Low ratio of Financial Assets in Household Savings and Resource Mobilization

In India, most part of saving is generated by the households but bulk of those savings is locked into unproductive physical assets. This article tries to make a brief analysis of this on resource mobilization.

Indian Public and its perception towards Physical versus Financial Assets

In India, around 70% of all the domestic savings is generated by the households. Ironically, most of these savings are locked in unproductive physical assets such as gold, real estate etc. This means that these resources don’t get deployed in growth generating avenues and thus cause a drag on the economy.

The main reasons for this include: historically better returns on physical assets (gold/real estate); low development of financial markets; low awareness about financial products; tax evasion and avoidance; lack of transparency in operation of financial assets etc. Further, this issue has some cultural aspects also. Indian public has huge preference to Gold, making the country largest consumer of Gold. Further, most people prefer ownership of the house than one on rent and this would lead to rise in land / house prices. However, this trend has shown a little reverse in last few years. For the last five or six year, households are not getting expected returns on property, gold etc. and have shown much anticipated interest in the financial assets. Before dematerialisation, there was not enough transparency and awareness among investors to trust the stock and bond markets, but that is now changing.

The government has taken several initiatives to reverse this trend including gold monetisation scheme; sovereign gold bonds; establishment of real estate regulatory authority; promotion of equity linked saving / pension products such as mutual funds and NPS etc. As per RBI (2016 annual report), financial savings of Indian households rose to about 7.5 per cent of national income in 2014-15 from 7.3 per cent in 2013-14. At the same time, real estate and gold, both declined as percentage of household savings. The 2016-17 year have seen demonetisation as one of the major momentum provider towards financial assets.  However, the shift from traditional or real assets to financial assets is gradual and slow because its not only about investment but also about traditional biases or the people. It is yet to be seen if these trends are temporary or result in genuine change in mindset of the people.

Policy Suggestions

Towards policy suggestions – the government should take initiatives towards developing widespread confidence in a transparent and equitable regulatory framework around financial assets and a faith in economy’s growth potential. Further, to mobilize the savings from common public, there is a need to some approaches. First, there should be a Universal Electronic Bank Account (UEBA) for every person above 18 years. Second, there should be ubiquitous access to payment services and deposit products at reasonable charges. Third, there sould be universal access to a range of deposit and investment products at reasaonble charges. Fourth, there should be reasonable access to range of insurance and risk management products at suitable charges. Last but not the least, the low income and middle income households should be legally protected rights pertaining to their financial services.