With decline in deposit rates over last two years, other avenues of financial savings such as mutual funds and life insurance are expected to gain traction.
By Sanjay Kumar, Chief Investment Officer, PNB MetLife Insurance
Demonetisation is expected to have a significant impact on boosting India’s economic growth in the medium to long-run. One of the biggest positive impacts of this move, along with several other measures taken over last two years to curtail unaccounted money, is increase in financial penetration.
Traditionally, Indian households have parked their savings in physical assets, notably real estate and gold. Over the last seven years, an average of 60% of household savings has been accounted for by these physical assets. While the share of physical savings in overall household savings has come down from the 40-years peak of 68% in FY12 to 59% in FY15, as per Reserve Bank of India, it still remains fairly high. A large part of this has been led by a sharp increase in real estate and gold prices over FY09-13. Households, as such, have perceived these assets as safe investment bets. Further, increase in unaccounted money in the system has also resulted in surge in physical savings post FY09 as a large part of transactions in real estate and gold are cash dominated, particularly in tier 2 and 3 cities. Interestingly, household gross savings rate, in general, has been witnessing a declining trend, falling from 25% (as a % of GDP) in FY10 to 19% in FY15. A large part of this has been led by decline in financial savings rate even as physical savings rate has also fallen over the period.
Household gross financial savings (GFS) rate has fallen from 15% of GDP in FY10 to 10% in FY15. However, it has started showing some improvement, with the GFS rate rising to 10.9% in FY16 – the first significant pick-up in six years. Net financial savings rate, however, has improved only marginally from 7.6% in FY15 to 7.8% in FY16 on account of increase in financial liabilities. The pick-up was led by increased exposure of households to shares and currency holdings.
A shift in household savings from physical to financial assets, therefore, has started happening since the last couple of years. A large part of this is attributable to decline in returns from real estate and gold over last few years and steps taken by the government to curb unaccounted money. Real estate has traditionally seen a reasonably high involvement of cash transactions. With the demonetisation move, real estate prices are expected to see a significant decline. Amid bleak outlook of real estate prices, investment demand is expected to remain subdued.
Gold and jewellery has also been considered as another safe haven for parking unaccounted money. With restrictions on cash transactions and mandatory disclosure of PAN card details for transactions above a certain threshold, demand for gold is expected to see some hit in the near to medium-term.
Decline in relative attractiveness of real estate and gold on account of curb on black money bodes well for financial savings. This, along with government’s efforts to increase banking penetration through Jan Dhan Yojana (173 million accounts opened in last two years), is expected to provide a big boost to financial savings in the medium to long-run. Bank deposits form a majority portion of households’ financial savings. However, with decline in deposit rates over last two years, other avenues of financial savings such as mutual funds and life insurance are expected to gain traction.
The demonetisation reform, therefore, is expected to bring a significant shift in households’ savings pattern over coming years.