The drop in household (HH) financial savings turns out to have been deeper and even more rapid than we believed from the numbers published last year. It is bad enough that gross domestic savings have come down from 36.8% of GDP in FY08 (the year of the financial crisis) to 30.1% in FY13 (bottom chart). But the components paint a picture even more dire.
Total financial savings (HHs, corporates and government combined) has almost halved from a high of 26% in FY08 to 15% in FY13. This fall was led by HHs. From 12% in FY10, their share had dropped to 10% in FY11 and then to 7% in FY12 and remained there in FY13. The FY12 number is also a downward revision; the first estimate was 8%. HH financial savings had hovered in the range of 11.3-12% during the four years from FY06FY10, with the exception of FY09 when it fell to 10%.
Private corporate savings are also down, but the drop is not as sharp, a peak of 9.4% in FY08 to 8.4% in FY10 and then 7% in FY13. This, obviously, reflects the slowdown in profits, offsetting the large cash holdings which have built up. The profits (plus depreciation) of a sample of companies (sourced from CMIE) show trends which are similar.
Public sector savings have also come down from a peak of 5% in FY08 to 1.2%, almost entirely due to the rise in fiscal deficits of the central and state government (which had increased from a combined 4.1% of GDP in FY08 to 9.4% in FY10 before stabilising to 7% in FY13. The residual drop was due to the (very modest) fall in savings of Public Sector Enterprises, whose profits (and hence savings) have held up better. A large part of this is presumably due to the ability of Public Sector Banks in maintaining profits.
For banks (and for the financial sector as a whole), unsurprisingly, deposit growth has also come down in line with financial savings (bottom chart). Although deposit growth is likely to be up in FY14, albeit just a bit above the previous years, this is dominantly due to the FCNR funds inflows of $26 billion. While counter-factuals are always difficult, in the absence of these flows, deposit growth would have been in the range of 1212.5%.
Though not quite a mirror image, HH physical savings have gone up since FY08 (11% of GDP) to 15% in FY13, almost exactly offsetting the drop in HH financial savings. Even though the trend is now widely known, the extent of the increase is a matter of concern. However, the trajectory of the increase was not symmetric with the drop in financial savings, with a big increase in FY09 to 13.5% (a bit puzzling, given the infusion of liquidity), hobbling at these levels for the next 2 years and then again rising to 16% in FY12 before settling down to 15% in FY13.
And no, counter-intuitive as it might sound, this is not the result of the rapid increase in gold demand and consumption. Gold is an anomaly in national accounting: it is not part of physical savings, nor of consumption. It is part, though, of valuables on the investment side but thats a separate story and has been treated in detail in a 2011 RBI Discussion Paper.
Also surprising is the trend in investment (capital formation), which had not been hit as badly, falling from 38% in FY08 to 35%. The resulting gap between domestic savings and investment needed to be funded by foreign capital and consequently led to the ballooning of the current account deficit to 4.8% of the GDP in FY13.
However, the real question is: what have been the drivers of this drop in HH savings and the switch between financial and physical How have the interactions between falling growth and high inflation played out What have been the role of monetary and fiscal policies in shaping behavioural changes A follow-up piece will address these.
With contribution from Abhaysingh Chavan, Axis Bank
The author is senior vice-president and chief economist, Axis Bank.
Views are personal