That
Indians are in love with fancy homes and precious metals is no secret.
This
only gets affirmed by the sharp rise over the last 5 years in the share of national savings
diverted from financial assets, like bank deposits, bonds, mutual funds,
equities, insurance and pension funds, to physical ones — plot of land,
buildings and precious metals. This diversion has led to a corresponding fall
in the flow of capital to productive sectors, affecting the capex cycle &
economic growth.
According
to Central Statistics Office (CSO) data, nearly half (46.4%) of India’s gross
domestic savings in 2011-12 were in physical assets a 9 year high.
At
the peak of India’s economic boom when GDP growth stood at 9.3% in 2007-08, the
corresponding ratio was a 12 year low of 29.3%. The skew towards physical
assets is even worse for households, including individuals who account for the
bulk of total savings.
In
the last ten years, households accounted for 72.6% of India’s gross domestic
savings on an average.
Investments
in real estate and precious metals soaked up two - thirds (64.2%) of the
personal savings in 2011-12, the highest since 1975, when physical assets
accounted for nearly three - fourths of all household savings.
In
other words, financial instruments now attract just a third of household
savings, against 52% in 2007-08..
Experts
attribute this to the vicious cycle of poor economic growth, high retail
inflation, rise in commodity prices and a real estate boom - each factor
feeding on the other.
Mr.
Dhananjay Sinha, Co-head (Institutional Equity), Emkay Global Financial
Services, said “After the 2008 global
financial crisis, a combination of high retail inflation & poor income growth in urban India moved the
terms of trade in rural households and away from the urban salaried class. The
former has a higher propensity to accumulate physical assets than invest in
financial instruments”
This,
in turn, dried up the capital flow to the private corporate sector and the
public sector, which rely in financial instruments such as equity, bonds
& bank deposits to raise capital for
funding of their investment plans.
The
end result was a sharp deceleration in the rate of capital formation - the
proportion of GDP invested in fixed assets -
which declined to 33.1% of GDP in 2012-13 from a high of 41.5% in
2007-08, according to CSO figures.
Mr.
Deep Narayan Mukherjee, Director (Ratings), India Ratings said, “A faster
increase in physical savings, especially gold, had a role to play in pulling
down the capex cycle & ultimately the economic growth”
Lack
of domestic capital forced companies to turn to foreign investors, with India
Inc resorting to external commercial borrowings to fill the widening gap
between the demand for capital and its availability.
In
2011-12, for instance, foreign capital inflow was equivalent to 4.5% of GDP and
it accounted for 12% of capital formation that year, the highest level in 23
years.
Savers’
love for physical assets also hit companies on the demand side, leading to poor
demand growth & decline in capacity utilisation across sectors.
“Real
estate investments typically have lower yields than similar investment in
productive assets in manufacturing & services sectors, while precious
metals do not give any yield. So, a rise in the share of physical assets in the
total investment pie depresses the investment yield for the entire economy. It
means less income and output for every rupee of incremental investment and
lower surplus for second round of investment. All of these add up to lower GDP
growth,” says Mr. Emkay’s Sinha.
Others,
however, blame it on the relative unattractiveness of financial assets &
high inflation.
Mr.
Raju Bhinge, CEO, Tata Strategic Management Group, said “Despite the recent rally, the stock market
has not gone anywhere in the last 5 years, while returns on bank deposits
adjusted for inflation are either negative or / near zero. You can not expect
people to park their savings in these assets, given the paltry returns”
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