Where have savings gone?

In 2010-11, for the second time in three years, Indian households have seen a dip in net financial savings. The year 2008-09 was the previous time when the financial savings dipped. This led to a sharp fall in financial savings-to-GDP ratio to 9.7 per cent, the lowest since 1997-98. In 2009-10, financial savings, as a proportion of GDP, was 12.1 per cent.

Net financial savings is calculated as the difference between savings by the household (gross financial savings) and loans availed by them during a period.

While during the year 2008-09, the gross savings dipped (due to weak equity markets), this time around (2010-11), it is the rise in liabilities of the households that led to the fall in net financial savings. Financial liabilities of households have risen by 41 per cent year-on-year while financial savings rose marginally by 5.3 per cent.

The share of bank deposits in gross financial savings dipped this year. In fact, it has fallen steadily to 44 per cent in 2010-11 from 46 per cent a year ago, it peaked at 57 per cent in 2008-09. Interest rates in 2010-11 were rising, but still far below the levels of 2008-09. With small savings offering better rates than banks, their share improved to 6.5 per cent from 4.3 per cent the previous year.

Households held 13.3 per cent of the gross financial savings in cash, the highest level since 1995-96. The amount held by way of cash by households was to the tune of Rs 1.39 lakh crore.

Low rates also seemed to prompt higher borrowings by households, leading to a rise in financial liabilities. These loans could have been taken for consumption or for buying physical assets.

Deploying in physical assets?

Physical assets, basically investments in real estate and gold (if you consider it an asset), may have attracted fresh money. While data on physical assets isn't available, the home loans availed for the year ended March 2011 went up by a net Rs 45,181 crore from Rs 21,564 crore the previous year. The rising proportion of over Rs.20 lakh loans also suggests an investment angle to home buying.

Gold jewellery buying too has been quite the rage. According to the World Gold Council data, Indian households bought Rs 1.82 lakh crore of gold in the year 2010-11. If you consider this an investment, gold would have ranked only next to bank deposits and insurance in the savings preferences of Indian households.