Free Reports

Modi-Rajan Bhai-Bhai, Financial Savings of Households at a Five Year High

Sep 1, 2016

28

The Reserve Bank of India released its annual report earlier this week. The report had some important data points which I shall discuss in this piece.

Take a look at the table below. The household financial savings of the country in 2015-2016 were the highest in five years. They stood at 7.7 per cent of the gross national disposable income. And what is gross national disposable income(GNDI)? Clara Capelli and Gianni Vaggi define the term in the research paper titled A better indicator for standard of living: The Gross National Disposable Income: "The GNDI...measures the income that residents can actually use for either consumption or saving, thus accounting for their purchasing power and, consequently, for their living standards."

Financial Savings Of the Household Sector

Let's try and understand GNDI in a little more detail. It is essentially the sum of the gross domestic product (a measure of national income) plus remittances (money transfer carried out by migrant workers to their home country) plus money/food received as a part of an international assistance programme plus the net primary income. Net primary income is essentially the "difference between the primary income receivable from non-residents and the primary income payable to non-residents".

As per the paper, India's GNDI is around 1.03 times its gross domestic product.

The household financial savings comprise of currency, deposits, shares and debentures, insurance funds, pension and provident funds and something referred to as claims on government. The claims on government largely reflects of investments made in post office small savings schemes.

The household financial savings have gone up to 7.7 per cent of GNDI in 2015-2016. This is a five-year high.

Why has this happened? The simple reason for this lies in the fact that the rate of inflation has been lower in 2015-2016 than it was in the earlier years.

Inflation as measured by the consumer price indexs

As the chart shows, the rate of inflation as measured by the consumer price index has shown a downward trend between December 2013 and September 2015. Since then the rate of inflation has gone up a little.

The point is that when the rate of inflation goes down (i.e. there is disinflation) people have a chance of saving a greater portion of their income and that is what seems to have happened. Lower rates of inflation have led to higher household financial savings. The inflation as measured by the consumer price index peaked at 11.5 per cent in November 2013. It collapsed to 4.3 per cent in December 2014 and it averaged under 5 per cent through 2015.

Both the Narendra Modi government and the Reserve Bank of India governor Raghuram Rajan deserve credit for this. The Modi government for managing food inflation by not increasing the minimum support price on rice and wheat at the same rapid rate as it had been raised in the past (although this had started during the last year of the Manmohan Singh government) and Rajan for managing inflationary expectations (or the expectations that consumers have of what future inflation is likely to be).

In fact, things get interesting if one looks at the breakup of the household financial savings. In 2011-2012, deposits formed the bulk of the savings. They stood at 6 per cent of the GNDI. By 2015-2016, this had fallen to 4.7 per cent of the GNDI. What is happening here?

This clearly shows that most people who invest in deposits (of banks or otherwise) are victims of money illusion. In 2011-2012 and 2012-2013, the nominal interest rates on bank deposits where close to 9-10 per cent and so was the inflation as measured by the consumer price index. This clearly meant that people were losing purchasing power on the money invested in deposits.

The inflation since then has fallen to around 5-6 per cent. The interest rates on bank deposits has fallen to around 7-7.5 per cent. Nevertheless, depositors are now making a real rate of return on their deposits because the rate of interest on deposits is greater than the rate of inflation. This clearly wasn't the case earlier, and the depositors were essentially losing purchasing power by staying invested in deposits.

As Gary Belsky and Thomas Gilovich write in Why Smart People Make Big Money Mistakes: "[Money illusion] involves a confusion between '"nominal" changes in money and "real" changes that reflect inflation...Accounting for inflation requires the application of a little arithmetic, which...is often an annoyance and downright impossible for many people...Most people we know routinely fail to consider the effects of inflation in their finance decision making."

This explains why people have moved away from deposits. The falling nominal rates have led to them shifting their investment to other avenues even though the nominal return on deposits is now in positive territory. Take a look at the claims on government. This has jumped from almost nothing to 0.4 per cent of GNDI. This basically means that the smarter lot has moved their money to small saving schemes where the nominal rate of interest as of now is higher than the interest on offer on fixed deposits.

Advertisement
 Claim Your Copy Of Hormegeddon At A Discount Of Almost 90%... 
  
 HORMEGEDDON book Pay Only Shipping Rs199!Claim your very own hardbound copy of Bill Bonner's latest book- Hormegeddon, at almost 90% off!

It is available on Amazon for Rs 1,810 but all you have to pay here is Rs 199 to cover shipping and handling...

