To the individual and the households financial stability and prosperity are represented by a steady inflow of recurring income. Part of the income so earned could be saved and retained as permenant wealth. Traditional sources of investment are acquisition of immovable property, gold, cattle etc. But the modern world has introduced several new types of investment-products to boost savings, like stock exchange securities, bank deposits and insurance policies, mutual fund investments etc. The features of a good investment are security, liquidity, value appreciation and generating a regular and assured income. A prudent investor diversifies his investments, to eliminate possible risks. The dictum is "do not keep all eggs in a single basket".

To a corporate entity however financial strength is represented by the capital it employs and the cash flow it generates. What is wealth to an individual is Capital to the Corporate body, and income to the individual is represented by turn-over (cash flow) and profits generated therefrom. From where does the corporate entity source its capital. It is gathered from the savings invested by individuals and households. Savings therefore underlie the nucleus for economic growth, development and prosperity. Savings are generated mostly by households and individuals, it is invested and turned into capital and capital is employed by the Corporate sector. It is function of the money market and capital/debt markets to transform savings of households as capital for productive enterprises operated by corporate entities.

From A research Paper on Savings

"The concept of saving plays an important role in economic analysis. Saving is defined as the difference between income and consumption. During pre-Independence period in India, people spent most of their income on consumption and only a small amount of income was left in the form of saving. As a result the saving rate was very low, specially in the rural sector. Since the attainment of Independence in 1947, the major objective of the government policy has been the promotion of saving and capital formation as they are the primary instruments of economic growth. Increase in the savings, use of increased saving for financing the increasing required investment, use of the increased investment for increasing savings, and use of the increased savings for a further financing the required investment constitute the strategy of economic growth. This process may continue till saving, investment ratio to income would get stabilized and there would be steady and self-sustained increases in national income and economic welfare. Several empirical studies have found that the rapid development of the western economies was the result of an increasing rate of investment. And the increase in the rate of investment was made possible by way of an almost proportionate rise in the rate of saving. Saving is therefore, the key factor in achieving a high rate of investment."

What is capital? Savings generate investment. Investment in turn create capital. Capital can be used by the same person, who has accumulated and created it, or it can be hired/lent to others. Normally assets at your disposal are suited for a single-time use or application. If you have an apple in your hands, the minute you start biting it and enjoying it, the apple is no longer there. But wealth or capital represents assets that are put to repeated use. The residential flat you own and live in is a capital-asset that you have created for you and your family through your savings and investment. The house will be there for ever unless you sell it. After your demise your children could live in the same house.

Capital is a factor of production, along with the other factors namely Land, Labour, and Entrepreneurship (also called 'management'). It can generate value by co-acting with other factors of production and yield rent, wages, profit or interest. All these are lessons in primary economics that we studied long back in our schools and colleges.

But capital has a two dimensional countenance, i.e. one to the owner or creator of capital and the other to the hirer or user of capital. The owner is the person who generates Capital for investment. As far he is concerned capital is not a factor of production. He merely identifies it as his savings or wealth. Capital/wealth in this context represents deferred consumption, unspent current earnings kept by way of a provision or a source of sustenence for a rainy day. However to the hirer or user of capital, it is an indispensable factor of production. The characteristic of savings is to increment itself. We have studied the time value of money. A hundred rupees you save today is worth more than a Rs.100 next year. Thus a sizeable savings made by a person yields him if wisely invested, a steady additional income regularly in the future. This is called the cumulative growth of savings.

As in the case of the individual, a nation does not consume all the goods and other materials it produces in a year or over a span of time. After meeting the demands of consumption of its citizens, the country carries forward a net surplus out of the economic wealth it has created in the current time. This represents the savings of the country. India has the reputation of being a country generating a very high rate of domestic savings . Around 23% to 25% of our GDP is retained byway of savings every year. The bulk of the savings are by individuals and households. Thus there are several millions of individuals who save and accumulate capital to retain with themselves. Industrialists and businessmen particularly in the large and medium sector on the other hand need huge capital for their productive enterprises. By themselves they cannot save or accumulate all the capital needed by them. How the savings of millions of individuals and others flow to the meet the demands of the capital seekers is explained by studying the functions of the organised money market and capital market (equity & debt market). Let us now turn to discussing more about savings and investments relating to our country.

A country with a developing economy cannot depend exclusively on its domestic savings alone to fuel its economy's rapid growth. The domestic savings of India is 25% of its GDP. But this can provide only a 2 to 3% growth of its economy on annual basis. The country has to maintain a 8 to 10% growth for a period of two decades to reach the level of advanced nations and to wipe out widespread poverty of its people. The gap is to be covered by inflow of foreign investment along with advanced technology.

