Savings – Bigad gai aadat !!

Thrift conscious Indians are fast becoming spendthrift and vague saver. Robust savings, an internationally acclaimed Indian phenomenon is taking a disturbing trend of slide owing to the uncertain and suspicious economic ambience around. It is just not that Gross domestic savings as the ratio of GDP is declining but composition of Indian savings has also become somewhat alarming. Financial savings instruments are losing their sheen   while non-liquid assets like gold, land or home are catching up quickly. This trend is not at all favorable for the growth of Indian economy as it reduces the stock of savings available for development expenditure.

Indian savings are registering a consistent decline since last few years.  As per the Economic Survey of 2011-12 the gross domestic savings have declined from 33.8 per cent of GDP in 2009-10 to 32.8 per cent in 2010-11. This decline is accounted for by a reduction in household savings in financial assets.  It is clearly evident that households have been putting less money in financial savings. Two more recent reports on the macro economy have drawn attention to this development, which has deep implications for the economy. The Economic Outlook, of the Economic Advisory Council of the Prime Minister (PMEAC), headed by C. Rangarajan, and the Reserve Bank of India’s  Annual Report (2011-12).  According to the Economic Outlook, gross financial savings which were at 15.4 per cent of gross domestic product (GDP) in 2007-08, fell to 13.6 per cent in 2010-11, and could have possibly fallen to below 12 per cent in the next year (2011-12). The RBI’s estimate is even less upbeat: household financial savings fell to 7.8 per cent (of GDP) in 2011-12, the lowest since 1989-90. During the preceding three years, it averaged 11 per cent.

Indian’s lure for gold not a new phenomenon but recent development is a bit more serious. Indian households have withdrawn from financial savings to put more money into gold. Indian investors are now more aware about the investment potential of gold. Even ordinary investors buy gold, hoping it would protect them from inflation. Gold investment is ranging from physical gold to exchange traded gold funds. Spurt in gold import is clearly a confirmation of the investment led gold buying. Real estate is the next asset class catching up to investor fancy. With rising income levels and bank credit support, real estate has become a high profile destination of Indian household savings. Gold and property savings are not available for economy as both are non-liquid assets. The non-transparent market of these assets also results in a huge tax loss to the govt

Rising inflation pinches from all the directions. Not only does it reduces the consumption on account of low income but also increases the expenditure. Consequently very less amount remains for savings. Inflation is one of the major factors behind a mass disenchantment from financial savings. Inflation is robbing return on savings while interest rate on bank deposits no way a cushion for common investor. Recent spate of reduction on saving banks interest rate has resulted in an all-time low growth in bank deposits. Present tax policies on insurance and MFs are also a dampener to the investment spirit.

Household savings are major source of investment for the nation. Reduction in common man’s thrift is a loss to economy as it forces govt to borrow to meet investment needs. That results in higher deficits.  It is very important to bring Indian savers back to the financial savings as the tendency to invest in non-liquid asset will surely fabricate grave repercussions in near future.