Where are India's savings?

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The percentage of household financial savings in stocks and debentures
is just 5 per cent.
BL The percentage of household financial savings in stocks and debentures is just 5 per cent.

Despite India's high savings to GDP ratio, every effort is made to attract foreign capital. There is obviously a problem of financial intermediation of domestic savings.

There are many paradoxes attached to Indian savings. At over 30 per cent, India has one of the highest savings/GDP ratios in the world. Yet, firms have been raising cheaper capital abroad, in the low-saving economies of the West. Small firms also find it difficult to finance their needs, while exclusion from the formal financial system is widespread.

What is equally paradoxical is that our policymakers point to the high domestic savings to also calculate a high potential growth rate. An incremental capital-output ratio of 4, with capital availability of 40 per cent of GDP (based on a peak savings achievement of 36 per cent plus a current account deficit of 4 per cent), gives a 10 per cent rate of growth.

At the same time, despite these high savings, every effort is made to attract foreign capital. If it is domestic resources that is making growth possible, why is more foreign capital so essential? A figure of Rs 40 lakh crore is floated as required for infrastructure investment over the next five years. But since the safe level of the current account deficit is about 3 per cent of GDP, not more than one-fourth of this can come from abroad. Foreign borrowing could be large in absolute numbers, but is dwarfed by the share of domestic resources required.

What this means is that the Government should be spending most of its energy on improving the financial intermediation of domestic savings.


More household savings should pass through the formal financial sector. Financial inclusion can increase the share of financial savings. Large mobile penetration offers the opportunity to develop complementary institutions and finally achieve inclusion. But these opportunities are poorly utilised as yet. In the absence of financial inclusion, the government's large rural spend has actually reversed financial intermediation. The currency-deposit ratio, which had been steadily falling, increased over 2008-10, as more income went to people excluded from the banking system.

After 20 years of financial reforms, the percentage of household financial savings in stocks and debentures, including through mutual funds, have shrunk from a pre-reform 20 per cent to as low as 5 per cent. Physical savings constitute half of domestic savings and the large household stocks of gold are not even part of measured physical savings.

Intra-day trade and foreign portfolio flows dominate Indian equity markets. Allowing pension and insurance funds to invest in stocks could be one way of increasing household savings that are invested in markets. This type of savings also provides essential long-term finance for infrastructure.


Technology cannot deliver alone. There have to be other institutions and systems to suit and adapt to Indian conditions. For example, deeper thought should be given to why the mutual fund model is not bringing in household savings. What is the proper role of brokers and of commission fees?

Can competitive fees for genuine services be combined with tighter systems? One could probably increase the time for cheque clearance in relation to IPOs, thereby reducing households' need to authorise brokers, which can be misused.

Information on low-cost financial alternatives such as index funds could be made available on websites. These websites on financial products can be ranked or rated by the Government or a rating agency.

The mobile equivalent of savings instruments, which works because it meets real needs, is yet to be developed. Households need secure inflation-indexed instruments that deliver decent returns. Despite rising interest rates, inflation gives households negative real interest rates on their savings.

The private sector under-provides financial innovations, since copying reduces returns to the risks on costly product innovation and development. Households associate government securities (G-secs) with security. Government-led product innovation, more clearly linked to G-secs, may work. It is also the most stable way for the government to borrow. In Japan, government debt is domestically held – unlike in Greece, where it is with foreign banks.


The supply of G-secs is very large in India, but banks hold the bulk of this as a statutory requirement (SLR). Since it is not marked-to-market (MTM), interest rate risks are not hedged, preventing an active debt market from developing.

It illustrates how a valid practice gets locked in, even when it has become dysfunctional. A system designed for one regime continues in another.

In 1985, the Reserve Bank of India (RBI) provided for valuation of held-to-maturity securities at cost prices in order to facilitate movement to-market determined interest rates.

This would mitigate the erosion in value of SLR G-secs from the expected rise in rates. But the system continues even in 2011, when two-way movement in interest rates is established. There is strong resistance from some banks to a fall in the MTM share of SLR securities.

The absence of an active G-secs market also makes it difficult for the RBI to conduct Open Market Operations and fine-tune liquidity. As domestic savings do not enter and interest gaps widen in narrow markets, firms borrow abroad. India's short-term debt, as a proportion of its total external debt, has reached 40 per cent in terms of residual maturity, at a time when international markets are stressed.

(The author is Professor of Economics, IGIDR, Mumbai.

(This article was published on November 9, 2011)
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India was selling infrastructure bonds - does that come under the
category of G-secs again? It should be giving good returns to
There are two questions here:
1. Is private sector getting more cash for business at cheap rates to
avoid foreign borrowing?
2. Are the common people investing in liquid assets to get the economy
For the first question - private sector is to blame if the stock
market be it stocks or debentures and mutual funds has not matured to
attract reliable substantial savings from the people. Now when they
borrow from foreign sources are they not letting control into foreign
hands? Does that not bother them? This is for the private sector to
ponder. IIM's and RBI or other economic educational instituitions can
help them weigh pros and cons - create robust instruments - here there
is a need for the industry and educational instituitions to partner to
increase offerings to public and create trust with investors that
otherwise tend to put it in real estat

from:  meeta
Posted on: Nov 10, 2011 at 02:38 IST

and gold.
Right now business is a very good place to invest in India with many
new sectors opening up - that are matured in other countries like
education, insurance, franchises of multinationals etc.
They are reaping big gains to rechannelise into real estate and other
For the really big businesses needing capital - a small pause to
create trust with investors locally in India is needed. They have to
explain their businesses, show the money - where it is coming from and
how much growth is anticipated in future - and how they wish to share
With dynastic and feudal background businesses in India also tend to
be family owned thereby the mentality of sharing wealth and building
brands for the country to make it stronger is not there - wherein lies
the crux of the problem - in not attracting investments. Reliance that
could convince investors in early days to grow to present size is not
able to carry investors like it did before as an example.

