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No saving(s) grace for the government!
Tue, 17 Jun Pre-Open

Consider this! Locking your money into fixed deposits will earn you interest of 8%. The inflation rate or the consumer price index (CPI) as it is measured is hovering around 8-9% levels. Thus inflation-adjusted returns stand negative. Thus leaving no incentive for savers to keep their hard earned savings in bank deposits or any other financial assets! Therefore households have been compelled to take resort to assets other than financial assets to protect their wealth. As a result, household savings as a percentage of GDP has been on declining spree in India for almost four years now. And not surprisingly, two-thirds of household savings today lie in physical assets such as gold and real estate.

Fall in household savings have had serious ramifications for our economy. Decline in savings has caused current account deficit to widen. Interest rates have remained high, making it difficult for corporates to raise money from banks and stock markets! Hence, the capex plans have been put on hold. Thus job creation has gone for a toss. And if private sector fails to create jobs, economic recovery will remain a distant dream.

Therefore an additional worry has become apparent for the new government - how to boost household savings! Seems our regulators have found panacea to this problem. Tax exemption! Yes. The regulators have urged the government to increase individual tax benefits to encourage people to save. But this solution may not be foolproof. For tax provisions can hurt the government revenues too. Not to forget fiscal consolidation remains a top priority. Therefore, it will be challenging for the government to strike a balance between these two. The government can expand the Rs 1 lakh tax exemption limit for individuals. It can also make an allocation for investments in infrastructure bonds to boost savings.

Tax exemptions may be one of the solutions to the declining savings trends. But a long term remedy is the need of the hour. And clearly addressing the notoriously sticky inflation is the key. Broadly the Modi government will have to find ways to repair structural issues and revive investments. We certainly hope the new government will not disappoint us in this regard.

Do you think the new government will succeed in combating inflation and boosting savings in the economy? Share your views on Equitymaster Club.

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