"A good man can be
stupid and still be good. But a bad man must have brains."
—Maxim Gorky (Russian,
1868-1936)
Word for the day
Ship (n)
A vessel, especially a large
ocean going one propelled by sails or engines.
Malice towards none
If one were to believe some
senior political leaders, RaGa is like Ghtochkach (son of Hidimba and Bhim) on
14th day of the epic Mahabharta War.
He alone is stopping all
opposition parties to come together to defeat NaMo in 2019 general election!!!
First random thought this morning
Bapu is relevant to Indian politics today, more than ever.
The entire Indian political establishment seems to be living a
life of untruth and pretense. Everyone seems scared of Truth. No one even wants
to experiment with Truth.
They despise anything and everything associated or even remotely
related with the person/thought/institution etc. which is hindering their way
to political power and/or material prosperity (including privileges,
recognition, money and comfort)
so much so that most of the time, the thing that is being
protested against, is actually immaterial to the protestor, e.g., Modi haters
haters questioning Yoga Day; Cong protesting against GST and Triple Talaq and
BJP protesting against FDI in Retail and Civil Nuclear deal (2009-2014).
Household savings - the changing paradigm
As I noted in recent posts,
changes in domestic savings pattern in past one decade is cause of serious
concern for Indian macroeconomic fundamentals. (see here)
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 for domestic enterprise.
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 sincerely believe that the
government and policymakers have not taken a holistic view of the problem and
the steps taken so far are not only inadequate but to some extent misdirected
also.
I feel the issue needs to be
analyzed comprehensively for making any worthwhile step to augment household
savings, especially financial savings. For example, the following questions may
need to be answered:
1. Why
the financial savings of Indian households have declined consistently over past
decade or so?
2. Why
should households deploy their savings in financial instruments?
3. Are
Indian corporates and governments more productive and efficient users of
capital than household savers?
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.
In past two years, we have again
seen rise in the share of financial savings, especially investment in stocks
& mutual funds, in the household savings.
Better accessibility of financial
products due to improved banking infrastructure and inclusion efforts could
have added few points to the rising popularity of market related products. But
the real reasons behind this trend probably are (i) poor real estate market;
(ii) positive real rates; and (iii) low return in gold due to global
disinflationary conditions.
In my view, none of these reasons
are structural and can reverse in due course. So taking domestic flows to
Indian equity as constant is fraught with risk.
On the contrary, there are reasons
to believe that the rate of household savings may stay lower or even diminish
further. For example, consider the following:
(a) Consumer prices for households will remain high, even if the rate
of yearly inflation moderates. 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
rate may remain lower.
(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) 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 real rates, cheaper houses/rent, good
public health/education/transport, and farm employment).
We have seen a glimpses of this happening
in FY19 budget, but we need to travel a long way before these measure lead to
reversal of trend in household savings....to continue tomorrow
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