Household savings need to be increased and incentivised: Economist

Rakesh Mohan cautions against drastic fall in domestic savings in recent years

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Household savings, which have been the bedrock of domestic savings in India, need to be restored to 10-per cent level and increased gradually to around 13 per cent by 2020-35, says eminent economist Rakesh Mohan. From 11-12 per cent of the GDP in 2007-08, these savings have fallen to 7 per cent in the recent years.

If that sounds drastic, take a look at some more figures. Domestic savings touched about 21 per cent of the GDP between 1997 to 2003, and a whopping 24 per cent between 2008-2011. In a paper titled 'Moving India to a New Growth Trajectory: Need for a comprehensive big push', Mohan, Senior Fellow at the Jackson Institute for Global Affairs, Yale University and Distinguished Fellow of Brookings India, points out that if India is to eliminate poverty and achieve upper middle income status by around 2035, it must grow at 8-9 per cent per annum

And to attain this, he points to a few import tasks: sustained increase in savings, particularly financial savings, investment and fiscal consolidation through enhanced tax revenues, along with a step up in infrastructure investment. Sounds a lot like what Chief Economic Adviser Dr K.V. Subramanian said in the Economic Survey 2019 that pitched for investments as the start of a “virtuous cycle”.

Dr Mohan says this rise in domestic savings rate would be reasonable if the financial aspect of the economy is enhanced continuously, as also the income growth. He, however, underscores the importance of the savings being put efficiently towards productive uses, and presumes maintenance of low inflation on a sustained basis, in order to provide real interest rates to savers.

The rising inflation from 2010 to 2013 had reduced the real interest rates on small savings and bank deposits to nothing, making households shift to gold, from which, Mohan says, they do not appear to have returned to traditional financial instruments. While some households have moved to invest in equity market through mutual funds, the crisis in NBFCs and their knock on effects on debt mutual funds could have had an adverse effect on them. “Hence, ensuring positive real returns on banks as well as small savings deposits in an environment of low and stable inflation is necessary to reverse the downtrend in household financial savings” he argues, calling for restoration of confidence through the strengthening of bank sector and improvement in banking regulation and supervision.

The Brookings Fellow also moots a focused policy thrust to promote contractual savings schemes through insurance, provident and pension funds, and points out that at present there is a marked preference for safe savings avenues such as postal savings and public sector bank deposits.

According to him, “Since there is really no social security worth the name in the country, and pensions are available to only the privileged few, there would be significant unmet demand for safe assets that provide a mildly positive real rate of return with some degree of assurance. Thus, there is a pressing need for the provision of savings vehicles that meet such demand in the form of simple, easy to understand, pension and life insurance products that combine some elements of defined benefits, while remaining predominantly defined contribution schemes.”

The reforms undertaken in insurance and pension sectors have not resulted in people rushing to them, and efforts have to be made to understand why it is so. Necessary corrections have to be made, he suggests, pointing out that such schemes will provide social security and help fund infra projects that need long-term finance.