This is my first attempt to understand finances of Indian govt, so this analysis could very well be wrong.
As can be seen from RBI data above (all numbers are % of GDP), there have been two big swing factors that have pushed India's saving and investment rate from 23% in FY02 to 36% in FY07. First has been corporate saving (or corporate profits), which has improved by 4.4%. Second, and even bigger, has been improvement in public sector saving by 5.2%. It has been better fiscal management of the budget and much improved finances of PSU's that has led to the biggest savings which have been used to finance investment.
Now, the fiscal situation threatens to turn ugly. Combined state and fiscal deficit in FY08 was close to 5.5% and will become worse.
First, India imports roughly 1bn barrel of oil. Oil prices have jumped by $20 since budget was presented => a hit of $20bn = 1.6% hit. (assume GDP at $1.2 trillion)
Second, fertilizer prices have gone through the roof. Mosaic CEO was saying that India's fertilizer subsidy this year will be higher than its defence bill. Defense bill is $25 billion for India. Last year fertilizer subsidy was $2billion. That is an extra $23 billion hit on account of fertilizers. That is close to 2% of GDP.
So, in total, these two add up to 3.6% of GDP.
Third, farm loan waiver of $15 billion = 1.2% of GDP. Lets ignore it.
Fourth, pay commision will impact state finances. Lets ignore it.
This will be offset to a very small degree by tax growth, better tax administration etc. Still, a 3% extra hit to fiscal position will happen from oil and fertilizer subsidy, if the prices of these don't moderate over the next year.
It is not that suddenly India growth story is over. In the short run, govt can do a lot of things, esp selling stakes in PSU's to improve its situation. But, if this situation were to persist for 2 years, it would be alarming.
I am not sure how the public sector savings number are computed above, and how it ties to the fiscal deficit of state and centres. Do PSU's get consolidated here, which implies that the oil bonds get taken care of? What about fertilizer subsidies?