India seems to be fast losing its status as a country of big savers. For the second year in a row, financial savings by Indian households declined in 2011-12.
According to the RBI’s latest Annual Report, household financial savings, as a percentage of GDP, fell to 7.8 per cent in 2011-12. This is the lowest since 1989-90. The ratio averaged 11 per cent in the preceding three years. The sharp fall in financial savings means India has to depend more on overseas flows to fund its capital needs.
Small savings, shares lose
Net financial savings for 2011-12, at Rs 6.95 lakh crore, were 2.6 per cent lower than the previous year. Investors pulled money out of small savings schemes, as also shares and debentures, including mutual funds this year.
There was an outflow of Rs 22,000-crore small savings in 2011-12 compared with Rs 39,900 crore of inflows the previous year. Insurers saw almost no increase in collections. Pension and provident funds got marginally more money, probably an outcome of rising salaries.
Deposits from banks and non-banking finance companies did attract more household savers, with inflows up 16 per cent. They continued to account for the lion’s share of financial savings, at 52 per cent of the total pool. NBFC deposits that offered higher interest rates saw a twofold jump in flows.
The preference for deposits is explained by the high interest rates on offer. Most banks raised their interest rates for 1-3 year deposits by 200 basis points to 9.25-9.5 per cent over the year.
A similar environment of higher deposit inflows prevailed in 2008-09, when interest rates ruled high.
What made households cut back on their financial savings? Persistent inflation that sent their day-to-day expenses soaring could be one reason.
The poor returns earned by savers after adjusting for inflation may also have put them off traditional financial products. Additionally, the poor showing by the equity market led to households looking elsewhere for returns.
This is also evident from the fact that households are choosing gold and property as avenues for savings, as the RBI itself has pointed out elsewhere in the Report. The central bank says: “The diversion of household financial savings to investment in gold may have impacted the growth of term deposits in recent years (16.7 per cent between 2009-10 and 2011-12, against 23.1 per cent between 2006-07 and 2008-09).”
Households have also not cut back sharply on loans, which have gone mainly into buying physical assets. Inflation benefits the borrower at the cost of the lender.