10 March 2015
Why savings are on the decline?
Since the financial crisis of 2008, the savings rate in Indian economy has been
on the decline. From a high of ~37% of GDP in FY08, it has declined to below
30% in the current year.
Source: Planning Commission
More particularly, the decline in financial savings of households that begun in
early 2000's has accelerated in recent years. This has serious implications for
the economy and therefore equity markets.
I find that household investors had began meaningful investment in listed
equity in late 70’s at the time of FERA dilution of MNCs. Reliance in 80’s and
PSU disinvestment and capital market reforms in early 90’s drew the 2nd lot of
household investors. IT boom of late 90’s drew the 3rd set to listed equity. In
these three decades households invested 8-17% of their financial savings in
capital market related products.
Though the household financial savings started declining from mid 1990’s,
2000 was the key inflection point. Since then household have invested more
in physical asserts than financial instruments.
The key cause for this trend in my view could be listed as follows:
(a) Fall in average age of house ownership. Higher income levels in urban
areas, rise in nuclear families and rise in real estate prices has prompted
people to buy houses earlier in their life cycle.
(b) Rise in personal automobile ownership.
(c) Low growth in white collar employment opportunities as compared to
growth in workforce has led to phenomenal rise in self owned enterprises
leading to diversion of savings to physical assets.
(d) Rise in gold prices in 2000’s has definitely contributed to the trend.
(e) Negative real rates for a material part of time.
Savings (% of GDP)
10 March 2015
I do not see any reason why this trend will reverse in near future. In fact there
are reasons to believe that household savings may diminish further in next
couple of years. For example consider the following:
(a) Though the rate of inflation may decline, the absolute consumer prices
for households will remain high. Expenses on items like education, health,
energy, transportation, communication, rental, protein, and fruit and
vegetable shall continue to rise disproportionate to rise in income. Hence
the savings may decline further.
(b) Implementation of GST and subdued growth in tax collections, will slow
down the wealth transfer for at least couple of years. Lower revenue for
the government, hence lower social welfare spending growth; higher
incidence of service tax; disruption of thousands of household businesses
to the advantage of large organized players; employment restructuring
as redundancies rise on a massive scale and skill requirement change.
(c) Factors like lower investment growth, higher productivity gains through
automation & elimination of redundancies, restructuring of PSUs shall
continue to impact the employment growth, especially for skilled labor.
(d) Lower employment opportunity may force more and more people
towards self-enterprise, leading to higher household debt.
(e) Given the sluggish credit growth outlook for at least 1H2015, the deposit
rates may decline further, thus de-motivating higher savings.
(f) Last but not the least, the trend for changes in consumption pattern shall
continue. Bicycle and Transistor Radio have definitely given way to motor
cycle and smart phones as essential marriage gift (dowry) in hinterland.
The running expenses are to be paid by someone after all - be it the
bridegroom, his parents or the bride's parents.
The economic growth will have to find an alternative source of funding (no
capital control) or a way to grow household savings (lower taxes, higher
rates, cheaper houses/rent, good public health/education/transport, and
I have seen little effort being made in this direction so far.
1970s 1980s 1990s FY00-05 FY06-10 FY11 FY12 FY13
Distribution of household savings
(% of total HH savings)
Financial Savings Physical Savings
IT bubble burst was decisive
inflection point in divergence of
financial and physical savings
10 March 2015
Why should I buy a financial instrument?
I wonder whether it is appropriate for finance minister, RBI governor, and
other policy makers to think like an individual household in formulation of
broader policy framework!
We all know that buying of a financial instrument merely signifies a transfer of
money (a promissory note) in lieu of a bond, deposit receipt or stock.
It changes the description in the balance sheet of an individual. But it
changes nothing in the aggregate balance sheet of the country.
Then why the government or policy makers should be bothered about it?
The question should therefore be whether the savers of money are being
adequately compensated for the consumption they are sacrificing today?
Essentially, the government and policy makers should analyze whether:
(a) The entities to whom household savers would assign their saved
money, could produce more real output then the savers investing
that money in assets himself?
(b) Is there sufficient empirical evidence to suggest that household
financial savings have earned more risk adjusted returns than the
physical savings of households?
