The Savings Shift

Strapped for money, most Indians have sought a risk-return midpoint. It’s quite a mindset shift from the pre-2008 days

In 2010-11, you and I saved less than what we did in previous years. According to the latest RBI report, Indian household savings grew by less than 10 per cent during the last fiscal year, the first time it dropped to a single-digit figure since 1997-98. There was also a shift in our preferences. Overall, we displayed less faith in bank deposits and corporate investments (equity shares and debentures), and favoured government-backed securities (NSCs and Post Office savings) and insurance products (with inbuilt saving schemes).

For India’s economy, this is a cause for concern. If this trend continues, it will adversely impact our dream of achieving double-digit annual growth rates in the near future. Lower domestic savings (by households, private firms and public sector units), if not adequately supplemented
by foreign inflows, invariably leads to less investment in new projects and expansion of existing ones. So it is important to understand the reasons for our inability to save.

Our incomes haven’t risen as fast as we thought they would. Although several surveys indicate that salaries went up by over 10 per cent in most sectors, the hikes were dented by high inflation. “If adjusted for inflation, let us say that most people earned only slightly more than what they did in 2009-10,” says a senior HR consultant.

In addition, our household budgets went for a toss. Last fiscal, the consumer price index every month ran in a range 8-14 per cent higher than the same time the previous year. If you looked at food and fuel prices, the price rise was worse—over 15 per cent in many months. Ever-increasing interest rates added to our woes, as they led to higher outgoes in terms of monthly repayment installments on cars and houses.

Even as higher living costs left less money to put aside, we were worried about the returns on our savings and the fact that we could lose money. So, we shifted away from low-risk, low-return options like bank deposits, whose share, as a percentage of overall household savings, came down from 53 per cent in 2008-09 to 42 per cent in 2010-11, and simultaneously avoided high-risk, high-return instruments like shares and debentures. Instead, we chose government-backed securities and insurance products, which are safe and deliver reasonable returns too (less than equity but more than bank deposits). The share of these two categories went up from 22.4 per cent in 2008-09 to 30.6 per cent in 2010-11. This is quite a mindset shift from the days of the pre-2008 boom, when everyone was enthusiastic about investing in Indian stockmarkets.

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