from:  meeta
Posted on: Nov 10, 2011 at 02:44 IST

So we come to the second part of the question:
Does government want people to invest in its instruments and the
government will then make those funds available to businesses at low
interest rates?
The government also has to mature w.r.t handling big money - be it
from new sources of income like auctioning spectrum or higher taxes or
royalties. Can it keep up with the speed of investing in quality
infrastructure, building of instituitions be it in education or
security or cutting edge technology like space, nuclear or any other?
There was a time pre liberalisation when people wanted to withdraw PF
as they were unsure it will be there. From there to now when it is
cash rich is a long journey.
But then Dubai got Burj Dubai, look at all developed countries with
infrastructure - money has to be put to use to show what it can do for
people to believe that the governemnt can be trusted with the money.
Just as business men show off their wealth to attract new business or
credit governments mus

from:  meeta
Posted on: Nov 10, 2011 at 02:49 IST

Governments must too. except it need not be flashy but build real
capacity by strengthening primary schools, secondary schools, higher
education instituitions, research capabilities, hospitals, supply
chain for food - maybe just what China did with their country but
better than them w.r.t handling of diversity and maintaining the
It is a tough task no doubt because you have to maintain low
unemployment - and that requires more ingenuity - it requires
identification of a host of careers practised by those not in the
system and marketing them within the country to officially recognise
them as valid employment and later throughgout the world - these new
occupations that Indians are familiar with but never though marketable
will attract investments - will create a marketable brand worldwide
without competetion.
Just as had happened with the film industries of india - that existed
and now have expanded - they will attract outside investment and
scrutiny and discussion for usurpti

from:  meeta
Posted on: Nov 10, 2011 at 02:57 IST

That reminds - why is Bollywood or all the different film industry not
formally in the money market system?

from:  meeta
Posted on: Nov 10, 2011 at 02:58 IST

don't we all know that swiss bank has most of the indian savings!!

from:  Darren
Posted on: Nov 10, 2011 at 07:30 IST

It is illogical that 'Allowing pension and insurance funds to invest in stocks could be one way of increasing household savings that are invested in markets'. It is a savings made without any stock market considerations or intra day trade and any such attempt is only to divert/reallocate the already amassed savings to stock market. As our population is generally greedy, luring them to formal channels of savings with high interest rewards, despite higher cost, is the time tested and sure way for inclusion of the mass . This can be achieved through our reasonable spread of banks and post offices. This should be offered only to those RD accounts with less than Rs.1000 per month savings with incentives for regularity & consistency. Similarly,salary class on the threshold of filing return would contribute any amount, even if less attractive,to avoid becoming an assessee and this area would fill the coffers with savings from the lower strata of population.

from:  sankararaman
Posted on: Nov 10, 2011 at 07:31 IST

Why are you trying to educated these foreign educated IMF driven economists in Ahluwalia and Manmohan Singh. They don't understand nor they will try to understand what you are saying which by the way is common sense. These foreign educated and IMF background World Bankers will never appreciate India's savings nor they will ever try to understand that using local capital is better than borrowing from abroad and in return giving away India's potential consumer market to Potato Chips but not to Intel and Computer Chips.

from:  John Abraham
Posted on: Nov 10, 2011 at 09:03 IST

ON reading this article, I am reminded of the speech of our former
Finance Minister CD Deshmukh on the day he nationalised Indian life
insuracne by taking over 243 companies. He said that that move was
needed in the context of the 2nd Plan that was in the offing then.
Today the 12th Plan thinks of an outlay of Rs. 40 lakh crore on
infrastructure and another 20 lakh crore on annual operations and
maintenance. Truly Indian financial sector can rise up to the occasion
by garnering the savings of the people which can go towards nation
building. Peoples' Money for Peoples' Welfare.

from:  s subramanyan
Posted on: Nov 10, 2011 at 12:11 IST

The author makes a valid observation that theoretically there is abundant savings but at the same time misses the point in the section on underdeveloped markets - the government (indirectly through RBI) forces inefficient use of funds by forcing banks to keep 25% SLR. This has a distortionary effect on nearly a fifth of the potential savings pool. It is time that SLR regime was done away with and governments started competing for funds in the market. Currently the capitve pools give a lot of flexibilitly to governments (both central and state) to run big deficits and perpetuate the inefficient non-plan expenditures they finance. Competing for funds could make governments more disciplined at the same time as providing market the ability to price capital depending on need and risk - opening up this vast pool of savings to fund long gestation projects rather than just fund inefficient current expenditure in government budgets.

from:  Anand Ramachandran
Posted on: Nov 10, 2011 at 15:18 IST
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