PRESENTED BY

BHARAT PATELCYRIL VICTOR

CHANDRAKANT EZONGDIPAN SARKARBINAY PRASAD

POUSALI MUKHERJEE

TRENDS AND CHANGES IN THE PATTERN OF SAVINGS AND INVESTMENTS IN INDIA AND

ITS EFFECT ON INDIAN ECONOMY

INTRODUCTION

Savings and investment have been considered as two critical macro-economic variables with microeconomic foundations for achieving price stability and promoting employment opportunities thereby contributing to sustainable economic growth.

Over the last three decades, Indian economy has emerged as one of the fastest growing economies of the world. Apart from registering impressive growth rate, India’s growth process has been almost stable. The role of savings and investment in proving the fundamental growth impulses in the economy is one major factor for the progress of the country.

WHAT IS SAVINGS ?

Savings is the income not spent, or deferred consumption. Methods of savings include putting money aside in a bank or using some other kinds of other investment plans.

It plays a vital role to increase the amount of fixed capital available, which contributes to economic growth.

IMPORTANCE OF SAVINGS… However , increased savings does not

always correspond to increased investment . If savings are not utilized properly , or otherwise are not deposited into the financial intermediary such as bank, there is no chance for those savings to be recycled as investment by business. This means that savings may increase without increase in the investment which may lead to recession rather than economic growth.

WHAT IS INVESTMENT ?

In economic theory or in macroeconomics, Investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production.

Investment is often modeled as a function of income and interest rates, given by the relation,

I = f ( Y, r )

IMPORTANCE OF INVESTMENT…

An increase in income encourages higher investment, where as a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents the opportunity cost of investing those funds rather than lending out that money for interest.

CHANGES IN THE PATTERN OF SAVINGS AND INVESTMENT

Indian economy has been showing a steep increase in the domestic savings as a percentage of GDP, driven by increases in savings by the households, corporate and government sectors. This ratio has gone up by about four times, from a meager 9.3%in 1950-51 to as high as 37.7% in 2007-08.

CHANGES IN THE PATTERN OF SAVINGS AND INVESTMENT

The savings at current prices in 2008-09 had gone up to Rs 18,11,585 crore from Rs 18,01,469 crore in 2007-08.

In respect of household sector, the rate of saving has remained at the same level of 22.6 per cent in 2007-08 and 2008-09.

CHANGES IN THE PATTERN OF SAVINGS AND INVESTMENT

People’s reaction to the current economic condition

In the first six months of 2011, the nominal savings growth declined to 9% compared with the same period in 2010.

Households are focusing only on two asset classes—gold and bank deposits. In terms of value, gold is up 51%, bank deposits 20%, and property 14%

CHANGES IN THE PATTERN OF SAVINGS AND INVESTMENT

Households seem to be searching for yield and safety, which is a distinct shift from 2010. Overall, it seems the low real rates have hurt the appetite for financial assets, with savings down 2.9% (in the first half of 2011 compared with 2010), as opposed to physical assets, which were up 39%.

EFFECT ON ECONOMIC GROWTH

Interestingly, the country's gross domestic savings has fallen to 32.5 per cent of GDP at market prices in 2008-09 as against 36.4 per cent in the previous year. The fall in the rate of gross domestic savings has been mainly attributed to the fall in rates of savings of public sector (from5 per cent in 2007-08 to 1.4 per cent in 2008-09) and private corporate sector (from 8.7 per cent in 2007-08 to 8.4 per cent in 2008-09).

EFFECT ON ECONOMIC GROWTH

Over a 20 year period when Indian capital markets have grown tremendously on many parameters, very few households have ventured too far beyond their bank, insurance agent, mandatory retirement funds and small savings. In fact, since 2000, household exposure to the capital market has crossed 7% only once, in 2007-08

EFFECT ON ECONOMIC GROWTH

Why does this happen? A SEBI-sponsored household survey provides some informations.The study estimated that India has approximately 227 million households, of which only 24.5 million invest in equity, debt, mutual funds, derivatives and other instruments in the capital market. That represents about 11% of the household sector. The remaining 89% are also likely to be net savers, but rely on non-risky avenues such as banks, insurance or post office savings instruments.

EFFECT ON ECONOMIC GROWTH

Among the households that did not invest in the secondary market, nearly 41% felt that they had inadequate information about financial markets and lacked investment skills. This perception was prevalent across various income groups and education categories. In addition, 16.5% of the most educated and 16% of the upper middle and upper income groups thought that investments in the secondary market are not safe.

RESULTS

For educators, trainers and industry associations, the challenge is to increase public awareness of the importance of financial planning while informing potential investors about the risks and returns of different investments.

For finance professionals, it is a signal to develop products keeping in mind the inherent risk-averse nature of Indian households.

CONCLUSION

In 2010-11, gross household financial savings was estimated at Rs.10,43,977 by the RBI. That is approximately $220 billion. If we could spur savings by, say, 10%, and attract that towards corporate debt or equity, then we have an additional $22 billion domestically available and flowing into our capital markets. That, incidentally, is more than the $17 billion that FIIs brought in during 2011-12. For a country that is starved of savings to fund its current account deficit, it would be wise to spur domestic savings as well as attract foreign inflows.

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