Will someone explain me how disinvestment of 5% shares in a government
owned enterprise (GOE) to household investors or LIC or domestic mutual
funds changes the balance sheet of the economy? As I understand it, the
effect of disinvestment is as follows:
(i) The total stock in GOE is owned collectively by all the citizens of the
country. A sale by the government directly to household savers just
transfers the ownership from collective to individual. A sale by the
government to domestic financial institutions transfers the ownership
collectively to a smaller group. No change occurs at aggregate
(ii) The government may retire some debt from the money it receives
through transfer of shares in GOE. It would save some interest at the
cost of dividend and prospective rise in the value of the stock so
(iii) The buyer will forgo interest and will be entitled to gain from
dividend and prospective rise in the value of the stock so
Similarly, I fail to understand what economic change will occur if a household
saver buys mutual fund units and the MF invests that money in buying stocks
from the market.
If a household saver deposits his savings in his bank account, the bank could
utilize that money in any of four ways, viz. ., (a) buy government securities (b)
deposit with RBI which in turn will buy government securities or Fx (c) lend to a
borrower and (d) do nothing.
10 March 2015
We all know that the government borrows not for earning but for spending.
The money spend on building infrastructure does help everyone and the
But it is worth examining how much of money borrowed by the government
in past decade from domestic savers has been actually invested in building
Similarly, it needs to be evaluated how much of savers' money lend by the
banks to various borrowers in past decade has actually produced more
return than the household could have earned by investing himself in physical
assets like gold, house, motor vehicle or intangible asset like education and
Equity trade has not been equitable
It is important to highlight that the debate on indifference of household
investors towards the publicly traded equity is not only inadequate but
perhaps misdirected also. There are a number of structural and systemic
reasons for household investors' disenchantment with the listed equities.
In fact regulator and the government authorities took cognizance of some of
these reasons in recent past, and we do have yet seen a few steps being
taken. But we are still some distance from finding a sustainable cure the
malice. Some of the reasons that we found are worth noting and act upon
are listed below:
(a) In past 25yrs, since the capital controls were removed, listed equities
have not been able to match the returns provided by traditional sources
of investment like real estate and gold. A deeper study is needed to
discover how much of the rise in market capitalization during this period
is due to rise in quantum of publicly traded equity and how much is due
to rise in earnings or PE re-rating.
(b) The mutual fund and insurance industry has grossly and consistently
failed the investors in these 25yrs decades. Except for 2-3 fund houses,
most fund managers have performed briefly and only during the bubble
(c) Regulatory framework has evolved over past couple of decades and is
robust enough to prevent any systemic collapse in the trade settlement.
However, it has still not been able to effectively break the malevolent
promoter-operator nexus, causing frequent cases of price manipulation.
Gold is just not for glitters
The policy makers' anguish against gold investment by household investors
also begs few questions.
It would be interesting to know whether any systematic study has been
conducted to analyze why most Indian household savers prefer to have
some gold in their portfolio.
I had done a small survey a couple of years ago and written about this. The
following points are worth repeating.
10 March 2015
(a) India, unlike many western countries and China is a country of
entrepreneurs. We might have more self-employed people than G-3
taken together. Therefore, a large part of India’s households’ net worth is
invested in equity – equity of their own businesses not in listed equity – but
nonetheless equity. Empirically, gold has never been a disproportionately
large part of household wealth.
(b) Indians have traditionally favored physical assets over paper assets. Every
Indians aspires to have their own house. So the home equity in India is
close to 100% in most cases, unlike in many developed countries.
(c) Most ancient cultures, China, Egypt, Mesopotamia, Indus Valley etc. have
believed in continuation of life after death. Gold being an indestructible
(and therefore sacred) object had always been an important part of their
religion, culture and beliefs since time immemorial. You do not trade your
culture and beliefs for ephemeral “money” or "government bonds".
(d) The gold is usually perceived as social security and hedge against
currency devaluation. The “obsession” with gold has distinctly risen after
INR devaluation and discontinuation of Rs.1000 currency during Mrs.
Gandhi’s regime. The trust deficit between the people and government
(and currency) has only widened since then.
(e) In large parts of the country, gold is still perceived as a status symbol. In
that sense it is a huge consumption story. This can be explained by the
profligacy of developed world on branded apparels, watches, luxury
cars, electronic gadgets, and expensive vacations.
All physical savings of households is not unproductive
In past two decades, since 1995, India’s economy has grown at an average
rate of 6.9%. However, the total employment in economy during this period
has grown at just 0.3% CAGR.
In this period the number of self entrepreneurs has certainly increased in the
country. This has coincided with the sharp fall in public sector employment.
The aggregate private sector employment level has not been able to
compensate for fewer opportunities available in public and unincorporated
private sector. Consequently, the total number of employees on live payrolls
has fallen sharply since early 2000’s.
The combination of two – lower employment opportunities and liberal
business rules – has perhaps forced people towards entrepreneurship that
keeps them underemployed for most of the time.
