Changing composition of household savings

The composition of household savings is of some relevance in the context of the recent reduction in the interest rates on government small savings instruments.

While household savings as a percentage of GDP show a decline from 20.5 per cent in 1990-91 (old GDP series) to 18.3 per cent in 1997-98 (new series), the years in between were marked by regular fluctuations.

Indeed, if the savings rate for 1990-91 is not taken into account, the trend if anything is in a modest upward direction. However, there was one clear trend during the Nineties - the shift away from physical savings (land, houses and the like) and in favour of financial savings. Since 1991-92, financial savings of households have consistently outstripped physical savings - the only exception was 1995-96 - as households increasingly put their money in financial instruments of many kinds.

In 1997-98, household financial savings amounted to 10.3 per cent of GDP while household savings in physical assets were 8 per cent of GDP.

During the past decade, households continuously moved their savings back and forth between instruments of various kinds in response to tax changes, shifts in rates of return, market trends and breaches of contracts by issuers of some instruments.

The RBI provides a fairly detailed classification of savings in different instruments - the percentage distribution of gross household financial savings for some years is presented in the accompanying Table. This presents a clearer picture as the change in the GDP series after 1993-94 makes trends on the basis of a proportion of GDP non-comparable. (Since 'households' in the estimates of savings and investments cover both households as normally understood as also unincorporated business establishments, a certain amount of caution is necessary in interpretation of true household savings).

The first thing that is clear is that despite the growth of a number of savings instruments, bank deposits remain the single largest avenue of household savings.

At the end of the decade bank deposits were almost double the next largest form of savings (provident and pension funds) - a picture that had not changed since the beginning of the decade.

The small savings instruments like the Indira Vikas Patra, National Savings Certificates and the like - contained in the group 'Claims on Government'' - had a chequered path during the Nineties.

Although they were the third largest form of savings in 1990-91, the withdrawal of the earlier 100 per cent tax deduction facility afforded to savings in these instruments saw collections plummet in 1992-93 to a third of their 1990-91 level.

Towards the end of the decade small savings collections had more or less recovered to their earlier level. This was partly because of the collapse of the non-banking financial companies after 1996-97 and the sluggishness in the stock markets.

Despite the growth of the capital market in mobilising funds, the household savings channelled to the stock markets have followed an erratic course.

The peak was actually reached in 1991-92 when as much as 23.3 per cent of gross financial savings were made in shares, debentures and UTI instruments. But as that boom collapsed and later the primary market boom of the mid-Nineties as well, relatively less and less of household financial savings were kept in company shares and mutual funds.

By the end of the decade less than 3 per cent of household financial savings were in shares - though the situation may have changed during the course of 1999-2000 with the mutual fund boom and now the zig-zag upward movements in the secondary markets.

The withdrawal of the larger tax exemption facility to government small savings and the fickle movements in the stock markets led to a growing proportion of household savings being kept in the non-banking financial companies during the mid-Nineties.

After accounting for a mere 2.2 per cent of gross savings in 1990-91, these deposits took in as much as 13.6 per cent of the total in 1996-97. Yet, the failure of a number of non-banking finance companies meant that the relative importance of these deposits fell sharply in 1997-98 before recovering a bit in 1998- 99.

Yet, in all these ups and downs, there were three fairly steady avenues of household savings.

Bank deposits was of course one, savings in life insurance and provident funds were the other two. At the beginning of the decade these three avenues took in two-thirds of household savings and at the end of the decade they still accounted for much the same proportion.

One can only hazard a guess that the one percentage point lowering of the interest rate on small savings instruments will lead to a shift towards bank deposits and perhaps the shares and UTI category.

CRR

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