Over the last two decades, the savings and investment patterns in India have seen some changes. Opening up our economy has lead to variations in our lifestyles and in our consumption habits. This in turn has influenced how people save and invest their money. All of this has contributed to a series of continuous ups and downs in the economy. In order to bring about economic growth, the government is looking to make structural reforms that focuses on the saving patterns of the common citizens. This will hopefully mean that investments and savings of individuals can be used for the betterment of the Indian economy.
Why do Indians Save Money?
Did you know that 70% of the savings come from the Indian household sector? Within this, a massive Rs. 90 lakh crores sits as saving deposits in banks. This comes as a big surprise because the present economic environment encourages people to spend beyond their means. With the opening up of our economy, it was expected that consumerism will prosper, as loans and credit cards became accessible to just about anyone. This in turn would lead to the drastic reduction in the savings of each household. Since this is what happened in the West, a replication of the same was expected here in India. Surprisingly, the saving patterns of Indians in the last decade has proved otherwise. Indian households are conservative in their expenditures. People now have more money and they invest money in fixed deposit plans, however it doesn’t mean that they are willing to spend it. Instead, prosperity has resulted in an increase in the savings!
In the last ten years or so, interest rates on bank savings have drastically fallen. On top of that, taxes levied on savings have further reduced the income from investment instruments. Even then, Indians save more and spend less. One major reason why this may be so is because unlike in the West, a social security system is almost non-existent in India.
Let’s Look at the Numbers!
In the 1990s, saving rates were very high. Bank deposits were the most popular form of savings. A three-year Fixed Deposit in April 1997 would get you an interest rate of 12%. That fell to 5.75% by January 2005. At this time, people did begin to diversifying their assets. Investors started opting for Insurance products, Mutual Funds and equities. The government too started offering many types of tax benefits to different savings instruments. However, bank deposits did not receive any such benefits. Such moves resulted in the percentage of savings in shares and debentures to rise from 8.3% to 13%.
This did not last very long, though. With the economy being unstable, people quickly returned to bank deposits despite the drastic reduction in interest rates, reversing the diversifying trend. Shares and debentures fell to 4.8% of household financial assets in the 2000s’, whereas bank deposits climbed from 36% in 2005-2006 to 55% in 2007-2008. Additionally, the government also introduced tax benefits on bank deposits that had tenures longer than five years. This meant that capital was now concentrated in bank deposits. Other instruments lacked funds, and this in turn is negatively affected India’s financial services industry.
What is The Government Doing?
At present, the government is looking for ways to channel household savings, like bank deposits, into different financial instruments. Indian investors are very sensitive to tax. A small change can result in multiple-crore Rupees moving from one instrument to another. To ensure a shift away from bank deposits, Go I has made all dividends, including those from Mutual Funds, tax free. On top of that, investments in equity as well as in equity-oriented Mutual Funds are not subjected to long-term capital gains.
With the government and the private sectors encouraging diversification, slowly but surely India’s investment patterns are changing. People are becoming open to the idea of putting their savings in different instruments. In the long run, this will help stabilise India’s financial markets.
There is however one worrying trend. Many investors are opting for household savings in physical assets, such as property, jewellery and consumer durables. From 2010-2011 to 2011-2012, physical assets have rise from 13.1% to 14.3%. The most popular investment instrument is gold, because it is seen as a non-volatile asset which comes with guaranteed returns. Physical assets are unproductive to the Indian economy. Therefore, it is crucial for the government to focus on how to reverse this trend.
Though bank deposits are still popular, it seems that the trend to diversify will certainly pick up speed in India. The majority of the population lies in the age group of 15-64 years, more and more people are working in the private sector which does not offer any kind of social security. Therefore, Indians will look to invest in high-return instruments and will probably demand new financial products to have more choices in regards to their own income and savings.
As an individual, before you invest your savings, use a FD interest calculator to check how much interest you will get. This will make it easier for you to compare and see which investment instrument gives you the highest benefits. Remember that diversification may help maximize your profits.