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Financial savings illusion PDF Print E-mail
Saturday, 19 September 2015 10:57
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Hike in household savings may not be sustainable

At first glance, the growth in financial savings by households in FY15 is impressive, and augurs well for the future. RBI’s Annual Report, last month, made the first mention of this, but the details of the break-up were revealed in the Handbook of Statistics just a few days ago. This confirms net financial savings of households are up from 7.2% of GDP in FY14 to 7.6% in FY15. While that is important, what is more encouraging is the shift away from savings in gold and real estate. In FY12, for instance, financial savings comprised less than 32% of all gross household savings, this had risen to 34.5% in FY13 and to just under 40% in FY14. While RBI does not have data for non-financial savings for FY15, chances are the trend has been accentuated. In FY15, for instance, with gold prices falling over 6%, gold demand fell from 857.4 tonnes in FY14 to 835.5 tonnes in FY15, or from $37.1 billion to $33 billion. Real estate investment is also likely to have fallen going by the fall in housing valuations and the large inventory that most real estate developers are holding today. Indeed, RBI data shows that, within the gross household financial savings, that is held in the form of shares and debentures rose from 2.5% in FY14 to 4.6% in FY15. Similarly, with the government allowing individuals to deposit more money in their PPF accounts—this was raised from Rs 1 lakh a year earlier to R1.5 lakh—the share of provident and pension funds in gross financial savings rose from 16% to 19% in the same period.

The problem, however, is that it is not clear the trend will sustain. For one, gross financial savings actually fell, from Rs 12.8 lakh crore in FY14 to Rs 12.4 lakh crore in FY15—as a proportion of GDP, this represents a fall from 11.3% to 9.9%. What made the net savings rise was the fact that there was a sharp collapse in household borrowings for either consumption or for purchases of durables. From Rs 4.6 lakh crore in FY14, this fell to Rs 2.8 lakh crore to FY15. So once consumption picks up, so will bank borrowings and, as a result, net financial savings could once again fall. Also, while the Sensex rising 32% in FY15 is what caused a rise in financial savings in shares and debentures, the fact that the rise was a mere 3.5% in the first half of FY16—that is, even below the rate of interest on savings deposits—could see a sharp reversal of this. Indeed, bank deposits, traditionally the largest share of financial savings, saw a major fall in FY15—given the sharp fall in both CPI and WPI, and therefore a hike in real interest rates, that is surprising, and indicates a severe stress in household balance sheets. Bank deposits fell from Rs 7.7 lakh crore in FY14 to Rs 5.8 lakh crore in FY15—as a proportion of gross financial savings, that’s a fall from 60.5% to a mere 46.9%. While this shift may be evidence of households being more sensitive to relative returns—and therefore moving to areas that offer a higher return—it also suggests a truly dramatic change in household savings is not going to take place until the economy shows significantly higher growth than it is showing at the moment.

 

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