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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