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Who moved my savings? Households’ savings rate declined in FY2017 led by financial savings rate. While there was a sharp increase in households’ financial assets investments, especially after demonetization, reduction in currency holdings has likely eroded flows into other asset classes. However, the ‘productive’ pool of financial savings had significantly increased, boding well for financing of future investments. FY2018 financial savings will likely be muted due to low accretion to bank deposits.

Financial savings rate declines in FY2017…

The overall national savings rate fell to 30% in FY2017 from 31.3% in FY2016—majority of the reduction came from household savings dropping to 16.3% in FY2017 from 17.8% in FY2016. Surprisingly, the financial savings rate fell to 6.8% in FY2017 from 8.2% in FY2016 even as physical savings rate remained steady at 9.2% (Exhibit 1). Preliminary data released by the RBI (sourced from CSO) had indicated that financial savings rate had increased to 8.2% in FY2017 from 7.9% in FY2016, which was in line with general expectations of households’ savings profile post demonetization (Exhibit 2). Recent data on banks’ deposits indicate that gains from deposits were not enough (contrary to preliminary RBI data) to compensate for the sharp fall in currency holdings in FY2017.

… but ‘productive’ financial savings rate improves

Financing of investments depends on households’ financial savings (along with corporate savings). Currency holdings do not add value to the financial system. Looking at the headline financial savings shows only part of the picture. The positive effect of demonetization can be seen in the ‘productive’ financial savings (financial savings ex-currency), which increased sharply after having been stagnant over the past few years (Exhibit 3). However, FY2018 will likely have a relatively more muted ‘productive’ financial savings profile (especially deposits) though flows into equity markets, mutual funds and insurance have stayed buoyant (Exhibit 4).

Households continue to shy away from real estate but move to ‘machinery and equipment’

Households’ investment in housing (and overall physical assets) has come down significantly over the years. However, physical savings rate remained steady in FY2017 with the investments in ‘machinery and equipment’ making up for the drop in real estate investment (Exhibit 5). Revival of the real estate (and the construction sector in general) is crucial to achieve the twin agenda of driving investments as well as increasing job opportunities. ‘Machinery and equipment’ comprises all types of non-electrical and electrical machinery such as agricultural machinery, furniture, manufacturing, power generating machinery, transport equipment, etc.

Net indirect tax burden could be weighing on household savings-consumption dynamics

Net indirect taxes (indirect taxes net of subsidies) as a proportion of GDP have steadily increased over the past few years (Exhibit 6). This is partly reflected in the fact that even as the household savings rate has steadily declined, we do not see a commensurate increase in private consumption. We do note that only tax dynamics may not be enough to explain savings-consumption dynamics. Private consumption’s share in GDP as well as the private consumption mix has remained fairly stable over the past few years. Expenditure remains skewed towards food and beverages though shares on health and education has increased (Exhibits 7-8). It is crucial for overall household savings to improve given (1) investment rate in a developing economy needs to improve without aggravating external imbalance, and (2) share of physical assets should also improve (construction sector) while financial assets flow remains steady.

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