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Shifts in focus of household savings

Sudhanshu Ranade

Chennai , Jan. 26

GROSS financial savings of the household sector as a percentage of GDP at current prices touched what may be an all-time high last year at 15.1 per cent, according to preliminary estimates.

The previous peak in the period following the launch of the economic reforms was 14.4 per cent, in 1994/95. The collapse from that peak is `mirrored' in a rough and ready fashion by the fall in the share of stocks and debentures in gross financial savings, which in turn seems to generally reflect a fall in share prices rather than in the `moving out' of shares by households as a group.

Gross financial savings stood at 10.4 per cent, 11.7 per cent and 12.1 per cent of GDP in 1996, 1997 and 1998 respectively, when the corresponding proportion of shares/debentures in household savings fell from 11.9 per cent in 1995 to 7.4 per cent, 6.6 per cent and 2.4 per cent in 1996, 1997 and 1998 respectively.

There was a sharp but brief recovery in the share of stocks/debentures in total financial savings to 7.7 per cent in 2000, and a straight year-on-year fall thereafter to 4.1 per cent and 2.7 per cent in 2001 and 2002, and, finally, 1.6 per cent in 2003. The preliminary estimate for March 2004 is 1.4 per cent.

Deposits with non-banking companies increased their share in total financial savings from 2.2 per cent in 1991, to 3.3 per cent, 7.5 per cent, 10.6 per cent, 10.7 per cent and 16.4 per cent in 1992, 1993, 1994, 1996 and 1997.

The bubble burst thereafter (1998: 4.2 per cent), after a dress rehearsal in 1994/95 (1995: 7.9 per cent). Here, too, sad to say, the decline may perhaps reflect a drop in the market value rather than the face value of deposits held by households.

The bursting of the non-banking financial companies bubble seems to have been followed by an increased interest in pensions and provident funds, which increased their share in total financial savings from 18.1 per cent (1.9% of GDP) in 1996 to 19.1 per cent (2.2%), 20.5 per cent (2.5%) and 22.7 per cent (2.8% of GDP) in 1997, 1998 and 1999 respectively. This share thereafter remained steady in 2000, before dropping to 19.3 per cent (2.3% of GDP) in 2001 and 16.1 per cent (2% of GDP) in 2002, at which fraction of GDP it stayed put right up to the preliminary estimate for 2004, though the share in total financial savings continued its steady decline to, hopefully, bottom out at 13 per cent in 2004. The move thereafter, in phase IV, was in favour of bank deposits, which increased their share in total financial savings, year on year, practically without exception, from 30.8 per cent in 2000 to 42.9 per cent in March 2004, according to the preliminary estimates for 2003/04.

Phase I, as noted above, was the heyday for stocks and debentures; Phase II for non-banking deposits; and Phase III for Pension and Provident Funds. The only item of financial savings which rose consistently was life insurance, which increased steadily, year after year, both in terms of its share in total financial savings, and in terms of its proportion to GDP.

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