Given the strong anecdotal evidence of households shifting their investments away from financial savings instruments, corroboration from official agencies was perhaps not needed. Even so, the Reserve Bank of India’s finding that household financial savings fell to 7.8 per cent of the GDP in 2011-12 is a major cause for concern. It is the lowest in 11 years and way below the average of 11 per cent in the three preceding years. Since government savings today are in negative territory and corporate retained earnings are under stress, the fall in household financial savings will have an adverse impact on the government’s efforts at stepping up investment. A number of factors are at play here. Many more individuals are investing in gold and physical assets such as real estate. Gold has always been in demand for making jewellery but its recent track record as an investment asset that delivers high returns that few forms of financial savings can match explains the phenomenal increase in its demand. Gold is more easily available to the ordinary man than ever before. A large number of banks sell gold. While banks have always lent against gold, a few non-banking finance companies, many from Kerala, have cashed in on the demand and exponentially increased their lending. The RBI, concerned with such rapid growth, has clamped down in a few cases. The other big macroeconomic worry arises from the fact that very large gold imports widen the trade imbalance and the current account deficit.
Policy measures to increase, if not at least retain, financial savings should involve a two pronged approach. The lure of gold cannot be countered by clamping down on imports: the trade will simply shift underground. Instead, innovative ways of integrating the bullion and the financial markets must be encouraged. Already, besides gold loans, exchange traded funds in gold have gained acceptance. Commercial banks should be given the wherewithal to offer gold backed deposit schemes of the type offered in important financial centres like Singapore. The other part of the strategy is to make the existing financial savings avenues more attractive to investors. Recently, the SEBI has tried to provide additional incentives to mutual funds and their distributors. The government has sought to popularise the equity cult among small investors with mixed results. Bank deposits continue to account for over 50 per cent of financial savings. But this is hardly an unequivocal endorsement of the most traditional form of savings. An average bank depositor has many valid reasons to complain. Limited tax concessions and the hassles in obtaining tax deduction certificates are just a few.