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The govt gets the bulk of household savings, but gives returns that don’t cover even inflation says R Vaidyanathan, Professor of Finance, IIMB

The savings rate of our economy, i.e. gross domestic savings expressed as a percentage of gross domestic product at market prices, has gone up from 12% in the sixties to nearly 24% in the late nineties and has reached 32% during 2005-2006. More than 70% of this savings is from the household sector, consisting of consuming households and mixed income households, namely partnership and proprietorship activities.

The household sector savings consist of physical savings and financial savings. Savings in the form of financial assets, are (1) currency, (2) bank deposits, (3) shares and debentures, (4) small savings represented as net claims on the government by households, (5) Life insurance funds and (6) Provident and pension funds.

We do not have any generalised social security system in our country. Actually, nearly 90% of our population is not covered by any social security system for old age. This has been highlighted by the Old Age Social and Income Security (OASIS) report of the ministry of social justice and empowerment in 2000. From this point of view, India is the only private market economy in the world, since the role of state from the point of social security is negligible.

In our context, individuals have to depend on their own savings and/or joint family support in old age. Hence, there is a dire necessity for families to save in the context of increasing life expectancy and decline in joint family system.

Not only that, the family has also to save for the education of their children (which is very expensive and in a perverse way, inversely related to the level of education, like KG is more expensive than PG), for their healthcare needs (which is more expensive than in the UK), for their birth/ marriage/ death expenses, which are part of the samskaras of an average Indian.Where do the savings of households go? The government is a large grabber of the savings of the households.

Table shows the components of household savings. It also reveals that capital formation in the household sector can easily be undertaken by the savings of that sector, which provides substantial amounts to the government and private corporate sector.

For instance, during the year 2005, we find that 85% of the financial savings was invested in bank deposits, small savings (net claims on government), life funds and PF and pension funds - all mainly in government agencies. We also know that substantial portions of bank; insurance and PF funds are mandatorily to be invested in government securities - ranging from 40% to 90%. In spite of all discussions about stock market being the barometer of the economy, only 3% was invested through stocks and bonds.
The government has been a very inefficient user and provides returns that are do not so much as cover inflation.

In other words, households are earning a negative or marginally positive rate of return, which is supposed to help them in educating their children, taking care of health benefits, old age expenses, etc. This grabbing of household savings by the state is an old ‘socialist’ paradigm, which assumes that the state knows best, which in our context is laughable but for its tragic undertones.

Had the household savings been used prudently by community-based local parents’ associations, we could have had better schools and more accountable teachers. Same is the case with hospitals. The uncertainties of the future faced by households is aggravated by the philandering and predatory corrupt state, which furiously taxes the same hapless households both as direct taxes and also recently as service tax.

Actually, in the absence of any social security cover, the government should not be taxing the non-government, non-corporate employees/ proprietors at all. It should also have given full tax credit for education and health expenses plus other ceremonies like birth/marriage and death, since these are part of our cultural roots and civilisational ethos.

But, the cosmopolitan elite, who decide taxes and allocation of savings, may not even know about samskaras of the commoners. The ubiquitous corruption also takes away a substantial portion of household earnings by its minions. The community is alienated from the state and looks upon it as a nuisance for collecting taxes and bribes.

The major equaliser in the Indian situation between the haves and others is education, which has become very expensive in the last two decades. Education of two children and healthcare benefits for the family could take away nearly a quarter of the aggregate life earnings and samskaras take away another quarter. What is left is used for current consumption.

We are talking of the 90% of the households who are not part of the government or private corporate sector, and who have not heard exquisite words like ‘dearness allowance’, ‘pay commission’, ‘perquisites’, reimbursements’, ‘fringe benefit tax’ and ‘ESOPS’.

All savings done by households for education is to enhance the ‘equaliser’ quotient on an inter-generational basis. It is based on the attitude - let my child be, at least in a higher profession, or have larger earnings than me. Hence, any attempt to lure people to ‘shop till you drop’ culture will aggravate social tensions and it is imperative that we stress the traditional virtues of frugality and thrift to safeguard the social cohesion and welfare of families in future.

The Indian housewife has delivered the maximum for the economy. Let us recognise it. We need to urgently look beyond the hackneyed nineteenth century dogmas of ‘socialism’ and ‘market will solve all’ mantra and evolve mechanisms to make our communities solve the problems of education and health using their own phenomenal savings.

vaidya@iimb.ernet.in

The views in this article are the writer’s own and may not reflect those of his organisation or this paper.