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ANNUAL REPORT 2007-08

Gross domestic savings as a per cent of GDP at current market prices increased from 34.3 per cent in 2005-06 to 34.8 per cent in 2006-07 as a result of increase in the savings of private corporate sector and savings of the public sector. While there has been no change in the saving rate in the form of physical assets for the household sector at 12.5 per cent, a marginal decline in the form of financial savings from 11.8 per cent in 2005-06 to 11.3 per cent in 2006-07 was observed. Thus the household saving rate has declined to 23.8 per cent in 2006-07 from 24.2 per cent in 2005-06. The saving rate of the private corporate sector had increased from 3.4 per cent in 2001-02 to 7.5 per cent in 2005-06 and further to 7.8 per cent in 2006-07. Public sector savings further improved from 2.6 per cent of GDP in 2005-06 to 3.2 per cent in 2006-07 due to higher savings of non-departmental as well as departmental enterprises. While the gross domestic saving rate at the economy level increased by 5 percentage points in 2006-07, the gross domestic capital formation rate increased by 4 percentage points from 35.5 per cent in 2005-06 to 35.9 per cent in 2006-07. A marginal decline in net capital inflows from 1.2 per cent in 2005-06 to 1.1 per cent in 2006-07 was recorded.

Preliminary estimates of household financial savings released by RBI revealed a change in the pattern of the household savings in 2007-08 from that of 2006-07 reflecting the households preferences in a growing economy. As a percentage of GDP, while savings in the form of currency and investments in shares increased in 2007-08, savings in the form of bank deposits has declined. Gross financial savings of the household sector comprised of 11 per cent in the form of currency, 56.5 per cent in the form of deposits. The share of insurance funds in household savings increased from 14.9 per cent in 2006-07 to 17.5 per cent in 2007-08 reflecting households’ need for insurance and availability of innovative products customized to different segments of the households. Savings in the form of life insurance funds increased to 16.9 per cent in 2007-08 from 14.4 per cent in 2006-07, which could be due to the success of ULIPs in 2007-08. Postal insurance has marginally increased from 0.3 per cent in 2006-07 to 0.4 per cent in 2007-08. A similar increase was observed in the investments in Mutual Funds. Their share has increased from 5.2 per cent in 2006-07 to 7.7 per cent in 2007-08.

Price Situation

Inflation across many countries firmed up during 2007-08, mainly due to higher food and fuel prices as well as strong demand conditions. Increase in oil prices to record high levels caused concern over inflation risks and demand-supply imbalances. The above conditions impacted the inflation level in India also. Inflation as measured by the movements in the Whole Price Index (WPI) increased to 7.7 per cent at end- March 2008 from 5.9 per cent a year ago. Among primary articles group both food and non-food, exerted upward pressures on inflation during 2007-08, reflecting lower domestic production of some commodities as well as firm international prices. Various supply side measures to improve domestic availability of rice and wheat undertaken by the Government contained the high inflation. Within food articles, rice, wheat and milk prices increased, on an year-on-year, by 9.1 per cent, 5.1 per cent and 8.7 per cent, respectively in 2007-08 as compared with 5.7 per cent, 7.3 per cent and 8.4 per cent, respectively a year ago. Within non-food primary articles, oil seeds and raw cotton prices increased by 20.3 per cent and 14.0 per cent respectively on top of 31.6 per cent and 21.9 per cent increase a year ago. Overall, primary articles inflation, on an year-on-year basis was 9.7 per cent at end March 2008 as compared with 10.7 per cent a year ago.

Fuel group inflation, which was negative during June-November 2007, reflecting the base effect as well as reduction in petrol and diesel prices in November 2006 and February 2007, turned positive from mid-November 2007 and reached 6.8 per cent on March 29, 2008 as against 1.0 per cent a year ago. The increase in fuel group inflation beginning November 2007 was due to continuous increase in the prices of non-administered petroleum products as well as upward revision in the domestic prices of petrol and diesel. International crude oil (Indian basket) prices increased by almost 75 per cent from US Dollar 56.6 barrel in February 2007 to US Dollar 99.3 a barrel in March 2008.

During 2007-08 inflation in manufactured products was the main driver of overall inflation. Inflation in the manufactured products increased to 7.3 per cent at end March 2008 as against 6.1 per cent a year ago. With a weight of 63.8 per cent, manufactured products contributed 52.8 per cent to the

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