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Will the budget boost domestic savings?
Fri, 11 Jul Pre-Open

India's Savings to GDP ratio has hovered between 30-36% since a decade. Gross savings are calculated as gross national income less total consumption, plus net transfers from abroad. At over 30%, it is one of the highest savings/GDP ratio in the world. However, most of the household savings which is the largest contributor to the overall savings goes into gold consumption. This proves a double whammy for the economy as rising prices of gold has been the prime reason for burgeoning current account deficit. Apart from household, private and public savings are also not adequate. As a result when it comes to availability of funds, corporates have always had a tough time raising funds in India. More often than not, they have to raise cheaper capital abroad. Public savings are essential to fund various infrastructure projects. Also, in the wake of high current account deficit when the exports are low, the onus is largely on domestic savings to provide the much needed capital.

To make the matters worse; in the last few years, increase in government expenditure and rising inflation has worsened the savings ratio. Thus, it is no surprise that India's gross domestic savings (as % of GDP) has decreased from 36.8% in 2007-2008 to 30.1% in 2012-2013. The question is, is there any remedy to boost savings? Above all, since most of the household savings go in to buying gold and real estate, the switch has to be made to financial products. Secondly, large part of rural India lacks a strong banking system and hence the most viable mode of saving is gold. So, if the government wants to encourage more people to invest in financial assets; the savings need to be first channelized into the banking system. This requires more bank branches to be opened in rural areas. Also, various financial products like stocks, debentures, mutual funds, insurance products as well as various other financial and saving schemes should be made more feasible in order to formalize the savings.

On a positive note, the Union budget 2014-2015 has indeed placed adequate focus on the above mentioned measures to boost financial savings. This shall boost investor confidence in the Indian economy which shall encourage savings. This can eventually strengthen the savings to GDP ratio.

The following are the key policies and announcements that can help boost savings:

  • Higher income tax exemption limits
  • Kissan Vikas Patra (KVP) saving scheme to be reintroduced.
  • In order to revitalize small saving scheme; a special small savings instrument to cater to the requirements of educating and marriage of the Girl Child to be introduced
  • A National Savings Certificate with insurance cover to provide additional benefits for the small saver.
  • In the PPF Scheme, annual ceiling has been enhanced to Rs 1.5 lakh p.a. from Rs 1 lakh at present.
  • Tax incentive to be given to all types of bonds instead of just infrastructure bonds
  • RBI to create a framework for licensing small banks and other differentiated banks (this shall lead to opening up of more banks in rural areas)
We believe these small measures shall go a long way in paving the path for encouraging savings in the economy. To conclude, domestic savings is just a spoke of the economic wheel. In order to get the economy back on track, the government needs to work towards fiscal consolidation and inflation control. In the budget, the FM has rightly targeted for fiscal deficit of around 3% by FY17 from around 4.5% in FY14. Also, various schemes and reforms have been announced to boost infrastructure. These measures together shall improve overall economic scenario thereby boosting domestic savings.

Do you think the budget can help revive savings to GDP ratio? Share your views on the Equitymaster Club.

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