Understanding savings 

The importance of savings in development is well known. It is also a well-known fact that the rate of savings has been an important economic variable for economic development, particularly, in developing countries like India.

There are, of course, other determinants of economic growth such as technological progress, institutional development, domestic politics, and the external economic environment, but the traditional interest in savings is that, at the aggregate and household levels, it is the main determinant of investment. Investment, of course, is acknowledged as the primary engine of economic growth.

“Saving” differs from “savings.” The former refers to an increase in one’s assets, an increase in net worth, whereas the latter refers to one part of one’s assets, usually deposits in savings accounts, or to all of one’s assets. Saving refers to an activity occurring over time, a flow variable, whereas savings refers to something that exists at any one time, a stock variable. However, the term “savings” signifies the excess of income over consumption expenditure. All income that is not consumed is saved.

The savings of a nation is known as national savings. In the case of our country, it is known as Gross Domestic Savings (GDS) which is measured only in current market prices and originates from three distinct sectors viz. public, private, and household sectors. Savings of the above sector are known as Public Sector Savings, Private Corporate Sector Savings, and Household Sector Savings respectively.

The household savings and corporate savings are combinely known as  private savings too.

Gross Domestic Saving calculated as GDP minus final consumption. The gross domestic saving (GDS) rate as a percentage of gross domestic product (GDP) at current market prices moved away from a scant average of 9.9% of GDP in the ‘fifties to touch an average of 12.7% during the ‘sixties, an average of 17.5% in ‘seventies, 19.4 % in ‘eighties, 23.0% in ‘nineties and peaked to 37.8 % in 2007-08 before it started dwindling. It declined to 36.9% in 2010-11 and further declined to 28.2% in 2020-21. It revolves around 30% of GDP now a fall by 7% from peak.

The public sector comprises government and semi-government enterprises and departments. Government saving is the percentage of its investment that is financed out of revenues (that percentage can exceed 100 when the government covers its investment and also pays back debt. The number can be less than zero if the government is financing its current expenditure, which can include redistribution programs, with debt.

The net savings of this sector are excess of current receipts over current expenditure which are estimated from the results published in their annual report. It was revolving around 1% in past.  However, again, with government expenditure exceeding the revenues, the savings were negative. Government dis-saving has averaged 2.1% of GDP in the past 10 Years.

The private sector comprises private business organizations like companies, financial institutions and cooperative institutions. Private Sector Savings comprises corporate savings and household Sector.

Gross corporate savings in the National Accounts Statistics (NAS) equals undistributed corporate profits, while net savings equals undistributed (retained) profits less capital consumption (depreciation). In other words, corporate savings refers to undistributed profit of a corporate body which is retained to meet further fixed and working capital, that is, to reinvest them in the business. The savings of this sector are obtained from the profit and loss accounts and the balance sheets of the respective units.

The private corporate sector, characterised by a stagnant savings rate until 2002-03, has recently emerged as the category experiencing the most rapid growth of savings in the country. This has contributed to the increase in India’s overall savings rate.

The corporate savings rate as a percentage of gross domestic product (GDP) at current market prices moved away from a scant average of 0.9% of GDP in the 1950-51 to touch 1.3% in 1969-70 and 1.9% in 1988-89, 2.9% in 1991-92, 4.3% in 2003-04, 8.7% in 2004-05, record high of 12.2% in 2007-08 and again declining marginally to 11.9% in 2015-16 and 10% 2020-21.

Corporate saving has increased relative to GDP and corporate investment over the past two decades, reflecting how the decline in the labour has led to increased corporate profits.

Savings by the household sector is known as household savings. The household sector plays a major role in the Indian economy as the supplier of financial resources in the form of savings.  The saving of the household sector is an indicator of the well-being of people.

According to Central Statistical Organization (CSO), the household sector by definition comprises, apart from individuals, all non-government, non-corporate enterprises of firm business and non-firm business-like sole proprietorship and partnership and non-profit institutions which furnish educational, health, cultural, recreational and other social and community services to households.

Household savings consist of savings in physical assets, gold and silver ornaments  and net financial savings. Saving in physical assets comprises net addition to investments in fixed assets of construction, machinery, equipment, and change in stocks.

Since, direct annual data on household income expenditure of households are not available, the saving of the household sector is worked out by following the residual method except saving in the form of life insurance funds and provident & pension funds.

In other words, the saving of the household sector is taken as the sum of its investments in various instruments of financial saving and in the form of physical assets including jewellery such as gold and silver.

India’s total household savings hovered around 20% of GDP in the last 10 years. India’s total household savings were Rs 38.45 lakh-crore in 2018-2019; 20.34% of GDP. In 2021-2022, the total household savings were Rs 46.20 lakh-crore; 19.68% of GDP. This reduction of 0.68 % in household savings meant Indians saved Rs 1.60 lakh-crore less in 2021-2022.

The share of household savings in Gross Domestic Savings (GDS) declined from 68.2% in 2011-12 to 57.8% in 2015-16 but increased thereafter to 78.5% in 2020-21. Again, it has declined. Of the total savings by the household, 46.7% are in the form of physical savings and 52.5% in the form of financial savings in 2020-21 and these have become the most preferred source of savings for the sector.

