Demonetisation, it appears, has led to an acceleration in the financialisation of savings in India. RBI data points to such financialisation in the form of gains for three non-banking intermediaries: mutual funds, insurance companies and non-bank financial companies. However, the growth that such savings is expected to drive may still be elusive. This is because household investment has remained a laggard, rather than private corporate investment, as is commonly believed.

Households — which include individuals, non-government, non-corporate enterprises like sole proprietorships and partnerships owned/controlled by individuals (essentially MSMEs) and non-profit institutions —have been the largest contributors to both savings and investment in India. However, household savings and investment rates have been falling. The household sector savings rate (as a proportion of GDP at market prices) fell from 23.6 per cent in 2011-12 to 19 per cent in 2015-16, while household investment to GDP fell from 16.3 per cent to 10.9 per cent over the same period. The savings-investment imbalance of the household sector thus has risen from 7.3 per cent to 8.1 per cent. Households are saving more than they are investing, even as both are declining.

Further, the share of household savings has fallen from 94 per cent of India’s gross savings in 2001-02 to 68 per cent in 2011-12, and further to 59.2 per cent in 2015-16. Similarly, the share of household investment has also declined from 46.6 per cent of Gross Capital Formation (Investment) in 2001-02 to 45.9 per cent in 2011-12 and further to 36.9 per cent of the GCF in 2015-16.

Demonetisation impact

Household savings comprise financial and physical savings. While financial savings (as a proportion of GDP) increased between 2011-12 and 2015-16, they have been more than offset by a by a fall in savings in physical assets, leading to an overall decline in household savings.

What trends can we discern in household gross financial savings over the period 2011-12 to 2015-16? And how did demonetisation affect such financialisation of savings in 2016-17? Interestingly, the share of currency in gross financial savings of households had actually reduced between 2011-12 to 2014-15. In 2015-16, however, the share of currency increased. Although bank deposits constituted the bulk of household financial savings, their share had reduced by more than 15 percentage points between 2011-12 and 2015-16. (The share of bank deposits to gross financial savings reduced from 56.39 per cent to 41.08 per cent between 2011-12 and 2015-16.) Subsequently, in 2016-17, it had risen to 60 per cent.

Savings in provident and pension funds witnessed an 8 percentage point increase over this period, and so did household small savings and savings in non-banking deposits. (Savings in provident funds and pension funds as a proportion of gross financial savings increased from 10.26 per cent to 18.28 per cent between 2011-12 and 2015-16). In 2016-17, it had reduced to 16.26 per cent. Share of life insurance funds and trade debt reduced. Spurred by buoyant stock markets, households saved in shares and debentures.

In 2016-17, the share of currency in households’ gross financial savings has turned negative at minus 17.4 per cent. Not surprisingly, bank deposits, as also life insurance funds’ shares have increased to 60 per cent and 24 per cent respectively. A big gainer is probably the stock market, with the share of ‘shares and debentures’ increasing from 2.73 per cent in 2015-16 to 10.03 per cent in 2016-17.

Such trends imply that the current boom in the stock markets may be transitory, driven by the higher proportion of household financial savings diverted into them as a fallout of the demonetisation process. The increase in the share of bank deposits to levels higher than even 2011-12, is clearly transitory. So is the current decline in the share of currency.

Investment fallacy

More worrisome is the dip in household investment, driven by a steep fall in investment in dwellings, other buildings and structures. In fact, India’s overall investment has fallen due to a dip in overall household sector investment. Private corporate investment, contrary to popular belief, actually increased from 32.7 per cent of the GCF to 37.9 per cent over the period 2011-12 to 2015-16, while share of private corporate savings in India’s gross savings over the same period increased from 27.3 per cent to 36.7 per cent.

The private corporate sector invested 13.02 per cent of current GDP, while saving 11.85 per cent of the same. The saving–investment gap for the private corporate sector was thus minus 1.16 per cent. This negative saving-investment gap of the private corporate sector has partly been bridged by the positive saving-investment gap of the household sector. The household sector has also bridged the negative saving–investment gap of the government sector. Thus, India’s investment is driven by the household S-I gap.

For the household sector to finance corporate and government investments, the challenge for the RBI will be to increase interest (deposit) rates. The decay in household investment, the largest driver of growth in the previous decade, needs to be addressed.

The writer is a professor of economics at SP Jain Institute of Management & Research, Mumbai. The views are personal