Contact Your Financial
Adviser Money Making MC
2
September 2016
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Rate Hike (The Total
Investment & Insurance Solutions)
India’s savings rate is declining. The private
sector, including households and corporates are the main driver of total
savings, while the public sector has been a drag. Within the private sector,
households are the main source of savings. This component has, however, emerged
as a key drain, with its share in total savings falling to 60% in FY2014-2015
from 70% four years earlier.
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Household Accounts (The
Total Investment & Insurance Solutions)
In a report, DBS Bank
Ltd, says, "The fall in savings needs to be arrested given India’s
investment needs. Relying on foreign savings puts pressure on the current
account and the returns from that investment go abroad as well. Corrective
measures are underway to lift savings and investment, but a quick turnaround is
unlikely." The Total Investment
& Insurance Solutions
There is a combination of factors are behind
this slowdown, the report says adding, low incomes are one, which along with
extended periods of high inflation, pushed households to set aside a bigger
proportion of incomes for consumption, thus impinging on savings. Not
surprisingly, household savings now make less than a quarter of their
disposable incomes, from above 30% earlier, it added.
DBS says, besides
incomes, interest rates, inflation and demographics also drive household
savings. Even though India’s demographics are amongst the most favourable in
the region, years of high inflation and negative real rates have dented
savings. The Total Investment &
Insurance Solutions
While interest rates were raised in response
to high inflation in 2011-13, real deposit rates were still negative (see chart
below). Back then, wholesale price index (WPI) inflation was a policy target,
rather than a much elevated consumer price index (CPI) inflation, which meant
real deposit rates were deeper in red and for longer, than earlier understood.
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Real Deposits rate (The
Total Investment & Insurance Solutions)
In addition to falling households’ savings,
DBS says, its composition is imbalanced. In 2012-13, two-thirds of household
savings comprised of physical assets like gold and property. This was driven by
a need to offset inflation, though it led to a ballooning current account
deficit (CAD) driven by gold imports. Not only did this hurt the current
account, it lowered investment into the real economy.
"More recently, some of this imbalance
has corrected, but physical assets continue to dominate the savings mix. The
marginal increase in financial savings has also been concentrated in shares and
debentures, insurance and retirement funds rather than bank deposits," the
report says. (See chart below)
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| Breakdown Financial Savings (The Total Investment & Insurance Solutions) |
According to the research note, India's
savings rate is caught in a cyclical rather than structural slowdown. It says,
"Unlike much of Asia where rising incomes have been accompanied by a fall
in savings, India’s per capita gross domestic product (GDP) is still amongst
the lowest in the region. Despite this level of incomes, savings have been
falling (See chart below).
"We reckon this is
more a function of low incomes, tough economic conditions, falling real returns
and high inflation, rather than structural impediments of a rising dependency
ratio or a fall in working age population," DBS Bank says. The Total Investment & Insurance
Solutions
The report endorses demographics as one of
India's key strengths. It says, "While Japan, China and many Western
countries grapple with ageing populations, India’s dependency ratio is
declining. The working age group (15-64 years) makes up close to two-thirds of
the overall population. Growth in the working age population will exceed
overall population growth for at least two more decades, pointing to a
sustained fall in the dependency ratio. Although structural tailwinds are in
place, the savings rate continues to stagnate, pointing to cyclical
hurdles."
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Per Capita Income (The
Total Investment & Insurance Solutions)
In the near-term, DBS says, Indian
authorities need to continue encouraging households’ to shift from physical
savings to financial avenues. "This is important not only to meet
investment spending needs, but also ensure efficient savings for growth and limit
external imbalances," it added.
On policy, the report
says, further significant rate cuts are thereby unlikely in the interest of
maintaining positive real and nominal deposit rates. IT says, "We look for
25 basis points (bps) cut in December, before rates plateau, contingent on
sharp disinflation to or below 5% and dovish monetary policy committee." The Total Investment & Insurance
Solutions
"Further out,
concerted efforts to lift incomes and job creation are crucial structural
tailwinds to lift the savings rate. Work is in progress on this front, under
the government’s ‘Make in India’ initiative, skills development, ensuring
education access and improving the ease of doing business. Until the domestic
private sector is able to pick the baton, we expect public sector and foreign
direct investments to drive the initial part of the capex cycle," the
report from DBS concluded. The Total
Investment & Insurance Solutions
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