Stagnating or falling level of household savings, which accounts for two-third of the national savings, seems to have become a major constraint to boosting investments critical for accelerating growth. This is more so because corporate firms and public sector companies depends on household savings for their resource mobilisation. The question is whether the stagnancy and fall in household savings is a short-term phenomenon that can be reversed or is it that the financial savings of households has already touched peak rates given the low per capita incomes and the increased access to bank credit which impacts negatively on the net savings rate of households.
A look at the long-term trends shows that the ratio of net financial savings of households to GDP which had steadily picked up from 1.9% in the fifties to 2.7% in the sixties and further to 4.6%, 6.8% and 10% in the 1970s, 1980s and the 1990s has stagnated and even fallen in the most recent year from 11.7% in 2006-07 to 11.2% in 2007-08. Though the fall in household financial savings has not impacted the total national savings due to the improvements in public sector savings and also because of the higher pick up in corporate savings in the recent years, the scenario is now changing rapidly because of the reduced scope for further corrections in the public sector or for accelerating corporate savings rates in a slowing economy. Economic theory suggests that household savings are influenced by many factors, including non-economic factors like demographic changes.
Savings of households are expected to increase as the dependency ratios fall with the number of working people rising faster than the number of children and the aged. But the positive impact of the falling dependency ratio is yet to be noticed in the Indian case. So, one has to look into the components of household savings to get a better idea about the various economic factors that have reduced the buoyancy in household savings.
Figures on gross financial savings of households, which are available till 2007-08 shows that one reason for the fall is the sudden volatility of savings in bank deposits, the largest component of household financial savings. Though the gross share of bank deposits of households has doubled over the current decade to 10.1% of GDP by 2006-07, it fell sharply to 8.7% in 2007-08. This because of the sharp rise in inflation that eroded the real returns and the growing preference of households to invest in equities. In fact the household savings in shares and debentures has steadily picked up over the last three years from 0.3% of GDP to 1.6%, the highest ever level. But the sharp fall of savings in bank deposits in 2007-08, which was almost three times the increase in flows into equity and debentures, clearly sends the message that it is the monetary policies, which were ineffective in curbing inflation, that have contributed the most to the falling financial sector savings of households.
It would not be entirely fair to blame the central bank alone for the fall in financial savings. Long-term trends show that the reduced popularity of some important forms of contractual savings, especially that of provident and pension funds, whose relative share fell sharply from peak level of 2.8% of GDP at the end of the last decade to just 1.3% in 2007-08 also played a major role in constraining the growth of financial savings. The slow opening up of this sector to private funds and the continued domination of the public sector institutions in this crucial segment have also led to the fall.
A reason for hope is the growth of savings in the form of insurance funds, whose share has almost doubled to 2.8% of GDP during the current decade after the entry of private firms. A similar opening up of the provident and pension funds business will help reverse their falling share. One can safely conclude that a good monetary management and a fast opening up to the private sector will help restore the financial savings of the households back to the growth path.
?p.raghavan@expressindia.com