# If Gross Savings is less than Gross Investment, could we say that investment is being made with borrowed money?

For example, gross savings of India in the financial year 2014 - 2015 was $30.2%$ of GDP, while the Gross Investments during this same period was $31.6%$ of GDP. Can we then conclude investments are being made with borrowed money?

Also, if "Gross Savings" is $30.2%$, can it be said that an average person in India saves about $30.2%$ of his income?

Yes, in particular, the Home country is borrowing from abroad.

• In a closed economy,

$\text{GDP} = C + G + I$. And savings is defined as $S = \text{GDP} - C - G$. And thus, it is necessarily the case that $S = I$.

Example. In 2015, India produces 10 bananas, each valued at ₹10, for a total value of ₹100. Private consumers consume 4 bananas ($C = ₹40$), government consumes 5 bananas ($G = ₹50$), and 1 banana is stored for consumption in future years ($I = ₹10$). (Bear in mind that additions to inventories, as with this last banana, count as investment.)

$GDP = C + G + I = ₹40 + ₹50 + ₹10 = ₹100$. Total final consumption ($C + G$) was ₹40 + ₹50 = ₹90. Hence, $S = ₹10$. This is a closed economy, so savings must necessarily equal investment. And sure enough, $I = ₹10$.

• In an open economy, it need no longer be the case that $S = I$.

Example. In 2016, India produces 10 bananas, each valued at ₹10, for a total value of ₹100. India also imports 5 bananas ($M = ₹50$).

Private consumers consume 4 bananas ($C = ₹40$), government consumes 5 bananas ($G = ₹50$), and 6 bananas are stored for consumption in future years ($I = ₹60$). There are no exports ($X = ₹0$).

$GDP = C + G + I + (X - M) = ₹40 + ₹50 + ₹60 + (0 - ₹60)= ₹100$. Total final consumption ($C + G$) was ₹40 + ₹50 = ₹90. Hence, $S = ₹10$. But $I = ₹60$.

So $S < I$. How is this possible? The reason is that the gap between investment and savings of $I - S = ₹60 - ₹10 = ₹50$ is made up for precisely by imports. So our shortfall in savings (relative to investment) is made up for by borrowing from abroad, in this case through imports.

• As for your second question,

Yes, we can say that on average, each Indian saves 30.2% of income. But this average is not necessarily very meaningful. For example it may be that the vast majority of Indians spend all of their income on consumption and it is only a tiny minority of the wealthiest Indians who do the saving.