The Hindu Business Line : Market for savings second only to food

PRIVATE final consumption expenditure in India, as a percentage of GDP, has been slowly but steadily declining from 1990. This percentage has fallen from 75.8 per cent in 1990 to 70.7 per cent in 2003.

Surprisingly, this trend does not seem to have been affected either by whether the economy has been going through a good patch or a bad one, or by steadily increasing levels of average income.

In other words, some sort of diminishing marginal propensity to consume seems to have set in for the economy as a whole. As for the latter point, it will be recalled that in a famous paper in the Economic and Political Weekly a few years ago, Prof. C.H. Hanumantha Rao had pointed to the fact that as households graduated out of poverty the proportion of food in their (now larger) consumption baskets seems to actually decrease.

Meanwhile, in respect of the first of these two points we can note that neither the crisis years of 1991 and 1992, nor the rampant inflation which was witnessed later in the decade did anything to make the trend fall in consumption deviate from its seemingly set pattern.

Household savings, which made good the shortfall between income and consumption, allowed households to smoothen their consumption levels over time, shielding them from adverse effects of booms and slumps, or perhaps in part to serve as a sort of `insurance' for infirmity, accidents, old age or whatever.

This too, if true, would mean that we could expect to find savings increasing somewhat faster than incomes. As a corollary, the savings industry (stock markets, mutual funds, life insurance, bank deposits, housing, gold, provident and pension funds etc) taken together can look forward to large and continuing improvements in their prospects.

Be that as it may, there seems hardly any doubt that households do seem in the recent past to have been motivated by a desire to live within their means, while making an effort to keep consumption levels relatively steady and providing themselves with cushions against future adversity.

Thus even in years when the economy did rather well, it was household savings that shot up most noticeably as a percentage of GDP, not household consumption. This at any rate is one reading of the data presented in the accompanying table which shows the changes that took place between the years ended March 1997 and March 2003.

The second point of interest is that households seem at various times to have given different degrees of importance to physical vis-a-vis financial savings. In respect of financial savings, too, there were marked differences over time in the relative importance attached to the funds channelled by households towards, life insurance, pension and provident funds, shares and debentures, bank deposits, deposits with non-banking financial companies.

In all these years, as in the years before (and probably afterwards as well, for a long time to come), savings were (and probably will be) the largest single item of household `expenditure', with the exception of food, as will be seen from the accompanying table.

Once again the message is clear. It is the savings industry that has been singled out this time by fate. Business will simply come flooding in. Other sectors may not find the future nearly so bright.

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