The Coming Shift!

India’s household savings : Dramatic multiplier effect from the coming shift from physical to financial assets.

Indian households love the luster of gold and patronage of property. These physical assets holds as much as two-thirds of their overall savings (below chart). Financial savings that include bank deposits, bonds and shares constitute the balance. When one translates this to percent of GDP, numbers looks abysmally low compared to global averages. With annual household savings around 16% level of GDP, annual saving in financial assets is stagnating at around 5% level while global averages are upwards of 20%. Below chart gives the cumulative distribution pattern ( not annual) of the Indian household assets. Such low level of financial savings have curtailed capital productivity, increased lending cost, choked economic growth in general. But, all that is set to change in the coming years.


Multiple factors have come together miraculously to conspire a deadly change in the household dynamics. First, it started with gold prices losing its luster, a trend that started a year back. The prolonged painful downturn in property prices came as a second blow to households. In normal times, these two would have been discounted as cyclical turns. But what is likely to change this otherwise cyclical turn into a powerful structural one that will prolong for a painful period is current administration’s ambitious drive to weed out black money. This drive is unlikely to stop with just demonetization. This will probably be taken to logical conclusion with more curbs on benami transactions and on gold stocking. Such steps are sure to change the landscape of household savings in a material fashion. Stars are aligned for such a dramatic shift, so to say.

This coming shift has the potential to trigger far reaching changes, some of which are:

  • Improved tax-to-GDP ratio leading to lower fiscal deficit structurally.
  • Inflation trajectory trending lower on improved fiscal deficit and on lower black money.
  • Deepening of corp. bond markets leading to better transmission of monetary policy rates.
  • Competitive cost of capital ( hence improved productivity) on structurally lower interest rates ( on higher liquidity, better transmission and on lower inflation)
  • Surge in FDI on stable and stronger currency (on structurally lower inflation) leading to significant ramp up in capital investments and hence higher GDP growth.
  • Large and faster business scale-up on improved primary equity offerings (IPOs).

All these, may seem incremental in isolation, but put together, can structurally put the economy in a higher growth orbit, which in turn can lead to dramatic increase in the per-capita income from the current paltry levels of  $1500+. This is not to say that the current policy initiatives will lead to immediate revival in growth momentum, given the stressed balance sheets of corporate and  banks. However, if the policy initiatives such as demonetization are taken to logical conclusion with further steps on both gold and property (benami), it will set long-term drivers in motion to put India on a higher growth orbit.

Happy Value Investing!


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