Pattern of Savings in India in Recent Years

In India domestic savings originate from three principal sectors namely:

1. household sector: The household sector comprises of individual, non-corporate business and private collectives like temples, educational institutions and charitable foundations. The saving can be held in the form of increases in (a) Liquid assets like currency bank deposits and gold (b) Financial assets like shares, securities and insurance policies and physical assets.
2. the private corporate sector: The corporate sector includes joint stock companies in the private business sector, industrial credit and investment corporation etc., and cooperative institutions. Saving of the corporate sector is represented by the retained earning of this sector.
3. Public sector: Government sector consists of the central and state government, the local authorities and various government and department undertakings, hence the saving of this sector relates to the budgetary surplus on current account of the central government, state government, local authorities, the current surplus of various government departments and retained projects of government undertakings.

The proportion of these three components of National saving throw more light on the structure of saving in India. The table given below provides the figure of sector wise saving in India in the year 1980-81 to 1998-99

Volume of Savings in India (at current price) (Amount in Crores)

Sector	1980-81	%-age	1990-91	%-age	1998-99	%-age
Household saving	21848	75.9	109623	84.4	325456	82.7
Private saving	2284	8.0	14940	11.5	67573	17.2
Public saving	4654	16.2	5436	4.2	572	0.15
Total saving	28786	100.0	129999	100.0	393601	100.0

Source: Economic Survey 1999-2000

The above table reveals that household sector saving provides the bulk of national saving. The share of total household saving to total National saving is more than three quarters. It does further suggest that the public sector saving rate declined but the corporate saving rate improved. This declining trend of public sector saving rate is due to negative saving of government administration. a decline in public savings was attributed to poor performance of government non-statutory corporations, mounting government employment and wage bill and rising trend in government purchases of goods and services. The private corporate saving rate was very low during eighties. The dampened saving impulse was owing to the growth in consumerism. It also pointed out that the low private corporate saving was due to the typical behaviour of the India corporate sector relying more on borrowed funds as against owned funds. Private corporate saving has shown a steady increase over the last two decades. This was due to liberalized environment. In the liberalized environment with increased internal and foreign competition as well as foreign direct investment in various sectors, the profits of corporate sector have been high leading to increased saving.

The statistics furnished in the Economic Survey for the year 2002-03 published with the Union Budget for the year 2003-04 gives the following picture with reference to savings, investment & capital formation.

In 2001-02, gross and net domestic savings at current prices, grew by 11.8 percent and 13.3 percent respectively, to increase their share in GDP at market prices. Gross (net) domestic savings, as a proportion of GDP (NNP) at market prices, improved to 24.0 (16.0) percent in 2001-02, from 23.4 (15.4) percent in 2000-01. The household sector was once again the best performer, with the increase in its gross savings exceeding the total increase in gross domestic savings. Households increased the share of financial savings in their total savings from 48.0 percent in 2000-01 to 49.8 percent in 2001-02. Private corporate savings increased roughly at half the rate of increase of household savings. The public sector not only continued to be a net dis-saver, but it increased its dissavings by nearly Rs 10,000 crore. The departmental enterprises became net dis-savers in 2001-02. The increased savings by non-departmental enterprises were more than neutralized by the increased net dissavings of government administration.

Gross domestic capital formation at constant prices grew at 3.0 percent in 2001-02, which was considerably lower than the growth of GDP. At current prices, gross capital formation constituted 23.7 percent of GDP in 2001-02, which was slightly lower than the share of 24.0 percent observed in 2000-01, and 25.2 percent observed in 1999-2000.

From the foregoing it will be clear that despite having a good savings rate, the Indian economy cannot sustain a higher rate growth and it needs much larger growth of Investments and capital formation.

As per the Development Goals and Strategy of the 10th Plan, which was recently finalised

The strategy to achieve a high annual growth target of 8.00% combines accelerated capital accumulation to raise the average investment rate from 24.23% to 28.41% with an increase in capital-use efficiency to reduce the ratio of incremental capital to output from 4.00 to about 3.55. Private sector development, infrastructure development, and increased foreign investment and trade are key to increasing efficiency

Indians are wise savers but poor investors

A recent nationwide survey of over 60,000 households by National Council of Applied Economic Research (NCAER), New Delhi and Max New York Life has revealed that people in India do not plan for long-term future and keep away from investing in long-term instruments though they save for long-term goals such as emergencies, education and old age.

