The Reserve Bank of India (RBI) and the government’s efforts to direct household savings away from physical assets, particularly gold and channel them into financial instruments seem to have yielded some results.
According to RBI’s annual report, in 2012-13 the average Indian reduced investment in valuables such as gold and increased investments in bank deposits and mutual funds, and took on more loans a part of which was used for consumption and to buy physical assets such as houses.
Financial savings increased to 7.7% of GDP from 7.5% while household investments into valuables declined to 2% of gross domestic product (GDP) in 2012-13 from 2.4% a year ago.
“The marginal increase in household savings rate during 2012-13 emanated from the higher growth in savings under bank deposits and mutual funds even as life insurance funds remained sluggish and outflows under small savings persisted,” said the annual report.
At the same time, financial liabilities of households increased, largely driven by acceleration in personal loans and retail credit the central bank’s report added.
High and persistent double-digit retail inflation had channelled household savings away from financial products and into gold and real estate in 2011-12 and savings had plummeted to 7.5% of GDP from 10.3% in 2010-11. As a consequence, demand for gold strengthened which had pushed up the current account deficit (CAD) to an unsustainable 4.8% of GDP in 2012-13. Gold has been the biggest component only next to oil in India’s imports in 2012-13. Gold imports stood at a massive $54 billion in that year.
In its annual report, RBI reiterated concerns over CAD and said in April-June, the CAD is likely to be higher than the 3.6% of GDP seen in January-March quarter.
However, CAD is expected to moderate from July-September onwards and will likely be lower than the historic high of 4.8% of 2012-13 owing to the recent measures by the government, the report said.
Measures to address sector-specific issues such as boosting iron ore exports will have to be taken to further bring down CAD, RBI said. “Besides, there may be scope for curbing non-essential imports as well to improve the trade balance,” RBI said.
Noting that external sector vulnerability indicators have worsened, the central bank said that short-term debt has to be brought down.
Even as monetary policy must be calibrated to address CAD, it should be such that growth is not compromised, the report said.
On economic growth, RBI said the recovery can take shape later in 2013-14 but added it hinges on better governance and removal of supply constraints and maintenance of stability.
The central bank also said rural consumption demand could provide some buffer to growth on the back of normal monsoon. The normal rains could also dampen food inflation, RBI said.
However, the sharp fall of the exchange rate along with persistent food inflation could drive up headline inflation in 2013-14. RBI called for a speedy clearance of the infrastructure projects.
The central bank pointed out that of 569 projects, around 277 have been delayed and the resultant cost overruns were 18.8%.
“If infrastructure sector issues are not quickly resolved, it can have a domino effect on the asset quality of banks,” the report warned. RBI noted that banks’ non-performing assets have surged in 2012-13 to 3.42% of total loans.