A Structural shift in domestic savings

A shift in savings preference from gold and real estate to financial assets such as bank deposits and mutual funds is all set to benefit the economy

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.

Limited access to domestic savings

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.

Signs of change in saving preferences

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.

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.

Household savings to boost 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.