Thursday, February 22, 2018

Household savings - paradigm shift

"The best way out is always through."
—Robert Frost (American, 1874-1963)
Word for the day
Epigrammatic (adj)
Of or like an epigram;
Terse and ingenious in expression.
Malice towards none
Do headlines about Chawl dwellers being directors on the board of large jewellery companies, smack of deep rooted bourgeois mindset?
#Pakorasellers
#MehulChoksi
First random thought this morning
Kamala Hasan (KH) has started his political journey from the house of Rev. APJ Abdul Kalam.
Before this many have started (or restarted) their public life from Rajghat, and thoroughly disappointed in their conduct. So much so that a lot of people have lost faith in the alternative politics.
The dilemma before Tamil voter therefore would be "whether to give KH a fair chance without prejudice, or stay resigned to the status quo!"

Household savings - paradigm shift

Recovering from the distraction caused by the latest fraud in the Indian banking system, I would like to get back to the core issue of paradigm shift in household finances in the country.
In few earlier posts, I have discussed how the household savings in India are declining structurally as both the propensity to save and the capacity to save have declined, especially in past one decade.
The following factors, in particular, might have constricted the incremental savings potential of households in past couple of decades:
(1)   Inadequate job creation in organized sector
(2)   Rise in self employment needing significant investment
(3)   Rise in underemployment and disguised employment
(4)   Rise in the net incidence of tax on household
(5)   Rise in aspirational discretionary consumption and lower propensity to save
(6)   Rise in home and vehicle ownership
(7)   Persistently low (or negative) real rates
(8)   Poor real wage growth
(9)   Unremunerative agri produce prices
(10) Material rise in household inflation, especially in prices of healthcare, education, energy and protein.
There is an argument (though not well substantiated) that spread of financial inclusion and therefore easier access to credit may also be responsible for lower household propensity to save. Moreover, burgeoning personal debt means higher debt servicing costs and less savings for households.
If we consider the following examples of evolving trends in industrial development, the decline in household savings may seem structural:
  • Large scale automation of processes and digitization of transactions;
  • Extensive use of artificial intelligence;
  • Opening of domestic markets to large global corporations rendering millions of MSME units unviable;
  • Improving compliance standards making it tough for millions of units running from unauthorized premises, using informal credit and avoiding regulatory approvals.
One material impact of this change would be a structural rise in cost of capital in Indian economy and lower spreads for financial institutions who have so far thrived on the low cost household deposits....to continue

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