Household savings is a strong economic indicator for a country because more savings translate into more investments. Household savings are crucial to India’s economic growth as it constitutes more than half of all savings in the country. Its contribution to the total savings in the country is more than those made by private and public corporations. Therefore, a decline in household savings poses a serious threat to GDP growth and economic stability in the country.
Apart from other indicators of an economic slowdown such as low consumption, higher unemployment and declining GDP, the country is also seeing a decline in overall savings rate, not just the household savings rate.
For example, by the year ending 2016-17, the country’s overall savings rate had declined to 30% from 34.6% over a 5-year period. Household savings, which contributes more than 50% to India’s overall savings rate, had also come down to 16.3% from 23.6% over the same period.
What is the household savings rate?
Before we get into the nitty-gritty, let’s first understand the meaning of household savings rate. The household savings rate is the difference between a family’s total income and expenditure. For example – If Mr Satish, who is the sole earning member of the family, brings home Rs. 35,000 per month as salary, that would be his disposable income. If he spends Rs. 30,000 every month, his total household savings is Rs. 5,000.
The country’s overall savings rate is the amount of money belonging to individuals or organisations lying in savings accounts as a percentage of total disposable income.
Where does the Indian household invest?
As mentioned earlier, the bulk of savings in the Indian household gets invested in real estate. However, that is gradually changing now. In FY2018, equity constituted 8% of total financial assets compared to a meagre 3% in FY2016, as per RBI data. The mainstay of household savings in India: fixed deposits, real estate and gold, is also falling.
One of the only saving graces of demonetisation was that more people started investing in mutual funds SIPs and ULIP plans. In fact, more and more people are investing in ULIPs after the introduction of the long-term capital gains tax (LTCG) on stocks and mutual funds. Also, there are many tax benefits in investing in ULIPs over mutual funds and stocks.
Reluctance in staying with long-term investment
Though the Indian household is good with savings compared to many other countries, it is not as trusting in the financial markets when it comes to long-term investments. Let alone investments, Indians are not even persistent enough with their life insurance policies. Less than 40% of policyholders stay invested in 15-20 year policies for more than 5 years.
According to Association of Mutual Funds in India (AMFI) data, only 42% of equity mutual funds were held for more than 2 years, as of March, 2019. For long-term investments, the Indian household still relies on gold and real estate.
Current state of household savings
In a period of five years from FY2012 to FY2017, household savings including unregistered MSMEs accounted for almost 61% of the country’s total savings.  Post demonetisation, household investments started to fall down as savings rate began to decline. The rolling out of GST also had a negative impact on household savings rate as businesses of MSMEs were badly affected.
Also, as 75% of India’s household savings were in real estate, low returns from real estate also affected household disposable income and savings.
Due to lack of employment opportunities, stagnant incomes, sustained consumption and increase in financial liabilities, household savings rate declined from 22.5% in 2013 to 17.2% in 2018.
How to boost the declining household savings in India
Apart from extricating the Indian economy from the twin shocks of demonetisation and GST, the Indian government needs to incentivise households that invest their tax-paid money in long-term investment instruments. The growing unemployment rate in the country, which is at a 45-year high, is also eating into the household savings rate. Therefore, creating more job opportunities by infusing liquidity and enhancing ease of business is something that has to be done immediately. Household income, savings and investments are the mainstays of the Indian economy and the government must do everything in its power to empower and revive this sector.
Regular savings is not only good for your financial health but also positive for the country’s economy. Invest your savings in smart ULIP investment plans available on Finserv MARKETS and see your wealth grow exponentially with top-rated debt and equity funds.
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