Are the savings for a rainy day getting drained away
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BY AADRIKA SHUKLA / 31 JULY, 2021
The meticulous bias for physical assets and colossal inequalities in geographical divisions are just a few things which makes the saving culture in India an extremely engaging keynote.
e don’t need elaborate research or statistical data to authenticate that Indians have always been savers. Whether you look at an old mother figure in a Bollywood film getting cash from a masala box which she saved for an emergency or a middle aged man in his mid 50s cautiously saving to guarantee a good retirement home for himself, high savings have been characteristic to us. We are extremely habitual to saving the better part of our incomes, usually in a way of postponing consumption but also for a sense of security among other things. According to the National Council of Applied Economic Research (NCAER), “Understanding household savings is of importance for several reasons. At the national level, household savings provide the main source of investment financing, both for the government and for the corporate sector,but for the individual household too, saving is done in order to achieve specific short-term and long-term goals, notably financial security.” What adds to the intrigue is the fact that the Indian savings rate is better than many advanced economies and very close to the emerging Asian economies.
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What adds to the intrigue is the fact that the Indian savings rate is better than many advanced economies and very close to the emerging Asian economies.
Commencing at the point where it all began, even though there was little to no documentation on personal savings rates during the British raj, we know that the country suffered a massive economic collapse as well as several famines and fatalities during this time. This could be the rationale behind young independent India’s distress in the 1950s of having to store more for a time of need. Following independence, in the early 1950s and 1960s, the Indian government struggled to develop an economy. Smaller GDP, growth rates, income per capita and lower savings were all indicators of this. The post Independence disposable income was the lowest not only in the history of India but also all over the world. With household consumption making up about 87% of the GDP, the Indian economy was mostly consumption-oriented. Nevertheless, people chose to save a third of their earnings, a cultural behaviour probably influenced by past setbacks experienced during British control
With a rise in disposable income in the coming years, the rate of savings gradually climbed and this pattern was maintained for the next two decades, with the majority of savings going into gold and immovable assets. After the 1990 reforms, the culture of savings has steadily evolved as the economy has been guided by millennials and Generation Y, who have not experienced famines, fatalities, or economic catastrophes. Savings were gradually displaced by wealth consumption, supported by the remarkable rise of financial institutions and a plethora of financial instruments, where most physical savings became financial savings. Similarly, the declining returns on traditionally secure investments like real estate and gold have taught the younger generation that previous performance does not guarantee future results.
Pictured : Titled Kakeibo; Illustrated by Louisa Cannell via Refinery29
This timeline aids us in gaining a better understanding of the elements that make up the nature of this behaviour. As we have already seen, savings can be in the semblance of a number of things. An inspection orchestrated by the Reserve Bank of India in 2018, illustrates the state of household finance and savings. It is common knowledge that we prefer physical assets over financial ones with the latter comprising only 5% of an average household’s wealth. Our physical assets are dominated by real estate, which accounts for 77% of the total physical assets. While real estate takes up the largest share, gold makes up for 11%. A robustly informal system of exchange that allows gold to be converted into cash quickly, especially in times of need, only feeds the appetite. As Richard Davies writes in ‘Extreme Economies’, “In an economy buffeted by the ups and downs, the people are used to buying gold after bumper harvests and selling it after lean ones.”
A robustly informal system of exchange that allows gold to be converted into cash quickly, especially in times of need, only feeds the appetite.
One could say that we simply favour gold and real estate, however, a number of factors push individuals away from formal financial instruments, one of them being financial illiteracy and an immense lack of faith in financial institutions. Consumers believe they have less control over such assets, causing them to gravitate toward gold and other physical assets, which appear to be readily available. This attitude does not quite benefit us; according to the RBI report, people might be better off by INR 6,922 to INR 1.78 lakh if they move only 25% of their gold holdings to equities and other financial assets. This equates to 1.6-6% of the annual income of an average Indian.
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Pictured: Businessman under pressure due to the coronavirus economic impact on business background ‘via rawpixel
Aside from the aforementioned aspects, a number of other elements help us understand people's saving habits in general. Former Deputy Chairman of the Planning Commission of India, Montek Singh Ahluwalia, in his book ‘How India Earns, Spends and Saves’ reveals that this incidence of heightened savings is not limited to poor or middle-class homes, but also occurs in wealthy ones. Now, while household income is a significant determinant in regulating savings patterns, differences in savings behaviour are equally prompted by education and employment which does not come as much of a revelation as an individual’s income goes on to make household income in the long run. This is directly influenced by their employment, education, age, and location history among a number of other things. Consequently, households with higher levels of education have higher levels of average savings and income. Schooling boosts the saving-to-income ratio, with the average savings rate increasing faster than the average income rate. When the most educated individual in the home goes from “illiterate” to “graduate”, average household savings increase six-fold compared to a four-fold increase in income.
