Thursday, December 18, 2014

2015: Household savings - lower inflation offers little respite


Thought for the day
"As much as I converse with sages and heroes, they have very little of my love and admiration. I long for rural and domestic scene, for the warbling of birds and the prattling of my children."
-          John Adams (American, 1735-1826)
Word for the day
Bespoke (adj)
Made to individual order; custom-made.
(Source: Dictionary.com)
Teaser for the day
Will someone tell HRD Minister that "It is definitely not about your idea of "what is right for Indian kids".

2015: Household savings - lower inflation offers little respite

In my view change in domestic savings pattern in past one decade is cause of concern for Indian macroeconomic fundamentals.
Traditionally, domestic savings, especially household savings, have been a stable and sustainable source of funding for both private as well public investments. Though liberalization of capital controls has opened the doors for foreign capital. It still is not a major source of funding.
Source: Planning Commission
More particularly, the decline in financial savings of households that begun in early 2000's has accelerated in recent years. This has serious implications for the economy and therefore equity markets.
I believe household investors had began meaningful investment in listed equity in late 70’s at the time of FERA dilution of MNCs. Reliance in 80’s and PSU disinvestment and capital market reforms in early 90’s drew the 2nd lot of household investors. IT boom of late 90’s drew the 3rd set to listed equity. In these 3decades households invested 8-17% of their financial savings in capital market related products.
Though the household financial savings started declining from mid 1990’s, 2000 was the key inflection point. Since then household have invested more in physical asserts than financial instruments.
The key cause for this trend could be listed as follows:
(a)   Fall in average age of house ownership. Higher income levels in urban areas, rise in nuclear families and rise in real estate prices has prompted people to buy houses earlier in their life cycle.
(b)   Rise in personal automobile ownership.
(c)   Low growth in white collar employment opportunities as compared to growth in workforce has led to phenomenal rise in self owned enterprises leading to diversion of savings to physical assets.
(d)   Rise in gold prices in 2000’s has definitely contributed to the trend.
(e)   Persistent negative real rates.
I do not see any reason why this trend will reverse in 2015. In fact there are reasons to believe that household savings may diminish further in next couple of reasons. For example consider the following:
(a)   Consumer prices for households will remain high. Expenses on items like education, health, energy, transportation, communication, rental, protein, and fruit and vegetable shall continue to rise disproportionate to rise in income. Hence the savings may decline further.
(b)   Implementation of GST will reverse the wealth transfer for at least couple of years. Lower revenue for the government, hence lower social welfare spending growth; higher incidence of service tax; disruption of thousands of household businesses to the advantage of large organized players; employment restructuring as redundancies rise on a massive scale and skill requirement change.
(c)   Factors like lower investment growth, higher productivity gains through automation & elimination of redundancies, restructuring of PSUs shall continue to impact the employment growth, especially for skilled labor.
(d)   Lower employment opportunity may force more and more people towards self-enterprise, leading to higher household debt.
(e)   Given the sluggish credit growth outlook for at least 1H2015, the deposit rate may decline further, thus de-motivating higher savings.
(f)    Last but not the least, the trend for changes in consumption pattern shall continue. Bicycle and Transistor Radio have definitely given way to motor cycle and smart phone as essential marriage gift (dowry) in hinterland. The running expenses are to be paid by someone after all - be it the bridegroom, his parents or the bride's parents.
The economic growth will have to find an alternative source of funding (no capital control) or a way to grow household savings (lower taxes, higher rates, cheaper houses/rent, good public health/education/transport, and farm employment).
I have not seen any proposal for either as yet.

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