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Saturday, August 25, 2012

Household savings decline to 7.8% of the GDP, lowest in 22 years

MUMBAI: Thanks to slower growth in income and the rising rate of inflation, net household financial savings in India declined sharply during fiscal 2011-12 (FY12) to 7.8% of the GDP, down from 9.3% in FY11 and 12.2% in FY10. The 7.8% level is the lowest since fiscal 1990, that is, an over two-decade low.

According to preliminary estimates released by the RBI, the drop in net financial savings can be attributed to an absolute decline in small savings and lower growth in households' holdings of deposits, currency and life insurance funds, a report by Morgan Stanley pointed out. At the gross level, financial savings as a percentage of GDP decelerated to 10.9% in FY12 from 12.9% in FY11 and 15.3% in FY10.

Net financial savings include cash investments, deposits with banks and non-bank companies, investments in stocks, mutual funds, debentures, small savings, life insurance, provident and pension funds.

RBI attributed the decline in net financial savings to persistently high inflation, leading to low real rates on bank deposits and small savings funds, Morgan Stanley economists Chetan Ahya and Upasana Chachra wrote in the report. These, coupled with an uncertain global environment which has been adversely impacting returns from the stock market, are prompting households to favour investments in gold, seen as a hedge against inflation, and also bad market returns. "In addition to these factors, we believe slower urban job creation and income growth would also have affected the rate of household savings," Ahya and Chachra wrote.

During FY12, investments in small savings was down by 80 basis points (100 basis points = 1%) to a degrowth of 0.2% from a growth of 0.5% in the previous fiscal. In insurance, the drop was 40 basis points to 2.5% from 2.9% in the previous year, RBI data showed.

Since there is expectation that the rate of inflation should come down in FY13, that should lead to improvement in real rates (rate of return adjusted for inflation), which in turn could increase household financial savings during the current year. 
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