October 14, 2017
Currently, the majority of Indian household assets are held in physical forms
Ongoing Government initiatives are aiding people shift to financial savings
Demonetisation has encouraged masses to deposit cash holdings with banks
Higher financial savings will aid private lending and Government investment
The importance of household financial savings in an economy can hardly be over-estimated. It is the biggest and the most reliable source of funding for investment in India. Data from the Central Statistics Office shows that total gross savings in the economy in 2015-16 amounted to 31.6 per cent of the gross national disposable income. Meanwhile, the household sector’s savings was more than half of that, at 18.7 per cent of the gross national disposable income.
However, the majority of household savings in India have been locked up in physical assets, such as gold and real estate. As the Household Finance Committee Report in July 2017 pointed out, an average Indian household holds 84 per cent of its wealth in real estate and other physical properties, 11 per cent in gold and 5 per cent in financial assets. Hence the Government has tried to encourage the masses to move their savings to financial platforms.
There are many reasons why Indians have traditionally preferred to hold their wealth in physical forms. Age-old prejudices against institutions, poor literacy rate, lack of awareness as well as access to banks and other avenues of financial savings have been some of the main discouraging factors. Additionally, for the ones with undeclared incomes, gold and real estate have been a convenient form of holding unaccounted earnings.
But, there are signs of changes in the old order. Lower inflation has resulted in people having more money to save. The Government’s focus on registering unaccounted wealth (black money) and the demonetisation of big currency notes have led households to shift to financial savings. In 2016-17, the gross financial savings of the household sector went up to 11.8 per cent of Gross National Disposable Income (GNDI), from 10.9 per cent in the previous year.
As a result of the demonetisation exercise and the Government’s initiative for financial inclusion through opening of bank accounts for the masses (Jan Dhan scheme), there has been a shift in financial savings from cash to bank deposits. As a result, the percentage of household savings held in cash has gone down, while bank deposits went up. The additional deposit allows banks to lower interest rates, thus providing a boost to the economy.
Given the structural changes in the economy that the government is putting in place, the share of financial savings for households should continue to rise over the coming years. This has several positive implications for the economy. It will result in increasing liquidity in the financial markets which would ensure that interest rates remain low – this would boost borrowing by companies and households, thus giving a fillip to economic growth.
Moreover, this shift in savings from physical to financial assets has also been good for the Indian capital market. RBI data shows that household savings in the form of shares and debentures went up from a mere 0.3 per cent of GNDI in 2015-16 to 1.2 per cent in 2016-17.