Factors Affecting Indian Household Savings
These factors may be behavioral in nature or other types of factors and they impact the household savings in India in a number of ways. According to the Keynesian theory, the principal causal factor of saving is earnings or income and this stood firmly as a proven fact over the passage of time.
At the same time, a number of experiments and observations do not substantiate the capacity of other variable quantities, for example, inflation rate, rate of interest and tax rates regarding the impact on savings.
The factors affecting Indian household savings can be categorized into the following types:
- Interest rates: The financial liberalization that was pioneered in the decade of 1980s got the impetus following the year 1991. Currently, every interest rate excluding that of Provident Fund Plans, Post Office Small Savings Schemes, Bonds issued by the Government of India and Senior Citizen Savings Schemes (that are considered as financial securities with sovereign guarantee) are ascertained by the market. After 1991, there was a stable reduction in the rates of interest in the financial system of India. However, a significant rise was seen in the household savings in terms of the GDP (Gross Domestic Product) in both the periods 2002-2003 and 2003-2004 and this was quite high in comparison to the rate of household savings in the 1980s.
The shift from a protected and ineffective economic system to a market regulated and effective economic system has caused people to feel unsafe and propelled them to gather savings for the purpose of protection from unemployment in the future, regardless of the rates of interest. This unsafe feeling among people has instigated the growth of savings rate. In addition, the retired individuals have realized that since the interest rates have gone down, they should enhance the amount of savings in order to keep the similar range of cash flow. In conclusion, it can be suggested that rates of interest do not impact on household savings to a substantial degree.
- GDP Growth, Economic Liberalization and savings rate: The economic liberalization steps taken in the decade of 1980s (emphasized from the year 1991) had made a significant contribution to the growth rate in GDP (mean growth rate 5.6%) and the rate of savings (17%). This was present in the period 1984-1985 thru 1995-96. From the period of 1996-97 thru 2003-2004, it is noticed that the GDP has kept on increasing, even though at a variable rate, however, the savings rate has kept on increasing on a regular basis free of any variations. This proves the concept that income is the principal deciding factor behind savings and economic liberalization facilitates growth in savings by increasing income. As a matter of fact, from the time India became independent till the mid 1980s, the economy of India was characteristic of a sluggish growth rate of 3.5% every year that has altered from the mid part of the 1980s.
- Income: The increase in GDP (Gross Domestic Product) has resulted in a stable and considerable increase in Gross Domestic Savings. There is a reciprocal relationship between the increase in national savings and the growth in income. This means that the theory of income formulated by Keynes is applicable for India, as well. In addition, permanent income was the crucial deciding element in comparison to transient income. In the earlier phases of growth the degree of income functions as a significant deciding factor about the capability for saving.
- Tax incentives: Till the month of March 2005, the Government of India has rendered a large number of tax incentives. Every tax benefit is accessible from securities supported by the State Guarantee, excluding ICICI Bank. There has been a large extent of investment in this type of securities simply due to the dual benefits of State Cover and evasion of tax. The funds collected by the means of these securities are utilized to compensate the fiscal deficit of the Government of India. The principal objective behind these modifications is to force people regarding retirement savings and make people interested in the direction of stock markets.