Economic Highlights

New Delhi, 31 August 2012

Lowest household savings

SIGNAL OF DEEPER CRISIS

By Shivaji Sarkar

The country is moving from problem to problem. While the GDP growth is thawing, inflation is becoming unmanageable and fresh jobs are disappearing. Now, with the lowest household savings rates, in two decades since 1990, hitting the country, it could take India to a further abyss.

Pertinently, newly appointed Chief Economic Adviser, Raghuram Rajan, a former International Monetary Fund (IMF) chief economist is likely to make things more difficult. He is known for advocating raising retail fuel prices, deregulating and aligning these with international crude prices.

Remember, the basic strength of India’s economy has been its high savings by individual citizens. Wherein, it has been a tradition to ensure some savings at all costs. During the era of what is termed as the low Hindu growth phase of around 3 per cent, high savings sustained the Indian economy. Many developmental projects and even large public sector units were built with this money.

Today, this is eroding and signals a deeper crisis. Sadly, except lip service at the official level as no significant effort is noticed to correct this.

Indeed, the country, like Raghuram Rajan, is not prepared to learn from the failure of US and European economies. These countries suffered, despite Basle norms, due to high charges by banks, financial institutions and corporate malpractices. The New York stock exchange became the centre of manipulations by people like Bernard Madoff.

Yet, repeatedly the nation is exhorted to globalise and follow the failed path. Europe had one of the lowest savings rates and has one of the most unregulated systems despite it being placed elaborately on paper. During the past few weeks many Europeans in countries like Poland lost their huge savings in so-called gold schemes.

Besides, repeated calls to integrate with the West are fraught with danger. Notwithstanding, the Reserve Bank’s tight monetary policy’s inability to control inflation, it has done one singular act of saving dwindling bank funds due to losses (NPAs) from falling into the hands of scamsters.

The CRR, despite a dislike by SBI chairman Pratip Chaudhuri, has acted as a cushion against any liquidity crisis in the system. This may not be the practice in the Western countries, because banks do not earn interest, but in India’s context it has saved finances from crashing as witnessed in the wake of the Lehman Brothers scandal in the West.

Importantly, somewhere something Indian is at work which is the guard the nation takes against perceived odds. High inflation, as the RBI has repeatedly said, cannot be controlled only through monetary measures. Now, the Parliamentary Finance Committee too asserts that there is no synchronisation between fiscal and monetary measures being followed by the Government and the RBI. Adding, effective fiscal measures are necessary to rein in inflation and trigger sustainable growth.

The fall in net household financial savings to 7.8 per cent of the GDP in 2011-12 is attributed to slower growth and to the rising rate of inflation. It has been at 9.3 per cent in 2010-11, and 12.2 per cent in 2009-10. With net financial savings including cash investments, deposits with banks and non-bank companies, investments in stocks, mutual funds, small savings, life insurance, provident and pension funds.

According to Morgan Stanley economist Chetan Ahya, low bank interests on deposits and slower job creation also led to the fall in savings trend. In some cases, the affluent are hedging their investments in gold as it ensured a very high return during the last over five years.

True, the Government has brought down interest rates of savings like public provident fund (PPF), post office monthly income plan, senior citizen monthly income plan. It is coupled with further erosion on savings owing to tax deduction at source (TDS) on supposed interest income. This is working as a dampener in putting money in official instruments.

Undoubtedly, the Government needs to heed what the Parliamentary committee has said. Apart, its suggestion for fiscal measures it also calls for freeing bank deposits from the clutches of TDS. As this neither helps the Government earn extra revenue nor helps banks or citizens. Instead, it has made bank operations expensive.

Moreover, the TDS rationale on deposits is questionable. The deposits are put only after paying taxes. Questionably, should there be a double taxation on the same income? A bank interest earning should not be viewed as an income. It is an effort by an individual to help the State garner funds which are difficult to come by. The TDS on deposits is virtually killing the hen that lays golden eggs.

Further, many other rules which prevent opening of new bank accounts should also be viewed as warding off potential depositors. The fear of black money and supposed terrorist operations should not stifle the banking system.

Undeniably, the nation pines for liberalisation. However, the very basics of financial inclusion start with stronger controls. The entire set of rules for opening and operating bank operations by individuals need to be liberalised and not convoluted.

Recall, in the 1960s, the Government encouraged banks to open minor savings accounts with as low deposits as Rs 5. The opening of accounts was easy and it initiated generations in the culture of savings.

What’s more, procedural issues like fall in industrial and manufacturing production, lack of jobs and high cost of commodities are eroding opportunities for earning. Disposable --- spare or surplus --- money is not there with the people.

This requires a slew of measures and steps to bring down high costs from fuel to food. The US despite the worst crisis it faced in 2008 is in a better position because it has been able to contain its costs.

Significantly, India has to take some drastic measures to reverse the policies. As it stands, energy charges are at an exploitative level and need to be reduced. Also, high savings rate is necessary to push up growth along-with revision of policies to ensure better functioning of the economy.

Shockingly, interest rates are not keeping pace with inflation. This leads to savings getting diverted to gold and real estate. Since the middle class earning even Rs 50,000 a month is virtually on a hand-to-mouth existence it has become imperative that their interests (bulk of consumers) are protected.

If this does not happen, the nation is likely to get into further deeper problems.  ----- INFA

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