Economic data for the past few years shows us that Indians are creatures of habit and save one-third of their earnings, a phenomenon probably explained by our cultural values rooted in conservatism. The challenge, therefore, lies in successfully mobilising these savings towards nation building. However, the Economic Survey 2012-13 informs us that the ratio of financial savings vis-à-vis physical savings is not only lower but has declined in the past decade.

Notably, the Finance Minister has made few interesting taxation moves to encourage the housing of savings in financial instruments. The Rajiv Gandhi Equity Scheme which allows first-time investors a deduction of Rs 50,000 over and above the Rs 1,00,000 deduction available under Section 80C for investment in select equity and mutual fund schemes, has now been extended to an annual income limit of Rs 12,00,000 and for a period of three years.

Household savings, which constitute the large chunk of our National Savings, are normally housed in “safe” yet non-productive investments like gold. It is estimated that 1 per cent of the world’s gold is mined in India, while it consumes nearly 10 per cent of the world demand. In fact, the Reserve Bank of India, in its Annual Report 2011-12, counted the import of gold as the major factor behind India’s Current Account Deficit.

It is essential to appreciate the divergence that exists in the perception of gold between investors and the Government. While the Finance Minister believes that it is a disposition of income, investors treat it as a saving tool. The recent global financial crisis has, in all eventualities, cemented their belief that gold is the “safest” investment, which saw the US dollar nearly being downgraded. Furthermore, gold occupies a very distinct cultural position as well in India, as it is considered a signifier of affluence.

To the relief of first-time home buyers, they can claim a deduction of Rs 1,00,000 on interest payments for loans up to Rs 25 lakh raised during this fiscal.

The Budget also introduced inflation-indexed bonds and saving certificates to be designed in consultation with the Reserve Bank of India. Such instruments will offer some respite to investors, addressing at least the investor’s concerns regarding the erosion of capital.

Although the response of cautious Indian savers to Chidambaram’s proposals remains to be seen, it is unlikely to be overwhelming. Incentives for financial savings have been a long-standing feature of the Income Tax Act, 1961. Nonetheless, given the complexities associated with financial savings for an average household and the prevailing mistrust in the economic climate, gold is likely to be the winner.

(The writer is Partner, MPC Legal. Vibhooti Malhotra Associate, MPC Legal also contributed to the article)

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