Household savings hit 13-year low; dip to 9.7% of GDP

India's household savings, which have fuelled growth over the last few years, have dropped to below 10% of gross domestic product, or national income, for the first time in 13 years, as soaring inflation ate into disposable incomes.

Net financial savings by Indians, which include deposits with banks and non-banking finance companies, cash, investment in stocks, debentures and small savings instruments besides life insurance, provident fund and pension funds, dipped to 9.7% of GDP in FY11 compared with 12.1% a year ago, as per data released by the Reserve Bank of India on Thursday. "This is because household financial liabilities have risen," according to Deepak Mohanty, executive director, RBI.

The central bank has attributed the decline to slower growth in bank deposits and life insurance funds as well as an absolute decline in investment in equities, mainly driven by redemption of mutual fund units.

The last time net financial savings as a percentage of GDP dipped below 10% was in 1997-98 when it fell to 9.6%.

What has really impacted savings by individuals and small businesses is rising prices.

Higher prices have forced them to spend more on daily expenses and also on loan repayments.

Headline inflation was over 8% in FY11, which forced the RBI to raise rates aggressively, but the latest data confirms that rising prices have hurt households, with a higher share of disposable incomes being marked for spending rather than salting it away as has been the trend during the past few years. With negative returns on deposits in real terms because of high inflation and sharp slide in stocks, there could have been reallocation of financial savings to non-productive assets such as gold.

Powered by an annual average growth of over 8% between 2004 and 2008-09, India's savings rate surged to over 30% of GDP, including both physical and financial assets. This fuelled investments in the economy, thus helping reduce dependence on foreign capital.

India, along with China, had seen a secular trend in savings growth over the last decade with consumers saving more as incomes rose in keeping pace with economic growth. However, rising inflation has impacted this with the burden of higher loan repayments after several bouts of rate increases.

The RBI, in its annual report released on Thursday, said households' financial liabilities have risen reflecting higher borrowings from commercial banks. Besides, persistently high inflation, relatively slower adjustment of bank deposit rates, and volatility in Indian equity markets - impacted by global macroeconomic uncertainties - affected the level and composition of net financial savings of the household sector, it said.

Source: http://economictimes.indiatimes.com/news/economy/indicators/household-savings-hit-13-year-low-dip-to-9-7-of-gdp/articleshow/9739157.cms