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Saving has always been the hallmark of the Indian financial psyche. Throughout our short history as an independent country, the prevailing attitude towards income was to save for the future, rather than ‘consume today’.

There are many explanations for this. For one, India was amongst the poorest nations in the world during the early years of independence. Traumatic events such as famines were still very much fresh in the minds of people. We were also quite illiterate as a population, and as such financial knowledge was not prevalent across the masses. Investments were mainly done in assets like gold and property, where returns were not particularly exciting.

This was the case until the 80s, after which, there came a shift in the attitudes of people. This shift coincided with the liberalising of the Indian economy, following an economic crisis which prompted it. Not only did India open up to investment from other parts of the world, but it also opened up to the influence of Western culture. A growing middle class was looking to spend more as its incomes were rising as well.

As the Indian economy grew faster than it ever had, savings as a percentage of GDP grew with it. This was the case right from liberalisation up until around 2010.

Gross Savings as % of GDP - India | Source: World Bank

After this point, however, the savings rate began to fall steadily. Why? There is never usually just one reason. As explained above, the attitude towards consumption began to change, especially with the population being younger. Beyond that, the cost of healthcare and education has been on the rise. Unlike advanced economies, where savings are relatively higher, India does not have a social system that provides quality healthcare or education by the state.

From the graph above we can see that the savings rate fell from the mid 30s down to the mid to high 20s over the course of the last decade. While the above mentioned reasons were definitely a contributing factor, it is also the case that economic growth in the last decade was not as impressive as the decade preceding it. The latter half in particular has been disappointing

GDP Growth & Savings

The relationship between savings and GDP growth works both ways. On the one hand, increased savings amongst the population fuels economic growth, as there is a larger and cheaper pool of credit for people to access. Yet it has also been found that GDP growth fuels household savings in the short run. The depressed growth that we have witnessed in recent years has certainly had a part to play in the decline of the savings rate.

Household savings make up about 60% of the total contribution to national savings, with the corporate and public sector making up the rest. It is in household savings where the decline has been most pronounced. Savings in the corporate sector have remained however stable over the previous decade, even showing a slight increase.

The fact that household savings have declined is further accentuated by the fact that capital investmentas a percentage of GDP has also declined over the last decade. Savings and investments tend to go hand in hand, the more a population saves the more it is likely to invest.

India v/s World & Indian States

We can compare India to advanced economies and criticize its lack of savings but that wouldn’t be of much relevance. How do we fare against other emerging economies, however?

The above is a graph of countries deemed as ‘emerging economies’ by the IMF. We can see that India fares quite well against its counterparts, with only China having a significantly higher savings rate than ourselves. The data is for the year 2017. 

The savings rate in China has been considerably high over the last two decades, peaking at just over 50% in 2008. The reason has to do with low consumption as a % of GDP (it is actually comparable to that of Nigeria). Both the Chinese government and the citizens have incomes that are higher than their consumption. China’s one-child policy also means that its people do not need to spend heavily on their children, but it also means that they have to save for retirement because they cannot rely on their children alone. Additionally, social security for Chinese retirees is not particularly strong. Healthcare coverage for urban workers also declined significantly over the last two decades, forcing people to increase their savings.

India actually has a very similar savings rate to ‘advanced economies’ like Austria, Sweden, Denmark, USA, UK, Canada, and Australia. However, it is also true that these countries invest a higher proportion of their incomes at the individual level.

The table below, on the other hand, shows us how the various states in our country prefer to hold their wealth. The obvious takeaways are the fact that Indians still largely prefer to own land and gold as opposed to investing in financial assets. Going a little deeper, we see that land and gold holdings are higher in poorer states like Uttar Pradesh and Bihar, whereas holdings in financial assets are higher in wealthier states like Maharashtra, Karnataka, and Tamil Nadu.

Source: Indian Household Finance Report July 2017

The situation is quite similar in China as well, although the Chinese do have a slightly higher preference for holding their wealth in financial assets (11%) as compared to India. Most of the Chinese prefer to own housing assets. Land in China is primarily owned by the state un urban areas, and by rural collectives known as jiti tudi in rural areas.

The key takeaway is this – India’s savings is declining as a result of disappointing GDP growth along with rising costs of healthcare and education. The situation as it is right now is not bad, but the trend is heading in a worrying direction. With respect to social issues like healthcare and education, there is a long way to go before we see any real change. However, GDP growth is something that can turn around quickly which can in turn help individuals earn, and thereby, save more.

For feedback, views and comments write to pavan@bclindia.in

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