Estimation of Saving and Investment” (Chairman: C Rangarajan), Government of India.

Subba Rao, K G K (1994): “Methodological and Analytical Aspects in the Estimation of Saving and I nvestment in the Indian Economy”, Journal of I ncome and Wealth, June.

– (2006): “Indebtedness of Cultivator Households – Some Puzzling Results”, Economic & Political W eekly, 12 August.

– (2008): “On Estimates of Saving and Investment of the Household Sector”, paper presented at the Indian Association for Research in National I ncome and Wealth Conference, B angalore, N ovember.

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