Indian households are increasingly opting for physical assets as instruments of savings compared with their earlier emphasis on financial tools.
According to data released by the government, the household sector’s savings in physical assets increased by 16.12 per cent to Rs 5,17,837 crore in 2006-07 compared to Rs 4,45,915 crore in 2005-06. The savings in financial assets have gone up by 11.20 per cent to Rs 4,67,985 crore in 2006-07 compared with Rs 4,20,841 crore in 2005-06.
“As the stock market and real estate market witnessed a boom, a section of the population diverted its investments into physical assets. The investment in small savings has also seen come contraction. On account of increased intermediation, incrementally semi-urban areas are becoming aware of alternate investment options. The rural people are holding their savings in gold,” said Shubda Rao, chief economist, Yes Bank.
The Reserve Bank of India’s March 2008 bulletin shows that household savings constituted 23.8 per cent of the gross domestic product (GDP) between 2003-04 and 2006-07, as against 20.8 per cent from 1997-98 to 2002-03. In contrast, the share of physical assets has gone up and accounted for 12.7 per cent of the GDP between 2003-04 and 2006-07 compared with 10.5 per cent from 1997-98 to 2002-03.
“Rising consumerism and availability of bank credit has led to an increase in households’ financial expenses. The booming stock markets and real estate last year led many investors to park their funds in shares and debentures, while others opted for real estate. Incomes have gone and so has affordability. Despite a rise in the interest rates, consumers are buying houses. Savings are been diverted into these purchases,” said an economist with a foreign bank.
The bank household sector advances went up by 55 per cent to Rs 2,72,136 crore in 2006-07 as against Rs 1,75,010 crore in the previous financial year. Households’ savings in shares and debentures, including mutual funds, increased 62.31 per cent to Rs 48,228 crore in 2006-07 compared with Rs 29,712 crore in 2005-06. The bank deposits grew at 53.64 per cent, life insurance funds rose by 36.34 per cent and pension funds increased by 10.95 per cent during the period.
The net mobilisation of resources by mutual funds was 55.6 per cent higher at Rs 1,23,993 crore in April-December 2007.
“Indian youth want fast results and are willing to take risks if the returns are high. To minimise risks, individuals invest through mutual funds. Bank deposits and postal saving schemes are losing out to mutual funds, thanks to the stock markets. The stock market returns, even in case of under-performance, are anywhere in the region of 13 to 14 per cent,” said a public sector bank executive.
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