The question is why America is so rich when its saving rate is so low and India is so poor when its saving rate is so high? One of the highest saving rates is in Japan and its economy is not performing since many years now.
The American dollar is the most widely used currency in international trade. Americans are great spenders and their individual consumption levels are very high. The around 350 million Americans have a combined purchasing power may times that of more than one billion Indians. Americans are very poor savers but huge spenders. Their economy is heavilydependent on expenditure by its citizens.
America imports far more than it exports. Japan exports far more than it imports. Yet it is the Japanese who spend less and Americans who spend more. The Japanese, as is the general Asian custom believe in high savings. The resultant huge savings are recycled back into the US financial system in form of deposits, bonds, investments etc. Similarly the Chinese are also good savers and a significant part of these funds end up being parked in the US economy. Even India has parked around $50 billion of its foreign reserves in USA. Japan is supposed to have invested trillions of dollars in the USA. The Chinese are supposed to have around $160 billions invested in USA.
Also every country of the world wants a share of the American market pie. So, because of high competition, goods reach the American customers at relatively very low prices. I remember many years back, seeing, well stitched men’s shirts from Bangladesh, selling for $2 per piece in New York. How cheap can a shirt be than this price. All countries must have dollars if they want to import essential goods and petroleum products.
Thus America benefits both ways. It gets surplus dollars from the world over for safe keeping and its citizens get best of the goods at lowest of the prices. This creates a productive cycle of high consumption andsupply of goods making America the richest country in the world. And to know that American fiscal deficit runs into trillions of dollars. The Afghan war is consuming billions of dollars.
But the Americans are not worried, as it will continue to receive dollars, estimated to be at the rate of $2 billion per day from other countries for safe keeping. Such is the trust in them, that nearly 40 countries of the world have their gold holdings in the American Federal Banks. No doubt that the Americans are enjoying life by being great spenders.
The Indians are good savers and it is estimated that the saving rate is nearly 30-35%. These funds are inefficiently used by the government for its various schemes and we, by now know, in which pockets a good portion of it ends up. The country is periodically short of dollars and has to resort to frequent devaluations, to buy the ever costly dollar. It sets in a negative cycle as our imports are more than exports and nearly 80 % of our crude oil is imported. Also a significant portion of our savings are in form of gold which is non productive in nature and huge funds get blocked. Coupled is the fact that nearly 60% of our population has access to only about 15% of our GDP. All this makes us good savers but poor spenders and thus there is no economically healthy productive cycle established.
Coming to the Japanese, they export a lot ,save a lot but these days do not spend a lot and this has resulted in stagnation in their economy. They seem to be working for the American economy, for it is there, where they send their huge savings.
No doubt the Americans are not worried even if there economy is not performing properly. All the other nations are working to keep them rich.