By Madhavankutty. G
A three-and-a-half-feet-tall pure golden idol of Lord Vishnu studded with hundreds of diamonds, rubies and other precious stones; An 18-feet-long pure gold chain and a gold sheaf weighing 500 kg; A 36-kg golden veil and 1,200 gold-coin-chains encrusted with precious stones; Several sacks full of golden artefacts, necklaces, diamonds, rubies, sapphires and emerald.
If you are still clueless about what exactly the above description alludes to, it is the veritable treasure trove hidden inside the six vaults of Padmanabha Swamy Temple at Trivandrum, Kerala. The bounty is worth an estimated $22 billion and this excludes a vault that is yet to be opened, purportedly holding precious gold and jewellery worth at least another Rs 1 trillion, by conservative estimates. These are based on valuations done a decade ago and would definitely be worth more today. To put it in perspective, the stock worth almost Rs 2 trillion will suffice to meet the capital shortfall requirements of our public sector banking space in its entirety.
These treasures originally belong to the Royal family of Travancore and predates at least 500 years. Whether it is ‘permissible’ to gainfully deploy these is a subject for another day and is as much a question of law as anything else. However, what is noteworthy is that the Royal Kingdom did not squander away this princely sum. Had it indulged in mindless extravaganza, this bounty wouldn’t have been in existence. The sheer magnitude of these hoards indicate that rulers during those times indulged in wealth creation not just for their generation but also for posterity.
Saving today for a ‘rainy day’ tomorrow is ingrained in Indian psyche-unlike the west where consumption is the dominant theme. Indians save for their children’s education, for weddings, for a secured retirement and even for a decent roof over their heads. What is true for individuals holds good for national governments and the corporate sector. For emerging economies, growth is strongly correlated with aggregate savings as it funds public and private capex. A decline in savings is a grave concern that has been engaging the Indian policy maker’s attention since the past decade.
The System of National Accounts estimates aggregate savings under three broad categories — government, corporate and household sectors. The term ‘household’ is, however, much broader than its common use and includes unregistered micro and small enterprises besides individual households. Our headline savings rate declined from 34.6% of GDP to 31.4% during the past decade, much of it being in the first half. Corporate savings held steady due to muted private capex and an uncertain business outlook. Government savings, however, were negative due to massive public capex for physical and social infrastructure.
This fall in headline savings rate is attributable to a 400 bps decline in household savings, which constitute 60% of the overall pie. A disaggregated picture shows that the main culprit here is physical savings including dwellings and buildings, which fell by 550 bps during the initial half of the decade, before plateauing off.
It is necessary to qualify the term ‘household savings’ in this context. Since a significant portion of dwellings are for self-occupation (consumption), physical savings do not strictly correspond to the usual definition attributed to savings, which is income net of consumption. A more sensible terminology would be ‘capital formation’ as dwellings and buildings are nothing but asset creation. Interestingly, we see a reflection of this in national accounts where physical savings of households and capital formation under this head show identical numbers. Also, contrary to expectations, household savings in the form of gold and silver accounts for just 0.2% to 0.3% of GDP, an indication of the increasing allure of financial assets.
Physical capital formation in dwellings and buildings declined steeply during FY12 to FY16 after which it stagnated. Possible reasons for low investments in dwellings and building could be slower income growth in the 2010s, subdued confidence about future incomes, regulatory changes in real estate sector and measures against unaccounted money in construction activities.
Though household physical savings waned, financial savings bucked the trend and increased moderately. Net financial savings, which is gross savings netted off for liabilities, hover between 7-8% of GDP. Financial assets mainly comprise deposits, small savings instruments, mutual funds, as well as retirement and insurance products while loans and borrowings form the bulk of liabilities. In absolute terms, CAGR in household financial assets during the past decade (2012-20) was as follows: Deposits (6.2%), life insurance funds (7.3%), pension products and small savings (32.7%), currency (13%) and equity and mutual funds (21.9%).
Even as concerns mount on the adverse implications of a falling headline savings rate, the rising financial savings is a silver lining and clearly indicates increasing financialisation of the economy. Mutual Fund AUMs as well as retirement funds and insurance corpus grew faster than nominal GDP growth. Some hard statistics too buttress this fact. NSE data show that in FY21 retail investors contributed 45% of the total traded turnover up from 33% five years ago. There were 10.26 crore mutual fund folios as of June 2021 compared to 4.89 crore in 2015.
The erratic pattern of financial savings during the pandemic may be an outlier. Latest data show that in April-June 2021, the metric was 21.4% of GDP or 4 times the usual norm, only to revert to the long-term trend by December. However, this is in consonance with the trend seen across the globe during the pandemic.
But this outlier behaviour merits a logical explanation, apart from the statistical bulge due to a low denominator (GDP). Two plausible reasons can be attributed. First, the relatively well-off, accounting for a lion’s share of the savings, experienced only minor dent to their incomes, enabling them to save disproportionately during the pandemic, aided by restrictions on spending avenues. Second, contraction in household financial liabilities in Q1 FY21 facilitated by moratorium on loan repayments and lenders turning credit shy due to risk aversion also contributed.
Post Q1 FY21, both incremental as well as outstanding financial liabilities of the household sector showed an increasing trend: in fact household financial liabilities have been on the rise even before the pandemic. Household financial liabilities as a ratio of GDP increased from 33.8% during the quarter ended March 2020 to 37.9% by the end of December 2021.
It is indeed pertinent and noteworthy that despite household leverage increasing to 37.9% of GDP by December, net household financial savings was 8.1%, absolutely in sync with historical averages, showing signs of stability.
Even a cursory glance at various asset classes leave us in no doubt about the future trajectory of financial savings. For instance, mutual fund AUMs as a share of GDP increased by a whopping 500 bps during FY21. Retail euphoria in stock markets continue unabated and a reflection of this will be seen in retirement and insurance funds as well, though not as sharp as in mutual funds. The bottom-line- though headline savings rate has fallen, the trajectory of financial savings leave little room for concern.
Going ahead, government savings could deteriorate due to ambitious infrastructure spends and the scale of public apex required, both for physical and social infra. The medium fiscal deficit targets have been revised upwards as well. Meanwhile, the investment cycle is likely to revive as corporate deleveraging has almost bottomed out. While foreign capital is increasingly being resorted to, they involve inherent risks and come with specific expectations. It is the household sector that finances bulk of the funding gap (capital formation less savings) of government and corporates, largely through financial intermediation. For an emerging economy like India consistently augmenting household financial savings is a sine qua non for its medium-term growth story to fructify.
(Madhavankutty. G, is an Economist, Aditya Birla Group. Views expressed are the author’s own.)