The basic Life Cycle Hypothesis (LCH) model predicts that increase in real per capita income will result in a clear rise in saving; that the savings rate is proportional to per capita income growth rather than per capita income level. Age dependency ratio, which is the proportion of dependents (people under 15 or over 64) to the total working population (people between the ages of 16 and 64), is another important factor. The LCH model has a clear forecast about the population’s age structure: as the working population grows, so does the saving rate.
Pictured: life-cycle-hypothesis via economicshelp.org
Despite the fact that there isn’t enough direct quantitative data available on a regular basis to allow us to investigate discrepancies in savings culture, a good body of literature backs up the claim that there is a major disparity in savings between urban and rural areas. According to the findings, rural families save at an exceptionally low rate, with an income elasticity of saving less than one whereas that of urban families is high enough to imply the possibility of significantly higher savings potential. This is because in lower income households, the earnings being low, are exhausted on necessary commodities leaving little to no money for savings, whereas in high income households wages are more than enough for the subsistence of the individual, enabling the act of saving. Data from 2016 tells us that an average urban household saves 1.85 times more than an average rural household, implying that urban families save a greater percentage of their income, both on average and incremental level. In the same year, the national average saving-to-income ratio was 0.29 with the average in cities being 0.32, compared to 0.27 in rural areas. Furthermore, in rural India, self-employed households involved in farming and non-farming enterprises were the most significant savers, constituting for over half of all rural savings; in urban India, they placed second only to conventional wages households. Labor (agricultural and non-agricultural) families made little contribution, approximately 14% in the rural side and considerably less in cities, with 7.1%. In both rural and urban India, they recorded the lowest average savings. Compared to families involved in labour work, salaried households add a greater saving-to-income ratio of around 0.36 in both rural and urban areas while the former put together only half of the ratio at 0.18. Although prompted by vastly different reasons, an imbalance like that of urban and rural savings is observed when recent generations are compared to older ones.
Pictured: Illustration titled Savings by Felipe Vargas via behance
Unlike their forefathers, the coming generations do not want to retire with just enough to live comfortably. They want to retire early and they want to retire rich while not sacrificing on life’s comforts at the same time. As a result, their investing decisions are motivated by the desire to increase their earnings and not just beating economic calamity. According to a short study, our economy’s growth trajectory is frequently viewed in terms of transitional dynamics from one crisis to the next - wars, followed by oil shocks, emergencies, and a slew of other disasters, have resulted in unsustainable savings and growth rates. This can be seen in the fluctuations of household savings rate over time: whenever there has been financial upheaval owing to macro variables, financial household savings have taken a hit, and the old culture has returned as a preventive mechanism.
Unlike their forefathers, the coming generations do not want to retire with just enough to live comfortably. They want to retire early and they want to retire rich while not sacrificing on life’s comforts at the same time.
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The final question is how millennials and Generation Z would react to this economic downturn caused by Covid-19, considering that they have never witnessed or experienced anything like it. Will they become more cautious like their forefathers and drastically limit consumption lest financial investment should become less safe? Or will they continue with their usual patterns keeping the dilemma at bay?
Keywords
savings, investments, physical assets, financial instruments, gold, real estate, saving-to-income ratio, urban rural disparity, post independence culture, financial illiteracy, Montek Singh Ahluwalia, Richard Davies, NCAER, Life Cycle Hypothesis, British raj
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References
Dash, S. K., & Kumar, L. (2018). Does inflation affect savings non-linearly? Evidence from India. Margin: The Journal of Applied Economic Research, 12(4), 431-457.
Loayza, N., Schmidt-Hebbel, K., & Servén, L. (2000). Saving in developing countries: an overview. The World Bank Economic Review, 14(3), 393-414.
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Samantaraya, A., & Patra, S. K. (2014). Determinants of household savings in India: An empirical analysis using ARDL approach. Economics Research International.
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Shukla, R., & Sharma, A. (2016, January 8). Strengthen household saving data for effective policy-making. The Financial Express. https://www.financialexpress.com/opinion/strengthen-household-saving-data-for-effective-policy-making/190004/.
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Krishnan, A. (2020, April 2). India's savers also need a stimulus. Businessline. https://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/indias-savers-also-need-a-stimulus/article31239784.ece.
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