PC banks on domestic savings

Whatever may be the final growth estimate, it will be below India’s potential growth rate of 8 per cent.  Getting back to that growth rate is the challenge that faces the country, Finance Minister P Chidambaram said while presenting the General Budget for 2013-2014 in Parliament on February 28.

But if India were to achieve an economic growth rate of 6-6.5 per cent ­– the pre-crisis growth of 9 per cent looks distant at this point – commoners like you and I should save more. And now.

India’s gross domestic product (GDP) growth for the third quarter (October-December) 2012-13 is alarmingly low at 4.5 per cent. At less than 5 per cent GDP growth for FY13, it will most likely be its slowest rate in the last decade.

And this is precisely why Chidamabaram proposed measures encouraging savings, with a specific focus on households.

For, domestic savings  – be it term deposits, purchase of assets like gold, property, mutual funds, shares and others – is one of the biggest economic strengths of the country and contributes significantly to the country’s GDP.

“The household sector must be incentivised to save in financial instruments rather than buy gold,” Chidambaram said and proposed measures like liberalising the Rajiv Gandhi Equity Savings Scheme (RGESS), giving interest waiver for first time housing loan borrowers of up to `25 lakh and I-T exemptions on LIC premiums.

Domestic savings, primarily, reduces dependence on foreign capital to aid investment flow, which in turn will drive the growth engine. Interestingly, household savings alone contribute up to 80 per cent of India’s gross domestic savings.

But unfortunately, gross domestic savings rate fell sharply from 34 per cent to 30.8 per cent of the GDP between 2010-11 and 2011-12. “This is due to two reasons. One, high inflation due to which households’ savings plunged. Besides, companies were hit by the economic turbulence as a result of which profitability was low leading to low corporate savings,” says B A Prabhakar, CMD, Andhra Bank, whose deposits rate in the current financial year fell to 14 per cent from 18-19 per cent in the past. What’s worse is, domestic savings growth is further expected to plunge to a 10-year low of 27 per cent by end of this fiscal, according to Japanese brokerage firm Nomura.

“Based on the available investment data, we estimate that savigns will plunge even further to a 10-year low of 27 per cent of the GDP in FY13,” says Sonal Verma, Economist, Nomura India.

During the pre-recession period, the domestic savings rate stood at a healthy 36.9 per cent in 2007-08 before slipping to 34 per cent in 2010-11.

As per RBI data, household financial savings as a percentage of GDP in India fell by 150 basis points to 7.8 per cent in FY12 –  the lowest since 1989-90. A year ago, it was 9.3 per cent of the GDP. Household financial savings averaged at 11.2 per cent between FY04 and FY08.

Similarly, corporate savings fell from 9.4 per cent in FY08 to 7.9 per cent in FY11. Due to the fall in both public and private savings, fiscal deficit increased from 2.5 per cent to 4.9 per cent between FY08 and FY11.

According to M G Sanghvi, CMD, Bangalore-based Syndicate Bank, the fall in domestic savings will affect credit disbursements too as companies tend to scout external sources of funds even at a higher rate of interest.

Nomura Research too asserts that a lower financial savings are negative for an investment-starved economy like India as they reduce the amount of investible funds available to finance domestic investment, thereby increasing the dependence on foreign capital. It also estimates that the country’s current account deficit will likely deteriorate to about 5 per cent of GDP in FY13.

A section of the bankers, while agreeing that bank deposits growth is falling, however, take comfort in the fact that the overall domestic savings are on the rise and that the economy is actually on the recovery path. “Bank deposit rates have been hit in the recent past. But overall savings, be it in the form of assets purchase, is steadily increasing,” reasons Subhalakshmi Panse, CMD, Allahabad Bank.

According to her, households, which hitherto used to save and then purchase assets, are now borrowing credit first and they repaying. “Either way, there’s saving in some fashion, which is good for the economy,” she said.

So initiatives like RGESS will enable first time investors to invest in mutual funds as well as listed shares. “Giving a further boost, the income limit of investors has been raised from Rs 10,00,000 to Rs 12,00,000. Besides, first time home loan borrowers seeking loans up to Rs 25 lakh during 2013-14 will be entitled for an additional deduction of interest of up to Rs 1 lakh. This will help traction in Tier II and III cities. It would have been good, if the limit was extended to loans up to Rs 35 lakh,” says Anshuman Magazine, CMD, CBRE.

Lastly, Chidambaram also proposed to introduce instruments to protect savings from inflation, especially the savings of the poor and middle classes in the form of inflation-indexed bonds or inflation-indexed National Security Certificates.