The Economic Survey for 2012-13 has pitched for introduction of inflation-indexed bonds to raise household savings and reducing the attractiveness of alternatives such as gold.

A wider variety of reliable financial savings opportunities, such as inflation-index bonds, and easier access to them could help raise the share of financial savings in total savings, the Survey has said.

‘Safe haven’

Within households, the share of financial savings vis-à-vis physical savings has been declining in recent years.

In fact, household financial savings were lower by nearly Rs 90,000 crore in 2011-12 vis-à-vis 2010-11, the Survey has pointed out.

Financial savings take the form of bank deposits, life insurance funds, pension and provident funds, shares and debentures. The Survey has highlighted that financial savings accounted for 55 per cent of total household savings during the 1990s. Their share declined to 47 per cent in the 2000-10 decade and it stood at 36 per cent in 2011-12.

Lower returns from shares and debentures, coupled with high inflation, could be one reason why gold has become a ‘safe haven’ investment in recent times, the Survey has said.

Acquisition of gold by the households in the country tends to have a negative impact on savings and on household financial investments, it noted.

Equity, debt

Shares and debentures accounted for 8.3 per cent of total financial savings in the 1980s. Their share increased to nearly 13 per cent in the 1990s, before falling to 4.8 per cent in the 2000s.

The increase in the proportion of shares and debentures in total financial savings in the 1990s could be ascribed to higher returns on the Sensex (21.4 per cent a year, on an average, for the decade), along with lower volatility.

The returns on the BSE Sensex halved to 10.7 per cent in the 2000s as volatility increased.

Inflation effect

Thus, a combination of lower returns and higher volatility in the 2000s vis-à-vis the 1990s could have contributed to the reduced proportion of shares and debentures in total financial savings.

Noting that household savings will have to be increased, the Survey expects household financial savings to improve with lower inflation, especially as the real rate of return on financial savings rises.

(This article was published on February 27, 2013)
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