Many neo-liberal reformers have argued that in a world of substantially more mobile capital, domestic savings is no longer the potential constraint on investment and growth that it could be when demand is not the binding constraint. Rather, it is typically suggested that what really matters is a deregulated environment designed to be attractive to external investors, which would attract foreign savings and allow domestic investment to increase accordingly. In accordance with this view, government policy over the 1990s sought to be increasingly attractive to foreign investment of all varieties, not only by removing a range of restrictions on inward capital flows of both long term and short term nature, but also through a number of fiscal and interest rate concessions. Success on this front – in terms of thereby attracting more foreign savings – would have to be measured in terms of the investment-savings gap (which in turn reflects the current account deficit and changes in foreign exchange reserves).
 
By this measure, the policy efforts of the 1990s appear to have been remarkably unsuccessful. The investment-savings gap as a share of GDP in the 1990s has remained at a level much lower than the average of the 1980s. As Chart 3 shows, the gap was largest in the latter part of the 1980s, when it amounted to 2.5 per cent of GDP, and has been at only 1.3 per cent of GDP subsequently. Thus, even in its own terms, the strategy of designing domestic economic policies to please foreign investors in order to add to domestic savings has failed to attract more foreign investment.

Chart 3 >> Click to Enlarge
 
At the peak of state involvement in the industrialisation process, in the period from the mid-1950s to the mid-1960s, the public sector accounted for well over half of gross domestic capital formation. In fact, this proportion continued even into the 1970s, and at is height in 1974-75 the public sector share of total domestic investment was as high as 65 per cent. Over the first half of the 1980s, as can be seen from Chart 4, the share of the public sector in gross domestic capital formation was roughly stable at around half, but towards the latter part of the decade, and especially after 1986-87, it began to decline both as a share of total investment and as a share of GDP.

Chart 4 >> Click to Enlarge
 
Over the 1990s, the share of the public sector in investment has slipped quite substantially. In terms of proportion of GDP, the year-on-year decline in public sector capital formation from the beginning to the end of the decade has been as high as 2 percentage points. This reflects the general perception of declining state involvement in productive investment activity, which is mirrored in the budgetary variable of declining capital expenditure of the Central Government as a share of GDP, but extends the decline to all public sector entities taken together.