Indian's Personal Savings in 2011-12 :Real Estate and Gold was 64.2 %..!

That Indians are in love with fancy homes and precious metals is no secret.

This only gets affirmed by the sharp rise over the last  5 years in the share of national savings diverted from financial assets, like bank deposits, bonds, mutual funds, equities, insurance and pension funds, to physical ones — plot of land, buildings and precious metals. This diversion has led to a corresponding fall in the flow of capital to productive sectors, affecting the capex cycle & economic growth.





According to Central Statistics Office (CSO) data, nearly half (46.4%) of India’s gross domestic savings in 2011-12 were in physical assets  a 9 year high.


At the peak of India’s economic boom when GDP growth stood at 9.3% in 2007-08, the corresponding ratio was a 12 year low of 29.3%. The skew towards physical assets is even worse for households, including individuals who account for the bulk of total savings.
 
In the last ten years, households accounted for 72.6% of India’s gross domestic savings on an average.

Investments in real estate and precious metals soaked up two - thirds (64.2%) of the personal savings in 2011-12, the highest since 1975, when physical assets accounted for nearly three - fourths of all household savings.

In other words, financial instruments now attract just a third of household savings, against 52% in 2007-08..
 Experts attribute this to the vicious cycle of poor economic growth, high retail inflation, rise in commodity prices and a real estate boom - each factor feeding on the other.

Mr. Dhananjay Sinha, Co-head (Institutional Equity), Emkay Global Financial Services, said “After the 2008 global financial crisis, a combination of high retail inflation &  poor income growth in urban India moved the terms of trade in rural households and away from the urban salaried class. The former has a higher propensity to accumulate physical assets than invest in financial instruments”

This, in turn, dried up the capital flow to the private corporate sector and the public sector, which rely in financial instruments such as equity, bonds &  bank deposits to raise capital for funding of their investment plans.

The end result was a sharp deceleration in the rate of capital formation - the proportion of GDP invested in fixed assets -  which declined to 33.1% of GDP in 2012-13 from a high of 41.5% in 2007-08, according to CSO figures.
 
Mr. Deep Narayan Mukherjee, Director (Ratings), India Ratings said, “A faster increase in physical savings, especially gold, had a role to play in pulling down the capex cycle & ultimately the economic growth”

Lack of domestic capital forced companies to turn to foreign investors, with India Inc resorting to external commercial borrowings to fill the widening gap between the demand for capital and its availability.

In 2011-12, for instance, foreign capital inflow was equivalent to 4.5% of GDP and it accounted for 12% of capital formation that year, the highest level in 23 years.

Savers’ love for physical assets also hit companies on the demand side, leading to poor demand growth & decline in capacity utilisation across sectors.

“Real estate investments typically have lower yields than similar investment in productive assets in manufacturing & services sectors, while precious metals do not give any yield. So, a rise in the share of physical assets in the total investment pie depresses the investment yield for the entire economy. It means less income and output for every rupee of incremental investment and lower surplus for second round of investment. All of these add up to lower GDP growth,” says Mr. Emkay’s Sinha.

Others, however, blame it on the relative unattractiveness of financial assets & high inflation.

Mr. Raju Bhinge, CEO, Tata Strategic Management Group, said  “Despite the recent rally, the stock market has not gone anywhere in the last 5 years, while returns on bank deposits adjusted for inflation are either negative or / near zero. You can not expect people to park their savings in these assets, given the paltry returns”


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