The Hindu Business Line : Drop in net financial savings of households

FOR the first time in several years, net financial savings of households declined during the financial year ended March 2005, according to data disclosed in the annual report of RBI. A large 65 per cent increase in the financial liabilities of households was the reason behind the decline in net financial savings.

Households are a residual category, which includes every entity other than the public sector and the private sector, including sole-proprietorships, partnership firms and the salaried class. Household savings represent that portion of the income for the year that is not consumed but saved.

The last time net financial savings declined was in FY 1996. Then a fall in investment in bank deposits sparked the decline. Now, savings in various financial assets has increased by about 10 per cent in FY05 but the growth in financial liabilities has outpaced investments.

According to Dr Mahesh Vyas, Managing Director & CEO, Centre for Monitoring Indian Economy, the rise in financial liabilities reflects increased lending by banks to the retail sector.

When asked if it was appropriate to compare loans taken against savings made in a particular year, he said it is absolutely correct from an accounting perspective.

Dr Vyas also indicated that the increase in financial liabilities represents a rise in consumerism and an increase in standard of living. Only last week, the Finance Minister referred to the penchant of Indian households to save more in the form of physical assets and less in financial assets. He had also exhorted Indian households to invest more in financial assets. So, in this light, is the increase in financial liabilities a cause for concern?

Dr Vyas does not think so. He says the trend in household savings is not hurting capital formation as savings from rest of the world is now filling the gap.

RBI data also indicated that households invested only 1.1 per cent of their annual savings in shares and debentures. According to Dr Vyas, this only represents investments in fresh issue of shares and debentures. There is a problem with the information gathering mechanism, as it does not capture investments in the secondary market, he added.

As of now, it is not possible to ascertain investments of households in secondary market transactions, he averred.

For the year ended March 2005, net financial savings of the households worked out to 9.9 per cent of gross domestic product. ndian GDP for year ended March 2005 was about Rs 31,13,000 crore.

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