Budget 2014: India's falling savings, inflation, investments and returns

Feb 18 2014, 13:25 IST
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India’s savings and investment peaked at 36.8% and 38.1% of GDP, respectively, in FY08. (AP) India’s savings and investment peaked at 36.8% and 38.1% of GDP, respectively, in FY08. (AP)
SummaryBudget 2014 explains the manner in which money is to be spent and the way it is to be raised.

In the interim budget 2014-15, the finance minister did not tinker with direct tax rates as, unlike a full-fledged budget, the vote-on-account does not make any changes to the prevailing tax rates and restricts itself to the expenditure side.

The budget explains the manner in which money is to be spent and the way it is to be raised. With the household savings rate at a nine-year low due to high inflation and a shift from financial savings to physical savings, the regular budget in June will have to address some important concerns, which will probably give some traction to individuals’ wealth management.

Falling savings

India’s savings and investment peaked at 36.8% and 38.1% of GDP, respectively, in FY08. In FY13, the overall savings rate dropped to 30.1% of GDP and investment to 34.8% of GDP. The 120-basis-point fall in the savings rate, from 31.3% in FY12 to 30.1% of GDP in FY13, was on the back of a 90-basis-point decline in household savings (which comprise 73% of total savings) to 21.9% of GDP in FY13 from 22.8% in FY12. Corporate savings, which account for 23% of total savings, fell marginally to 7.1% of GDP in FY13 from 7.3% in FY12. Public sector savings remained constant at 1.3% of GDP in FY13.

Household savings have averaged around 22% of GDP, but there has been a major shift in the composition (from financial savings to physical savings) because of high inflation and lower returns on financial instruments such as bank deposits, stocks and insurance vis-a-vis physical investments like gold and real estate. Similarly, gross capital formation fell to 34.8% of GDP in FY13 from 35.5% in FY12 and a peak of 38.1% in FY08. The widening gap between the savings and investment rate resulted in an all-time high current account deficit of 4.8% of GDP in FY13. Analysts, however, expect the savings-investment gap to narrow from 4.7%

of GDP in FY13 to 2.3% of GDP in FY14 because of lower gold imports.

Inflation and returns

In India, bank deposits comprise over 50% of total financial savings, followed by insurance and provident fund. However, in the five years between 2008-09 and 2012-13, average deposit rates remained below the consumer price index-based inflation. With the annual average CPI-based inflation touching double digits during the period, bank deposits have yielded negative returns in real terms. On the other hand, returns from gold and real estate far exceeded CPI

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