Nuances of household savings

Household (HH) savings in India consist of two parts net financial savings (NFS) and physical savings.

- NIKHIL GUPTA

HHNFS is arrived at after deducting financial liabilities (known as annual borrowing) from gross financial savings (GFS). GFS includes seven key areas: Currencies; deposits (bank and non-bank); insurance; provident and pension funds (P&PF), including the public provident fund (PPF); shares and debentures (S&D); claims on government (small savings); and others.

HH physical savings primarily constitute residential real estate (accounting for about two-thirds) and machinery and equipment (owned by producers within the HH sector).

Three key trends have emerged within HH savings in recent years: 1) within GFS, HHS have increased their exposure to riskier assets (eg S&D), and the contractual category (P&PF and government schemes, ie small savings) and shifted from bank deposits; 2) HH liabilities have mounted in the past few years; and 3) HHs have transitioned from financialisation of its savings by allocating a larger portion to physical assets.

I intend to discuss the economic implications of these developments and explain some nuances of HH savings.

It is a good idea to start by addressing the confusion surrounding the role of deposits within HH GFS.

It is argued that even if an individual invests in mutual funds, insurance, or the PPF, almost all of it eventually ends up in someone's (company's) bank or non-bank deposits. If so, the change in the composition of GFS away from deposits into S&D or insurance or P&PF should not affect deposit growth.