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India: savings rate declining during the ongoing Covid-19 crisis

3/10/2020 at 6:00 AM

The declining savings ratio hasn’t yet acquired any problematic proportion, yet it needs to be constantly monitored. The declining trend could be attributed mainly to falling interest rates on savings products on one hand and rising financial disintermediation on the other. Loss of employment and income during the on-going Covid-19 crisis doesn’t augur well for the savings scenario…

Dr Manas R Das

India’s savings ‘culture’ is widely acclaimed. As per the World Bank’s latest country-wise data, from 1960 onwards, the average decadal savings ratio (Gross Domestic Savings/Gross Domestic Product or GDP) of the country reflected a consistently increasing trend at a fast rate. During 2004-17, it remained unwaveringly above 30.0%, peaking at 34.4% in 2007. Although the 2010-19 decade witnessed a downward trend, yet the ratio in 2019 at 28.0% was not only 4.6 times that in 1960 but also exceeded the world average at 25.2% (latest available for 2018) and the average for the lower-middle income group of countries (to which India belongs) at 23.4%. Chart 1 depicts the historical trend.

In terms of the savings ratio, in 2019, India ranked 38th among 127 countries (for which the ratios were available, and the ratios were positive) and 2nd among the BRICS (Brazil, Russia, India, China and South Africa) economies (excluding China for which the 2019 ratio was not available, but in 2018, it was 44.94%). Among 11 neighbouring Asian countries, i.e., Thailand, Indonesia, Mongolia, Malaysia, India, Vietnam, Bangladesh, Sri Lanka, Nepal, Philippines and Pakistan (in decreasing order of the ratio), India’s savings ratio was the 5th highest.

During 2018-19, the country’s Gross Savings/GDP and Gross Savings/Gross National Disposable Income ratios stood at 30.1% and 29.7% respectively. The household sector has always been the largest contributor to gross savings. During 2018-19, household sector savings accounted for 60.3% of gross savings, and as ratio of GDP, these worked out to 18.2%. In the household sector savings, financial savings (net of financial liabilities) constituted 35.7% during 2018-19, serially down from 44.9% during 2015-16. The share of physical savings in the household sector savings moved up from 53.2% to 63.3% during 2015-16 to 2018-19. (All savings and income data are at current prices)

The largest chunk of savings is channelled through banks. This continues to be so despite various other segments of the financial sector such as the stock and commodity markets, insurance companies and mutual funds acquiring enhanced width and depth. As far as the household sector is concerned, during 2018-19, (change in) bank deposits constituted 37.3% of (change in) financial assets, denoting a sharp rise from the preceding year at 24.8%.

Aggregate bank deposits as ratio of GDP (at current prices) stood at 66.7% in 2019-20. Chart 3 reveals a declining trend from 2014-15 onwards till 2018-19, ignoring the sudden spike in 2016-17 which could be treated as an aberration due to the Nov-16 demonetization.

It may be noted that a section of households is financially excluded. According to the World Bank’s Global Findex Database (2017),80.0% of the adults in India had an account with a formal financial institution, up from 53.0% in 2014and35.0% in 2011 Findex Databases, thereby indicating reduction in financial exclusion.

The declining savings ratio hasn’t yet acquired any problematic proportion, yet it needs to be constantly monitored. The declining trend could be attributed mainly to falling interest rates on savings products on one hand and rising financial disintermediation on the other. Loss of employment and income during the on-going Covid-19 crisis doesn’t augur well for the savings scenario. At the same time, in order to reinvigorate theweakenedeconomy private consumption expenditure needs to supplement the increased public expenditure as well as private capital expenditure, and that could be dilemmatic.

About the Author:Dr. Manas R. Das is a former senior economist of State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medallist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of Indian Institute of Bankers. He has won several awards, besides being a prolific writer.

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