The problem of savings

The Central Statistics Office’s (CSO) detailed estimates of national income for 2012-13 reveal the extent of deterioration that has taken place in domestic savings, both quantitatively and qualitatively. Since 2007-08, India’s gross savings rate has dropped from 36.8 to just 30.1 per cent of its GDP. The current fiscal could well see this go below 30 per cent, the first time after 2003-04. The decline in the overall savings rate is, however, only one part. Of equal concern is the composition of savings. In 2007-08, 51.9 per cent of household savings were in bank deposits, insurance policies, provident/pension funds, shares, mutual fund units and other financial instruments. But five years later, financial savings constituted only 32.4 per cent of total household savings, even registering an absolute decline from ₹774,753 crore to ₹717,131 crore between 2009-10 and 2012-13.

So, where are households — who account for nearly three-fourths of all savings in India — putting most of their surpluses of income over consumption? Well, in the head called savings in ‘physical assets’ that mainly comprises land and buildings. During the same three years when their annual financial savings fell, households increased their savings in physical form by almost 75 per cent. But even this does not give a complete picture of ‘de-financialisation’ of savings. For that, one should also look at what the CSO terms ‘valuables’, a category not clubbed under physical savings. Between 2007-08 and 2012-13, investment in valuables – gold and other precious metals, including jewellery — soared five-fold from ₹53,592 crore to ₹266,482 crore. If valuables are also accounted for, the movement from financial to physical savings becomes all the more obvious.

One reason for this massive de-financialisation of savings has clearly to do with inflation, which reduces the portion of people’s income remaining after consumption to start with. When this is combined with negative real returns on bank deposits and other financial assets, even those in a position to save would choose to park their surpluses in real estate, gold and such seemingly better inflation hedges. There is certainly some basis to this argument, which has been marshalled by the Reserve Bank of India to justify its strong anti-inflationary stance and hiking of interest rates. But the fact that even physical savings (inclusive of valuables) have fallen from 18.5 to 17.4 per cent of GDP between 2011-12 and 2012-13 probably shows that negative real returns on financial assets aren’t the sole villain. Savings can also dip when growth slows down, affecting job creation and incomes. The last three years have not only witnessed high inflation rates but also a severe growth-cum-investment slowdown. Together, they have brought down the incomes from which savings can be generated. Policymakers, therefore, need to focus both on inflation and growth while addressing the problem of savings.

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