As per the latest data available from CSO, the demonetization
appears to have a material impact on the financial savings of the Indian
household. The composition of financial savings deployment has changed
substantially in the period following demonetization. The currency in hands of
people has seen a sharp jump mainly at the expense of bank deposits.
Another interesting feature of the changes in household savings
deployment is rise in private financial securities, e.g., shares &
debentures of private companies and units of mutual funds. This component of
household savings deployment has seen decent growth post FY16. This trend has
in fact been much talked about in popular discourse.
Three key take away from this trend are -
(i) Most of the growth in
this component may be coming from shift of bank deposits, confirming the trend that
corporates are now increasingly seeking funds directly from public as against
banks (see
here);
(ii) Stagnant real wages in
private sectors might be forcing people to look out for higher return on
savings; and
(iii) Despite the recent
rise in the proportion of private securities component in household savings,
the ratio is still far below the highs seen during mid 1990s or even during
years immediately preceding the global financial crisis.
The key highlights of the components of household savings could be
noted as follows:
- The currency component in household savings almost doubled to 25% of gross financial savings (GFS) in FY18, from 13% of GFS in FY16.
Prima facie it appears that not only the entire currency that
was deposited in the banks during demonetization (FY17) has been withdrawn from
the banks in subsequent year (FY18), but the households are keen to hold more
currency in hand rather than deposit in the banks. This could be due to sharp
rise in working capital requirement in the self owned cottage, micro and small
scale enterprises.
- The bank deposits surprisingly saw a deep contraction to ~28% of GFS in FY18, from 43% of GFS in pre demonetization period. This is rather counterintuitive.
- The deployment in private securities (shares, debentures and mutual fund units) increased to 3.4% of GFS in FY18 from 1.9% of GFS in FY16. This rise came mainly from contraction in bank deposits from 43% in FY16 to 28.6% of GFS in FY18.
- The financial security (pension funds and provident funds) savings have grown steadily from 10% of GFS in FY11 to ~20% of GFS in FY18.
However, insurance has not seen any sustained change in
household savings deployment. Insurance payments accounted for 21% of GFS in
FY11 and ~19% of GFS in FY18.
- High real rates in the economy in past couple of years are fully reflected by the sharp increase in the small savings and other government securities like KVP etc.
This component has been steadily more than 4% of GFS during
FY16-FY18. Incidentally this is the period when the government's reliance on
small savings to fund fiscal deficit has risen the most.
See this space for trends in household consumption trends.
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