Gross financial assets otherwise known as gross financial savings are of two types; (i) Non contractual savings in the form of currency holdings of households, deposit holdings of banks and non-bank companies, share and debenture (including mutual funds), and net trade debt, net claim on government in the form of small savings, investment in central and state government securities (rupee debt) (ii) the contractual savings are in the form of life insurance, provident fund, and pension funds, etc.

In 2021-22, Gross Domestic Savings was Rs 70,76,659 crore while household savings was Rs 46,19,501 crore. Household savings consist of savings in physical assets of Rs 27,69,044 crore, gold and silver ornaments (Rs 5,9675 crore) and net financial savings (Rs 17,90,782 crore).

The  net financial savings are calculated by subtracting the financial liabilities of the household from gross financial savings. Financial liabilities cover the loans and advances from banks, other financial institutions, government, and cooperative non-credit societies.

Net financial savings/assets for 2022-23 (Rs 13,76,873.5 crore or 5.1% GDP) = Financial Assets/savings (2959050.05 Crore or 10.9% GDP)- Gross Financial Liabilities (Rs 15,82177.0 crore or 5.8% GDP).

Gross Financial Assets/Savings (29,59,050.05Crore) = Total Deposits (Rs 10,99,628.6 crore) +Life Insurance Funds (534820.1) +Provided Funds/Pension Funds /Public provident Fund (PPF) (Rs 6,63,027.7 crore)+ Currency (Rs 2,37,609.8)+ Mutual funds (Rs 1,79,087.8 crore)+ Equity (Rs 23,038.1 crore) + Small Savings Scheme excluding PPF (Rs 2,01,053.5 crore).

Total Deposits (Rs 10,99,628.6 crore ( a+b) = (a) Bank deposits (Rs 10,26,563.1 crore ) + (b) non-bank deposits (73065.5 crore)

(a)  Bank deposits (Rs 10,26,563.1 crore) = Commercial Banks (Rs9,92,606.02) + Cooperative banks (Rs 33,956.9 crore)

(b) Non-Bank Deposits (Rs 73,065.5 crore) = Non-Banking Financial Corporations (Rs 14480.5 crore) + Housing Finance Companies (Rs 4,206.6 crore)

Gross Financial Liabilities (Rs 15,82,177.0 crore or 5.8% GDP) = (a) Loans/Borrowings from Financial Corporations (Rs 15,82,143.3 crore) + (b) Loans/Borrowings from Non- Financial Corporations (Private Corporate business) (Rs 135 crore) +(C) Loans/Borrowings from General Government (Rs 101.3 crore)

(a) Loans/Borrowings from Financial Corporations (Rs15,82,143.3 crore) = Commercial Banks (Rs 11,88,146.3 crore) + Other financial institutions (Rs 3,65,793.2 crore)

Other financial institutions (Rs 3,65,793.2 crore) = Non-banking Financial companies (Rs 2,39,895.9)+ Housing Finance companies (Rs 1,17, 017.0 crore)+Insurance Corporations (Rs 8,880.3 crore)

Due to rise in financial liabilities, household debt has increased. Household debt, also was high at 37.6% of the GDP in 2022-23, as against 36.9% in the previous fiscal. According to the report by SBI Research in four years since 2017-18, the household debt as measured through financial liabilities has jumped by 7.20% from 30.1% in 2017-18 which was the year of GST implementation, to 31.7% in 2018-19, 32.5% in 2019-20 and has sharply jumped to 37.3% of the GDP in the pandemic year 2020-21 confirming the deeper financial impact of COVID-19.

Household debt is defined as all liabilities of households (including non-profit institutions serving households) that require payments of interest or principal by households to the creditors at a fixed dates in the future. On-Profit Institutions Serving Households (NPISH) are sports clubs, unions, churches, charities helping the poor and similar bodies.

As the name suggests, to be in this sector, a group must be not-for profit and must also be serving households for free. Debt is calculated as the sum of the following liability categories: loans (primarily mortgage loans and consumer credit) and other accounts payable. The indicator is measured as a percentage of net household disposable income.

Household debt refers to an activity occurring over time, a flow variable or cumulative one, whereas financial liabilities refers to something that exists at any one time, or one year or financial year -a stock variable. Financial liabilities of each year add to rise of household debt .

“Liability” and “debt” are two important concepts in accounting and finance. They are often used interchangeably in common language, but in accounting and finance, they have distinct meanings:

The main difference between liability and debt is that liabilities encompass all of one’s financial obligations, while debt is only those obligations associated with outstanding loans. Thus, debt is a subset of liabilities. Liabilities includes debt and other obligations of payment.

For example, public debt comprises internal debt and external debt. But if we consider the liabilities of the government, in addition to debt, the government is also liable to repay the outstanding against the various Small Savings schemes, Provident Funds, Securities issued to banks and other financial institutions.

The major concern is today that net financial savings of household has declined to a  47 year low of 5.1% of GDP in 2022-23. The financial savings constitutes that resources which government and corporates borrow at cheaper rate. Hence, there is imperative to enhance financial savings.