Falling savings rate has direct implications for the potential medium-term growth rate of the economy
India's household financial savings fell to the pre-1991 levels of 7.8 per cent of GDP in FY12 driven by a sharp contraction in investment in small savings and equities; and very low growth in insurance.
The impact of a falling savings rate is getting reflected in the falling investment rate. This has direct implications for the potential medium-term growth rate of the economy, which we think has fallen to 6.5 per cent.
Recent data released by RBI in its annual report confirms the hypothesis that India’s households’ financial savings are falling for reasons other than gold buying.
The evidence now reveals that the net financial savings of the household sector declined (Fig 1) further to 7.8 per cent of GDP (the lowest since 1991) in FY12 from 9.3 per cent the previous year.
There’s a sharp decline in absolute savings in small savings, share & debentures, and currency. Marginal growth in life insurance funds (1.2 per cent YoY) was also responsible for a fall in financial savings to GDP ratio. Even though savings in bank deposits grew by 15 per cent YoY, the deposits to GDP ratio was unchanged.
Sustained high inflation and falling real incomes also implied a decline in currency holdings of households (from 1.8 per cent of GDP in FY11 to 1.2 per cent in FY12). Deviation of savings to gold consumption also cannot be blamed as gold consumption has seen a significant correction in the last year, with the last data point for Q2’CY12 reflecting a 38 per cent YoY drop.
We estimate the gross savings to GDP ratio to have fallen to 31.4 per cent of GDP in FY12 resulting in the highest ever gap in savings and investment (over 4 per cent of GDP). What can change in FY13? While there is a likelihood of household financial savings recovering in FY13 given a slight moderation in inflation, the impact is unlikely to be material unless there’s a significant improvement in the regulatory environment for the insurance and mutual fund industries.
Private corporate saving may see an uptick given our call of further rate cuts of 75 basis points by RBI and our strategy team’s analysis suggesting bottoming out of earnings momentum given the moderation in global commodity prices.
What remains to be seen is to what extent the public authorities dissavings take away whatever small gains accrue on household financial and private corporate savings.
The impact of falling savings is evident in the falling investment rate as well. Fixed capital growth fell to 5.5 per cent in FY12 versus 7.5 per cent in FY11 and 6.8 per cent in FY10.
Given the average rate of growth in investment in the last three years, the sensitivity of growth to investments and capital productivity, we think the potential medium-term growth for India has fallen to 6.5 per cent, much lower than RBI’s estimate of 7.5 per cent.