High Inflation – Lower Savings from Households

High Inflation - Lower SavingsCentral Government Statistics Data indicate a sharp deceleration in savings to 30.8% of GDP from 34% in FY11, while investments slowed to 35% of GDP in FY12 from 36.8% in FY11. Despite growth slowing to a decade low, the substantial fall in savings relative to investments is key for India’s widening current account deficit (CAD).

Who Provide Funds by Savings to the Indian Economy ?
Indian Households are the main contributor (~73% of total), followed by private corporate sector at 23% and public sector at 4%. The 320bps fall in savings rate in FY12 is due to 120bps decline in household savings to 22.3% of GDP in FY12 vs 23.5% in FY11. Consistently High inflation due to rampant Corruption has led to a sharp fall in financial savings which has offset the rise in physical savings.

Does it Ring the Bell for Government / RBI ?
Now one can easily understand why Dr. Subbarao , Governor of the RBI is holding interest rates higher – as alarm bell rings in the savings data is the continued deceleration in financial savings, now in single digits, i.e. 8% of GDP vs 10.4% in FY11 and 12% in FY10. Better returns on alternate assets like gold and real estate are other reasons for the fall in Savings Rate. The average gold imports has risen to 850-900 tonnes from 650-700 tonnes earlier.

Going forward, the RBI Governor will have a tough job on hand to manage the Interest Rates and find money for the Indian Industry as Indians will pour more money into Real Estate and Gold – Government Sponsored Scams.