Financial Assets: Equity culture and small savings rates in India

Faculty Article

Financial Assets: Equity Culture and Small Savings Rates in India

Dr Prabhash Chandra, Professor, Finance

The mantra for Indian investing class while deciding on investment of their savings is finding an investment instrument that gives a high, guaranteed return with no risk or low risk and high liquidity. This is perhaps been most the obvious reasons for subdued participation in equity and stocks. The participation rate in general of Indian households in financial assets, and more specifically in equity, is well below the one observed in developed countries. The largest proportion of the wealth of young households in India is in the form of gold and durable goods. The largest share of wealth as Indian households approach the stage of retirement is held in housing and land. Financial assets and pensions account for a very low portion of the total investment portfolio even for the rich. The equity culture in India has not witnessed much change in last 15 years when we compare it to GDP growth in rupee term.The data below on household saving also reflects on amply clearly on the preference of investing class for fixed return instruments namely Bank Deposits, Non-Bank Deposits, Life Insurance Deposits, Small Savings options with government like the PPF, Pension Funds. The trend though for the FY 2017-18 is encouraging. Is Equity Culture in India visible in real practice? India has a savings to GDP ratio of 30% which is the highest in the world. It is a nation of savers and investors where more than 50% of the population is under 25 years of age. It is also a country that has distinction of having 85% of the household savings parked in fixed deposits. Country’s household invests a meagre 7% in shares and equity mutual funds. The National Sample Survey data for FY2016 puts less than 1% of all rural assets held in the form of equity, the number been marginally higher for the urban households though it is not at all encouraging; overall there is lack of equity culture in Indian household. This trend

Financial Assets (Savings) of the Households (2012-2018)

is much discouraging when we know that the major developed economies such as the US gets more than 50% of household savings in shares and mutual funds, even our Asian counter parts such as Taiwan, S Korea, Hong Kong boasts of far higher participation of household saving in equity and stock market. Source: RBI A fresh lease of life is likely in long term for equity saving habits in the Indian Household with the government announcing market linked rate of interest on some short-term small savings schemes, effective from 1 April 2016, thus the government started to reset small saving rates every quarter as part of the government’s plan to peg them closer to market rates to reduce banks to benchmark their fixed deposits on these interest rates and in turn preventing credit rates from being competitive. In medium term the policy decision of benchmarking of small saving rates to market linked prevailing rates will lead to enhanced flexibility for the banks and corporates in fixing their offering on competitive rates and migrate towards a lower rate regime in tune with the global trends. The lower interest rates in small saving, bank deposits will also influence investors to look more closely to equity as preferred asset class leading to higher inflow in this asset class and resultant impetus to equity culture in India. This policy initiatives of government on small saving also

market distortions. The three small saving schemes namely the Post Office Time Deposits with tenure of one, two and three years, the Post Office Recurring Deposits and the Kisan Vikas Patra (KVP) have been hall mark of higher fixed interest rates on small savings and seen as barrier to market based interest rate regime as they cannibalize the bank fixed deposits. The high interest rates of small savings remained high for very long forcing the bringing about the impetus on comprehensive financial inclusion through the Jan Dhan Accounts with supplementary initiatives for influencing savers to other asset class like equity. These initiatives are with good intent and will bring about holistic changes in saving habits of investing class. It is however needed that these efforts are supplemented from the demand side with RBI, Government and Regulators pitching in with efforts on financial literacy.