The year ended March 2016 saw aggregate deposits with banks grow by just 9.9%, on top of a not-so-big increase of 10.7% in 2014-15. Even in absolute terms, the accretion of Rs 845,360 crore in 2015-16 and Rs 827,730 crore in 2014-15 were below the Rs 955,110 crore for the preceding fiscal.
This fall in deposit growth to single digits — last recorded in 1962-63 — has confounded policymakers and economic commentators for at least three reasons.
First, most banks today are offering 7.25%-7.5% interest on one-year fixed deposits, which is more than the consumer price inflation of 4.8%. This wasn’t so until 2013-14, when one-year interest rates of 8.75%-9% were lower than the average inflation of 9.5%. If deposit growth was still strong then, it is obviously strange to find the reverse happening now, even when savers are getting positive real rates of interest.
Deposit flight from banks is, of course, possible if people have alternative avenues for parking savings. They did, in fact, put money in real estate and gold until about 2012-13. But Central Statistics Office (CSO) data show physical savings of households to have registered a decline in 2013-14 and 2014-15, which is also corroborated by the slump in real estate, and fall in gold imports. And that makes for the second cause for surprise.
The third source of bafflement over the slowdown in bank deposits is that it has been accompanied by higher growth — 14.9% or Rs 215,150 crore — in currency in circulation. This apparent sudden desire for holding cash over keeping money in banks is contrary to not just what one might expect in a regime of positive real interest rates, but also to the general trend towards making payments through credit/debit cards and even mobile services platforms.
Again, there are three broad explanations being trotted out for the weak bank deposit growth in combination with a sharp expansion in currency held by the public.
The first relates to the ongoing Assembly polls. Largescale cash withdrawals are a usual phenomenon in the run-up to elections, we are told. But then, why did this not take place in 2013-14 and 2014-15 — which too had elections, including the big one in April-May 2014?
A second explanation has to do with the tightening of KYC norms by banks as part of the Centre’s crackdown on money-laundering. This is believed to have particularly impacted growth in high-value fixed deposits.
The third reason for the observed spurt in currency in circulation is linked to the hike in service tax rates from 12.36% to 15% since 2013-14. It has led to people increasingly resorting to paying service providers in cash (services, unlike goods, cannot be “seen”, which makes evasion of tax relatively easy).
Both the KYC and service tax explanations have some credibility, but they still do not account for the extent of drop in deposit growth. Moreover, even the 14.9% jump in currency in circulation isn’t high compared to the growth rates prior to 2011-12. It is high only in relation to the steep decline in deposit growth from 2014-15 (See table).
But there is one cause of lower deposit growth — less alluring, though more probable — that nobody’s talking about. All savings, whether financial or physical, ultimately come from incomes. What if incomes themselves aren’t growing much? Is it possible we are in such a situation today, which official data isn’t adequately capturing?
There is little doubt that incomes in rural areas are under terrible stress. Over the last two years and more, farm-gate prices — be it of cotton, basmati paddy, soyabean, maize, sugarcane, rubber, guar-seed or even milk — have collapsed. Coupled with production loss from successive droughts, these would have resulted in annual agricultural incomes contracting by roughly Rs 200,000 crore or so. That, in turn, would have had a negative multiplier effect through reduced spending, translating into lower incomes elsewhere in the rural economy and beyond.
Such drying-up of incomes may not be as visible in other parts of the economy. Urban consumption, for instance, seems to have exhibited relative stability through most of the last two years. But even here, barring in select sectors such as e-commerce, there isn’t much evidence of job creation. A recent Labour Bureau report has shown new jobs in eight industries — textiles, leather, metals, automobiles, gems & jewellery, transport, IT/BPO and handloom/powerloom — to have fallen to 1.35 lakh in 2015, from 4.21 lakh and 4.19 lakh in the previous two years.
In a scenario where jobs and incomes are under pressure, it requires no great insight to expect savings to be squeezed out. The CSO data, in fact, points to a decline in household savings from 23.6% to 19.1% of GDP between 2011-12 and 2014-15. One doesn’t need to, therefore, search for complicated explanations — linking everything to elections and black money, no doubt, has a certain seductive appeal — to understand why bank deposit growth has fallen to single digits.
A better idea of the linkages between incomes, savings and bank deposits can be had if one were to simply look at their growth rates before 2011-12. At that time, rising incomes were truly generating a flood of savings in the form of both financial and physical assets. What we are currently witnessing is just the reverse — as simple as that.