There is increasing evidence of disenchantment among Indian savers towards parking their savings in financial assets. This is borne out by at least two sets of data. Deposits with banks have grown by only Rs 645,400 crore in 2011-12 (till March 7), compared with Rs 651,500 crore during the same period of the preceding fiscal. What is significant is that it has happened despite banks raising interest rates quite sharply in the last one year to well over 9 per cent for time deposits and up to 7 per cent even on savings deposits. The second pertains to deposits under the various post office-administered small savings schemes, including the public provident fund: These actually registered net outflows of Rs 6,000 crore last fiscal. There is no precise data on savings going into purchase of shares, debentures or units. But going by net inflows under mutual fund schemes (which were again about Rs 17,000 crore lower than in 2010-11) and the generally comatose state of the markets since 2011, the picture wouldn't be radically different.
The above numbers may be indicative of two things. The first is de-financialisation or movement of savings into gold, real estate and other physical assets. It happens particularly during episodes of high inflation, when households actively seek out more ‘solid' ways to prevent erosion in the value of their money. Moreover, the tendency to hold savings in physical form has always been strong in India. The proportion of physical savings in gross domestic savings stood at 48 per cent even in 2000-01, before steadily falling to a low of 29.3 per cent in 2007-98. That share has since gone back to 40 per cent in 2010-11 and – based on the data we have on bank/non-bank deposits, fund flows into the capital markets and also the spurt in gold imports – is likely to have increased further in 2011-12. The biggest sufferers in the process have been banks, with their deposit mobilisation efforts simply not enough to address liquidity tightness that has assumed systemic dimensions.
But the second possibility – the decline in financial savings growth being a result of a fall in the gross savings rate itself – is what is even more worrying. The savings ratio for the Indian economy hit a peak of 36.8 per cent in 2007-08, before plunging to 32 per cent in the following year of a worldwide crisis. It has recovered only marginally since then. One cannot rule out a further drop to have taken place in 2011-12, as economic conditions have been far from conducive. Persistent inflation and slowing growth have eaten into the incomes of households, earnings of companies and government revenues. All of this may well manifest themselves in a sub-30 per cent savings rate for the economy. That would be going back to the period of low savings, low investments and low growth prior to 2004-05.