Vijay Kumar Gaba

Monday, June 15, 2020

Trends in Household Savings

In a recently published paper, RBI has highlighted some interesting trends in the financial savings of the Indian household. The financial savings of household are considered very important given that they are the key providers of the capital to the Indian economy. Household savings have traditionally financed the fiscal deficit of the governments and also provided a stable source of short to midterm funding to the corporates. Study of trends in household finances is therefore considered most important to understand the growth dynamics of Indian economy.

The key highlights of the paper could be listed as follows:

1. The net household savings declined to 6.5% of GDP in FY19 from 7.7% in FY18. This was mostly due to higher household expenditure and larger borrowings. In FY20 net savings have rebounded to 7.7%, mainly due to sharp decline in financial liabilities of households.

2. Gross financial assets of Indian households have declined materially in past two years.

(i) Gross financial asset of households have declined from 12% of GDP in FY18 to 10.6% of GDP in FY20.

(ii) Bank deposits of households savers have increased from 2.8% of GDP in FY18 to 3.4% of GDP in FY20; while the household borrowing from banks has halved from 2.8% of GDP in FY18 to 1.4% of GDP in FY20.

(iii) The investments of households in financial products has declined materially from 1.1% of GDP in FY18 to 0.4% of GDP in FY20. Of this the investment in mutual funds has declined by whopping 75% from 0.8% of GDP in FY18 to 0.2% of GDP in FY20.

(iv) Small savings (excluding PPF) has registered the sharpest increase. It has increased from 0.9% of GDP in FY18 to 1.3% of GDP in FY20.

(v) The contribution to life insurance has come down from 2% of GDP in FY18 to 1.7% of GDP in FY20.

(vi) The currency in hand has also halved from 2.8% of GDP in FY18 to 1.4% of GDP in FY20.

Three trends that would need a deeper analysis, based on the above set of data are (a) The efficiency of financial inclusion programs as the borrowing from banks has come down; (b) How much of the lower share in the investments in financial assets is consequence of value erosion, withdrawal for expenditure and shift to non financial assets; and (c) despite massive push fro social security from the government side, why contribution to life insurance and PPF has shrinked.

(3) The share of NBFC lending to households has fallen significantly in FY20. This read with (i) NSSO recent report highlighting that household expenditure has been rising consistently resulting in lower savings; (ii) lower social security contribution (insurance and PPF) and sharp decline in investments, highlights the rising stress in the household sector.

(4) About 76% of household credit is provided by commercial banks; and another ~10% by the housing finance companies. Cooperatives, MFIs, NBFCs etc altogether provide only 14% of the total credit to households. The low penetration may encourage investors in these institutions, but it must raise some concerns for the policymakers.

Source for all charts and Tables: RBI Bulletin June 2020

Thursday, June 11, 2020

I shall hold my horses tightly

In my April review of investment strategy, I had emphasized that "the current crisis is unprecedented in the sense that it has seriously impacted the liquidity, solvency and viability of a large number of businesses, all at the same time. The number of businesses going out of business before this crisis ends would therefore be much larger than the crises faced by global economy in past 75 years since the end of WWII.

The only way out of this crisis is to inflate a colossal bubble in asset prices, which is equally unprecedented." (for full strategy review note see here and the presentation of "the big call" could be seen here)

Incidentally, the global markets have been behaving mostly like I have been anticipating. The central bankers world over continue to inject billions of dollars in new liquidity almost every day. Consequently, the asset and commodity prices are racing to pre COVID-19 period, despite there being definite signs of recessions in the global economy. The more noteworthy part is that the markets have been largely ignoring the warnings that recession this time is not a post facto thing like on previous occassions; it is likely to be there for much longer period than earlier anticipated.

I am not competent enough to make intelligent comments on the economy and markets. Nonetheless, I do possess some wisdom collected over past three decades of investing and studying economy and markets closely. I usually find this small piece of wisdom I own, sufficient enough for making and executing an investment strategy for myself.

I continue to believe that the inflation of bubble in global asset prices will continue. I also believe that Indian assets will participate in the global buoyancy but may not be able match the performance of its peers due to a variety of reasons. The socio-economic conditions in India are worsening at a fast pace and so far there is no hint of any reversal. At this pace, the economy may take much longer to revert to a sustainable growth path of 5-6%, than presently estimated. The rise in Indian asset prices will therefore be mostly dependent on the global events and liquidity. Hence, the volatility and risk may be much higher than usual.

In this context, it disturbs me to note that since the lockdown was implemented from 25 March 2020, the smaller companies (small cap) have outperformed the benchmark Nifty by a whopping 34%. Incidentally this is the segment of economy which is worst affected by the demonetization, economic slowdown, GST, and COVID-19 induced lockdown. The outperformance of this segment is worrisome to the extent that it is commensurate with the facts that domestic flows have receded materially and foreign flows have dominated in past 5-6 weeks. The conventional wisdom is that foreign investors usually invest in large cap liquid names. I am therefore inclined to suspect recurrence of some malpractices by the broker-promote-financier cartel.

I shall totally avoid this space no matter how much my sense of greed incites me.