Financial savings of Indian households took a hard knock in 2008-09, as a result of the financial crisis.
According to Reserve Bank Of India data presented in its annual report, gross financial savings of households increased by a low 4.3% in 2008-09, compared with a growth of 10.1% in the previous year. As a percentage of the gross domestic product (GDP) at current market prices, gross financial savings of households have fallen from 15.8% in 2006-07 to 15.2% in 2007-08 and now to 14% in 2008-09.
What contributed to this decline? Not bank deposits, which continued to grow handsomely in 2008-09, accounting for 54.9% of total household financial saving, compared with 50.4% in 2007-08. Not life insurance funds, which rose to 19.5% of financial savings in 2008-09 compared with 17.4% in the previous year. The real decline occurred in household investments in shares and debentures. These dropped from Rs89,134 crore in 2007-08 to Rs19,349 crore in 2008-09. Shares and debentures accounted for a mere 2.6% of gross household financial saving in 2008-09, compared with 12.4% in 2007-08. It’s very clear the meltdown in the market has made investors risk-averse.
Graphics: Sandeep Bhatnagar / Mint
The biggest change was seen in units of the Unit Trust of India (UTI) and in other mutual funds, from which investors pulled out money in 2008-09. For instance, investors who had pumped in Rs56,799 crore in mutual funds other than those of the UTI in 2007-08 pulled out Rs10,478 crore from these in 2008-09.
However, they continued to invest in shares and debentures of private firms, most probably in debentures rather than shares. Incidentally, deposits with non-banking companies also rose substantially, probably because of their higher interest rates.
But even though the percentage of shares and debentures in gross financial savings of the household sector fell in 2008-09, the fall has not been as steep as during the last downturn in the markets, when it fell to 0.1% in 2003-04. Also, financial savings of households reached a low of 11.9% of GDP at market prices in 2000-01. For Indian households, the current downturn hasn’t been as bad as the previous one.
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