Household Savings in India

From the Reserve Bank of India Annual Report 2005-06;

India is one of the high saving economies of the world.The rate of gross domestic savings (GDS) (i.e., GDS as apercentage of GDP at current market prices) has recorded a steady increase since the 1950s. The savings rate has increased from an average of around 10 per cent in the
1950s to over 23 per cent in the 1990s. It crossed 25 per cent in the mid-1990s and reached its highest level of 29.1 per cent in 2004-05.

A large part of the overall improvement in domestic savings has emanated from higher household savings. The rate of household saving – comprising financial and physical savings – increased from around 7 per cent in the 1950s to over 18 per cent in the 1990s. In 2004-05, it
stood at 22.0 per cent. Since the 1950s, the household sector has remained the predominant source of the GDS, and it contributed around 76 per cent of total domestic savings in 2004-05 (Chart B). Over time, although both financial and physical savings have recorded an increase,
the composition of household savings has seen a shift in favour of financial savings reflecting the spread of banking and financial services across the country. The share of household savings in physical assets – comprising investment in ‘construction’, ‘machinery and equipments’ and ‘change in stocks’– in the total household saving declined from more than 70 per cent in the 1950s to around 53 per cent in 2004-05. Concomitantly, the share of household financial savings – comprising currency, ‘net deposits’, ‘shares and debentures’, ‘net claims on government’, ‘life insurance funds’ and ‘provident and pension funds’ – in the total household savings increased from around 25 per cent in the 1950s to around 47 per cent in 2004-05. The rate of financial saving increased from less than 2 per cent in the 1950s to 10.3 per cent in

Since 2000-01, the household sector has shown some preference for saving in the form of physical assets, which could be attributed partly to the soft interest rate regime in recent years as well as investments in housing. Within financial assets, preference has shifted from savings in
the form of shares and debentures and deposits to claims on government and contractual savings. Contractual savings – comprising saving in life insurance funds and provident and pension funds – amounted to 3.8 per cent of GDP during 2000-01 to 2004-05. Demographic variables like life expectancy, literacy rate and dependency ratios have emerged as key determinants of savings in addition to traditional variables like real interest rate, growth, per
capita income, spread of banking facility and rate of inflation.


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