The number of self owned enterprise has swelled in past one decade. As per
67th round of NSSO survey (June 2011), there were 58million unincorporated
enterprises in India (excluding agriculture, construction and those registered
under Factories Act).
(a) Over 85% of these enterprises are run by the owner himself, without any
hired worker. 44% of these were run from the residence of the owner.
These enterprises employed 108mn people against just 39mn on the live
payroll in organized sectors, including 11mn in private sector. (Source:
10 March 2015
(b) These self owned enterprises generated annual gross profit of
Rs628.36bn; whereas all listed companies in India generated gross profit
of Rs610.44bn in FY12. 1/3rd of this profit was earned by top 36 PSUs. Top
100 listed companies accounted for over 76% of this value addition.
The point to ponder here is that given the strong equity culture amongst
Indian households, fewer employment opportunities, better business
opportunities and poor social security infrastructure - whether the households
should be incentivized to invest more in their own enterprises, home equity,
skill building, mobility and gold etc. or should they be motivated to invest in
I know that it may not be a black and white proposition and a plain "yes" or
"no" answer should not be expected.
However, I would like the finance minister to consider schemes like following,
rather than ruing about low financial saving rate and providing incentives like
80C, 80CC, 80CCD etc.
(a) Issue tradable tax credit certificates for investments made in training and
skill building for self enterprise.
(b) Subsidy on two wheelers and delivery vans used by self entrepreneurs
operating their businesses from home.
(c) An action plan to oust managements of public listed companies who
have failed to deliver at least 5% CAGR in shareholder's value (dividend
plus rise in share price) over past two decades and replace it with
professional management with clear mandate.
Mirza Ghalib famously wrote:
Bosa dete nahin aur dil pe hai har lehzaa nigaah
Jee mein kehte hain ki muft haath aaye to maal achcha hai
(O My love you do not allow me to kiss, but desire my love. Thinking, "the stuff
is good if only I could get it for free!")
This is what government thinks of households' savings.
10 March 2015
Nasdaq 1999 vs. Shanghai Composite 2014
Many analysts and market commentators have voiced serious concerns over
the huge bubble building in Chinese equities.
In a typical market frenzy - the domestic retail participation has risen to
record highs, leverage is unprecedented, disregard for valuations and asset
quality concerns audacious, and the chasm between macroeconomic &
corporate fundamentals and stock returns has widened to historic levels.
BNP Paribas in a recent report has highlighted the peril for global markets that
could come from Chinese equity bubble burst.
“Margin purchases are now accounting for almost 20% of equities daily
turnover which itself has soared to wholly unprecedented levels in another
sign of self-feeding speculative frenzy. What happens next is clearly an
‘unknown-unknown’. By definition detached from fundamentals, speculative
bubbles are inherently re-enforcing in the short-term and frequently last
longer than expected. The longer they continue, however, the larger the
“We certainly don’t see what could go wrong here. Last month alone, a new
investor base the size of Los Angeles — many of whom may be only semi-
literate — piled into Chinese equities which have nearly doubled in the space
of 8 months on the back of margin debt that can now be measured as a
percentage of GDP and volatility is at a 5-year high. Everything should be
"The world-beating surge in Chinese technology stocks is making the heady
days of the dot-com bubble look tame by comparison.
The industry is leading gains in China’s $6.9 trillion stock market, sending
valuations to an average 220 times reported profits, the most expensive level
among global peers. When the Nasdaq Composite Index peaked in March
2000, technology companies in the U.S. had a mean price-to-earnings ratio
10 March 2015
"Valuations in China are now higher than those in the U.S. at the height of the
dot-com bubble just about any way you slice them. The average Chinese
technology stock has a price-to-earnings ratio 41 percent above that of U.S.
peers in 2000, while the median valuation is twice as expensive and the
market capitalization-weighted average is 12 percent higher, according to
data compiled by Bloomberg."
"Topping it all off, it now appears as though China’s bubble is set to spill over
into Hong Kong thanks to the kind of stretched mainland valuations
described above. As we reported earlier: “China's Shanghai Composite
briefly rose above 4000 for the first time since 2008, but it was the surge in the
Hong Kong stock market that showed the Chinese bubble is finally spilling
over, in the form of a blistering rally on the Hang Seng which rose nearly 4%
on immense volume which at 250 billion Hong Kong dollars ($32 billion) was
three times the average daily volume over the past year and nearly 20%
more than the previous record volume day in October 2007, at the height of
the pre-financial crisis bubble.”
10 March 2015
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