India’s savings, at around 33% of gross domestic product (GDP), are among the world’s highest. Of this, households save about two-thirds or 22%, much higher than that in most countries. But there are large differences between states.
India is known for its stereotypes— south Indians are said to save a larger share of their income, while north Indians are believed to be spendthrift. But looking at urban incomes, this is not justified in practice. The only southern state in the top five rankings on urban savings rates is Kerala, which has significant remittances from outside the state. Nagaland, which has seen high income growth since 2000 at 9.2% per annum, tops the chart of urban savings rate. Bihar is also among the top saving states in India when we look at household savings as a share of household incomes.
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There is no cultural issue here, but strong economic reasons why some locations have greater savings than others. Nagaland has high urban incomes and Bihar has low credit options but poor governance and lack of supplementary laws prevent creditors from giving credit; households, therefore, need to save more to buy assets such as homes or land. Both states have law and order problems that also affect consumption options. When there is high uncertainty about income flows, precautionary savings take precedence over satisfaction of present consumption needs.
At the district level, on a per capita basis, we find that high savings districts are spread all over the country. Gautam Buddha Nagar in Uttar Pradesh to Vadodara in Gujarat, to Tiruvallur in Tamil Nadu to Singhbhum in Jharkhand—we find many districts that have a high propensity to save on a per capita basis.
What are the key factors that determine savings? First is, incomes, and some locations are growing more rapidly than others. Second, available avenues to spend—those that have better security of property and life, and have better infrastructure, tend to score well on this count. Third, availability of avenues to save—locations that have a better financial sector infrastructure would tend to do better.
Fourth, pre-committed expenditures—locations where there is lack of credit availability, or those where the dependency ratio (dependants per earner) is high, tend to perform poorly on this count. Fifth, a combination of these is then supplemented by available return or interest to impact savings at the household level.
Hence, the current environment of uncertainty and economic slowdown would affect different locations differently.
Demand Curve is a weekly column by research firm Indicus Analytics Pvt. Ltd on consumer trends and markets. Your comments are welcome at email@example.com