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Gross Domestic Savings (GDS) play a vital role in the economic growth of a country since it facilitates to provide requisite financial resources to undertake various developmental and welfare programs. A high level of savings helps the economy to progress on a continuous growth path as investment is mainly financed out of savings. GDS is one of the important economic indicators to measure the financial regulation and soundness of the country. Absence of required savings rate may lead to external dependence, which may jeopardize the interests of the Nation.
Savings habit is an in-built culture of the Indian system and it has been growing consistently over the years. The GDS percentage to GDP has shown considerable improvement from 10% in 1950 to 33.70% in 2010, which is one of the highest globally. It is interesting to note that while the share of corporate sector increased from 10% to 24% during 1950 to 2010, the share of public sector has come down to 6% from 18% during the said period. The buoyancy of corporate sector in post reform era could be one of the reasons for increased share of corporates in GDS. While there is increasing trend in saving rate, marginal decline is observed under household sector i.e. 72% to 70%
Notwithstanding the fact that the share of household savings to GDS is showing decline, still this segment is the significant contributor to GDS with 70% share. Indian households are among the most frugal in the world. However, commensurate capital formation has not been taking place as a lion’s share of household savings are being parked in physical assets compared to financial assets.
The pattern of disposition of saving is an important factor in determining how the saved amount is utilized for productive purposes. The proportion of household saving in financial assets determines the channelization of saving for investment in other sectors of the economy. However, the volume of investment of saving in physical assets determines the productivity and generation of income in that sector itself.
Post independence era has witnessed a significant shift in deployment of household savings especially the share of financial assets increased from 26.39% in 1950 to 54.05% in 1990 may be on account of increased bank branch network across the country coupled with improved awareness of investors on various financial/banking products. However, contrast to common expectations, the share of financial assets in total household savings has come down from 54.05% to 50.21% especially in post reform period i.e. 1990 to 2010 despite providing easy access and availability of banking facilities compared to earlier years. The increased share of physical assets over financial assets (around 4%) during the last two decades is a cause of concern requires focused attention to arrest the trend.
Traditionally, the Indians are risk-averse and prefer to invest surplus funds in physical assets such as Gold. Silver and lands Nevertheless, considerable share of savings also flowing to financial assets, which includes, currency, Bank Deposits, Claims on Government, contractual savings, Equities.
The composition of household financial savings shows that the bank deposits (44%) continue to remain the major contributor along with the rise in the Contractual Savings, Claims on Government and Currency.
Though there was gradual decline in currency holdings by the households i.e.13.79% in 1970s to 9.30% in 2007, still the present currency holding level with households appears to be on high side compared to other countries. The primary reasons for higher currency holdings could be absence of banking facilities in majority villages ( 5.70 lakh villages) as well as hoarding of unaccounted money in the form of cash to circumvent tax laws. Though, cash is treated as financial asset, in reality, a major portion of currency is blocked and become unproductive.
Bank deposits seemed to be the preferred choice mainly on account of its inbuilt features such as safety, Security and Liquidity. Traditionally, the Household sector has been playing a leading role in the landscape of bank deposits followed by the Government sector. However, the last two decades has witnessed significant shift in ownership of bank deposits. While there was improvement in corporate and Government sectors’ share by 8.30% and 7.20% respectively during the period 1999 to 2009, household sector lost a share of 13.30% in the post reform period.
In the post independence era, Indian financial system was characterized by poor infrastructure and low level of financial deepening. Saving in physical assets constituted the largest portion of the savings compared to the financial assets in the initial years of the planning periods. While rural households were keen on acquiring farm assets, the portfolio o urban households constituted consumer durables, gold, jewellery and house property.
Despite the fact that the household savings have been gradually moving from physical assets to financial assets over the years, still 49.79% of household savings are wrapped in unproductive physical assets, which is a cause of concern as the share of physical assets to total savings are very high in the recent years compared to emerging economies. This trend needs to be arrested as scarce funds are being diverted into unproductive segments.
Of course, investment in Real estate sector can be treated as productive provided construction activity is commenced within reasonable time, but it is regrettably note that many investors just buy and hold it for speculation leading to unproductive investments.
India has probably the largest fascination with gold than any other country in the world with a share of 9.50% of the world’s total gold holdings. The world Gold Council believes that they are over 18000 tonnes of gold holding in the country. More impressive is the fact that current demand from India alone consumes 25% of the world’s annual gold output. Large amount of capital is blocked in gold which resides in bank lockers and remain unproductive.
Indian economy would grow faster if the capital markets could attract more of the nation’s savings and channel them into more productive areas, especially infrastructure. If the Indian market can develop and evolve into a more mature financial system. Which persuades the middle class to put more of its money into equities, the potential is mind-boggling.