This price is available only for a limited period...

So grab a copy before it is too late.

Click here to find out how to claim your copy...
 

Investments in shares and debentures has also jumped up from 0.4 per cent to 0.7 per cent of GNDI. This should make the finance minister Arun Jaitley happy. He complained some time back that people invest so much money in fixed deposits while ignoring other forms of investing like shares, debentures and mutual funds.

Currency holdings have also jumped from 1.1 per cent of GNDI to 1.4 per cent of GNDI. I really do not have an explanation for this. Why would people want to hold money in a form where they don't get paid any interest?

The other interesting thing that comes out of the chart is that the gross household financial savings have risen to 10.8 per cent of GNDI in 2015-2016, from 10 per cent in 2014-2015. This has translated into the net household financial savings going up to 7.7 per cent of GDP in 2015-2016 from 7.5 per cent in 2014-2015.

Why is there such a substantial difference between the jump in gross household financial savings and the jump in net household financial savings? The net household financial savings figure is obtained by subtracting financial liabilities from the gross household financial savings.

The financial liabilities in 2015-2016 have jumped to 3 per cent of GNDI, in comparison to 2.5 per cent in 2014-2015. This basically means that people borrowed more in 2015-2016 than was the case in the past. In fact, at 3 per cent of GNDI, the financial liabilities are not significantly different from the 3.2 per cent figure of 2011-2012 and 2012-2013.

This basically tells us that households borrowing is alive and kicking. These numbers are again an answer to those who keep demanding that the RBI cut the repo rate at a much faster rate than it has. The trouble is clearly with corporate borrowing which continues to remain in a mess, and there is not much (and it shouldn't) that the RBI can do about ensuring that banks lend to corporates.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

How the Feds Doomed the Economy December 16, 2017
The Feds' ultra-low interest rates (often below zero!) have distorted almost every price in capitalism.
How the Fake Boom Ends December 15, 2017
And so cometh, like the Grim Reaper, the end of the biggest fake boom ever.
For Every Achal Kumar Jyoti, there was a Navin Chawla December 15, 2017
A narrative to have clearly emerged from the Gujarat elections is the Election Commission batting for the Bhartiya Janata Party (BJP), the party in power.
Who is Benefitting from Lower Interest Rates? December 14, 2017
It's definitely not the savers. And what about the borrowers?

Equitymaster requests your view! Post a comment on "Modi-Rajan Bhai-Bhai, Financial Savings of Households at a Five Year High". Click here!

5 Responses to "Modi-Rajan Bhai-Bhai, Financial Savings of Households at a Five Year High"

Mani

Sep 2, 2016

This was achieved despite Mr Rajan and not because of him. He has single-handedly put India's growth back by not cutting interest rates adequately even when inflation was down and despite desperate requests from India Inc for cutting rates to ensure a level playing field with foreign competitors. Mr Kaul, a known Modi-baiter has once again tried to downplay the NDA Government's achievement.

Like 

Gowtham G Shroff

Sep 1, 2016

Dear Vivek,

Interesting article. Even more interesting data. I do not agree that savings have increased because of lower inflation. First of all, is the inflation at the level it really is? I think 5-6% inflation is an eye wash. I am not an economist or even a number cruncher. Common sense and being aware of costs tells me that the cost of almost everything required for a basic living has gone up by more than 10%.
So, where is the saving coming from?
I think, due to significant increase in costs for a basic standard living, people have started to look at double incomes in the family. Both, wife and husband have started earning. When I look around, this I can say is one reason that has increased affordability and hence savings.
I really do not think it has anything to do with lower inflation, which is hard for me to believe.

Thanks,
Gowtham

Like (2)

m sivaramprasad

Sep 1, 2016

the analysis is good.
how much of savings is diverted to capital investments for longer benefits.
the problem of corporate borrowing has greater implications for the health of banks when they borrow short term funds and lend for long term borrowers.
there will be mismatch in asset liability management of banks.
it is high time banks keep off from infrastructure lending which spans for nearly 10 to 20 years

Like (2)

Guru

Sep 1, 2016

pl mail this to Smt.Niramala Sitharaman. The Commerce and Corporate Affairs minister need to understand this

Like (2)

KD

Sep 1, 2016

Saving rates will skyrocket.

Interest rates are so high that even business peope will start saving.

Like (2)
  
Equitymaster requests your view! Post a comment on "Modi-Rajan Bhai-Bhai, Financial Savings of Households at a Five Year High". Click here!