Government officials who?ve once again begun talking of a 9% growth, for the next Plan period, would do well to take a look at RBI?s latest Annual Report where it details the dramatic fall in the financial savings rates of Indian households. These fell from a high of 12.1% in 2009-10 to 9.7% in 2010-11, a level just a bit higher than the 9.6% seen way back in 1997-98?by and large, India?s growth trend can be correlated with the rise and fall in savings, though foreign flows like FDI can made a difference if they are sufficiently large. That financial savings would dip in 2010-11 was pretty obvious, given the high level of inflation. Whether things will turn around this year depends on how inflation fares. If it continues to rise, financial savings may once again bear the brunt.

The shift in composition of savings also has interesting consequences. The share of commercial deposits in household financial savings was about 61% in 2008-09 and fell to 47% by 2010-11; investments in shares and debentures, which rose to 4.6% in 2009-10, went to negative territory in 2010-11, meaning that people sold more shares and debentures than they bought or that the fall in the sensex was a factor. The share of life insurance in total savings has gone up from 16.1% in 2004-05 to almost a quarter (24.2%) in 2010-11, an obvious aberration in a middle-income developing country like India. But perhaps it has more to do with the extraordinary boom of Ulips during the period and the non availability of appropriate saving instruments to the vast majority of the population.

While the fall in the share of financial savings that are being channelised towards stock markets, and the overall decline in financial savings doesn?t bode well for higher economic growth?theoretically, productivity hikes can negate the impact of financial savings, but such hikes don?t happen so quickly?there is still some hope since India can still attract foreign savings. Easier ECB norms and quick decision-taking with respect to FDI in critical sectors such as insurance and retail could just be the panacea in these times when domestic savings are under pressure. Getting in more foreign funds may now become a necessity instead of just a preferred option.