The Hindu Business Line : The household sector: Super-savers, not star-shoppers

An economic climate that favours the concept `spending beyond means', creating an environment that pampers the consumer, should have resulted in a drastic reduction in household savings. But the last decade's savings figures show that Indian households have proved otherwise.

RECENTLY-published statistics on household savings suggests that the Indian household seems to mind its own business by securing its interest through adequate and prudent savings in a most conservative manner, notwithstanding the systematic discouraging policy initiatives, aping the West, to compel the household to blow the money.

In the last decade, the interest rates on savings have been drastically cut, the tax incentives for savings have suffered from serious instability, and both the capital market and the non-banking finance companies administered rude shocks to investors. Consumerism is being consciously promoted by making available loans/credit cards with increased options to prospective buyers.

The surprising reality is that while the `spending beyond means' as a main driver of economy no longer seems to be working even in the West — which in relative terms has in place an adequate social security system — in our country, with no credible social security, the policy-makers seem to favour aggressive consumerism.

Such an environment, punishing savings and pampering spending, should have resulted in drastic reduction in savings by households. But the figures of the last decade's savings prove that our households think otherwise.

Table 1 is an extract of some of the areas into which household savings have been channelled over the past 11 years — from 1993-94 to 2003-04. The majority of the savings flowed into bank deposits, claims on government (comprising government securities and savings), insurance and provident and pension fund, in that order.

The combined savings in these four channels alone account for about 85 per cent or more of the total financial savings of the household section, in the five-year period from 1999-00 to 2003-04 (See Table 2 for percentage distribution).

Bank deposits seem to be the preferred choice, consistently, despite the drastic reduction in interest rates, from 12 per cent for a three-year term in April 1997 to 5.75 per cent in January 2005, that is halving in this period. Safety, liquidity (including availability of loan against deposits), tax concessions (that increases the effective rate of interest) and, more important, absence of other investment avenues are the reasons for the rise.

The household has placed in banks Rs 1,69,540 crore up from a paltry Rs 30,548 crore in the beginning of the last decade. In the last five years alone, bank deposits have risen at a good 10 per cent in the choice of household financial savings (see Table 2).

The already meagre investment of about 1.7 per cent in non-banking company (NBFC) deposits plummeted to an infinitesimal 0.2 per cent in 2003-04. The depositors are quick to learn from their sorry experiences with these `unsecured' savings; several NBFCs bit the dust in 1995-96 especially in the South.

Investment in government securities and small savings has increased a substantial 500 basis points, from 12.3 per cent in 1999-00 to 17.7 per cent in 2003-04 (this figure is 24 per cent for 2004-05, according to the RBI's latest Annual Report). In nominal terms, from 1993-94 to 2003-04, these savings registered a whopping 12 times increase.

Though most of these savings lack liquidity, as they are long-term investment, and offer the highest safety to the depositor (government guaranteed) with tax incentives. All in all a decent return.

The current rate of return offered by these schemes also negate the basic rule in financial investment — `higher the reward' the more `riskier' the investment. These government guaranteed savings (including PF, discussed later) offer returns which, together with their tax effectiveness, are 2-3 per cent higher than the unsecured private company deposits, placing return and risk in inverse proportion.

Life insurance and provident/pension fund investments have also seen a rise. Life insurance funds growth could be for two reasons: Increased realisation about the need to insure, and the increased competition from private players in the last decade.

Investment in capital market suffered the same fate as risky company deposits. Barring the first two years (1993-94 and 1994-95) and the dotcom boom year 1999-2000 (where investment peaked to Rs 18,118 crore), the savings has come down to a third in the decade to Rs 5,699 crore in 2003-04.

These include investment through mutual funds (with the exception of UTI). The risk-averse household have kept away from this avenue, although, the Comptroller of Capital Issues has been replaced by SEBI (Securities and Exchange Board of India), and from 1993-94 on, the capital market regulator has been framing regulations on various issues connected with capital market.

As the regulation became tougher and more stringent, investment came down, aggravated by the investing community taking a beating with such mega scandals as, Harshad Metha and Ketan Parekh.

Similarly, after the crisis in UTI, the country's single largest mutual fund, the investors remained net sellers only.

It is worth mentioning here that the entire corporate revenue contribution to the nation's income is 14 per cent, and a large portion of the balance income comes from non-corporate sector comprising of manufacturing, trading and services by proprietary and partnership firms, which are in reality the wealth creators and outright savers as mentioned above, in addition to individuals in the household sector.

Therefore, any tax incentive to the stock market such as removal of double taxation on dividends and replacing transaction tax for capital gains stand to benefit primarily foreign and domestic institutional investors.

These are the investors who dominate the stock market and, the household is not lured by such tax bounties, but appear to rely on guaranteed return on safe investment, than possibly fancy returns on what is essentially a `risk' capital.

The household remains the super saver, if its investments in gold are counted. The private sector saves marginally and the public sector spends more or savings are in the negative. About 85 per cent of our national savings comes from households only.

Thus, shedding risky avenues, ignoring policy flip-flops, the household is conscious of the fact that they have to mind their business — that is, financial security of their next generation, depending on their own conservative saving techniques.

They are aware that the cost of living, medical, education (remember LKG is costlier than chartered accountancy) are all progressively increasing, which could be met, if only they create and sustain financial security.

By blowing up the existing kitty, they would end up enriching the business of shoppers, corporates and banks and that will not be minding their business. They cannot afford to think like our policy makers who plan to promote consumerism, but just the opposite — that is, save more money, to sustain same interest income when interest rate is reduced.

(The author is a Chennai-based practising chartered accountant and advocate.)

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