The book, 'How India Earns, Spends and Saves' launched by Deputy Chairman, Planning Commission, Government of India, Montek Singh Ahluwalia, Feb. 6, which contains the findings of the survey, reveals that this phenomena is not just confined to just poor or middleclass households, but is prevalent in rich households too.

The survey reveals that most Indians prefer keeping 65 percent of their savings in liquid assets like bank or post office deposits and cash at home, while investing 23 percent in physical investments like real estate and gold and only 12 percent in financial instruments.

For getting secure return on their earning, 51 percent of Indians put their savings in the banks while 36 percent of households still prefer to keep cash at home. The investment in post offices and other guaranteed return schemes and plans gets minor part of total savings. Only 5 percent of family put their money in post offices, while 2 percent buy insurance policies and 0.5 percent invests in equities.

Interestingly, though life insurance is among the most popular financial instruments (about 78 percent of the households are aware of life insurance), yet only 24 percent of households have a life insurance policy. The ownership is 38 percent among urban households but a low 19 percent among rural households.

The survey, which covered 342 towns and almost 2,000 villages across 250 districts and 2,255 wards, suggests that Indian households have a strong saving habit. While income level is an important factor in influencing the saving patterns of households, variations in savings behavior are equally decided by education level and occupation, said Dr. Rajesh Shukla, principal author of the report and Senior Fellow at NCAER.

According to the study, 83 percent of the households surveyed saved for emergency, while children's education (81 percent) was the other key priority. While only 69 percent households saved for old-age financial security, 63 percent households said they kept aside money to meet future expenses like marriage, births and other social ceremonies.

The study also notes that nearly 47 percent households saved to buy or build a house and a similar percentage saved to improve or enlarge their business. Only 22 percent households saved to buy consumer durable and 18 percent for meeting expenses towards gifts, donation or pilgrimage.

The survey findings confirm the wide disparity between urban and rural people. On an average, the urban Indian earns 85 percent higher than his or her rural counterpart, spends 71 percent more and saves nearly double - Rs.26,762 compared with Rs.11,613 - every year. According to the survey, a person's occupation, education, age, location and landholding directly influence his or her income. Households with graduates earn 3.5 times more than those with illiterate ones, and incomes nearly double between the ages of 25 and 66. While salaried class households, which constitute only 18 percent of the total households in the country "accounted for greatest proportion of savings" and are the cream of urban India, agriculturists with land are the richest in rural areas. Wage laborers are the poorest anywhere, comprising 62 percent of the lowest-income households.

"The highest savings (in terms of per household) are in the 56-65 age group where savings are Rs.21,196 per household, or 25 percent of the annual income," the study notes. The two main factors responsible for higher savings with growing age, according to the survey, are motivation to save and the need to meet old-age requirements. The survey also suggests a direct link between the education and savings by pointing out that households headed by graduates had highest level of savings in both absolute terms and as a percentage of income.

The survey notes that households managed by persons in 56-65 age group, kept bulk (57 percent) of their savings in liquid assets, though they also invested the surplus funds in shares and debentures.

Interestingly, the survey reveals that the households headed by persons in the age group of 26-35 years, paid more insurance premium than their senior counterparts. Households headed by graduates spent more on buying insurance around 10.2 percent, while merely 3.5 percent preferred investing in shares or debentures, the survey says. "Indians prefer to save money in 'in-house savings' rather than 'in banks or investment.' They save money for emergency and any mishappening," the study notes.

The reason behind this is because unlike in the western and developed countries, which have the system of social security that prevents the poor households from starvation and ill-social society by giving social protection and economic support, "there is no social security in the country (India) for the citizens of the nation," the study explained.

The sample size included 63,016 households, equally divided between rural and urban areas. "The habit of savings is good, but the way of savings are not good enough as only a meagre part of total savings come under the government account that is not enough to conduct various plans properly," said Ahluwalia, commenting on the survey results.

The survey also reveals that 96 percent of the households cannot survive beyond a year on their current savings in case of loss of income due to some eventuality such as death or disability of the chief earner. However, a majority of those surveyed expressed confidence in their financial well-being. Lack of awareness of their financial preparedness for income loss predicated their ignorance of the more viable channels for long-term investment. "It is high time we must encourage savings among the people. We must encourage contractual savings in the form of provident funds or any other such modes," Ahluwalia said.

"Insurance is the vehicle of savings," he added.

However, experts claim that government's policy of providing incentives for long-term savings is inadequate and hence, Indians lack appetite for long-term investment.

"The current tax incentives do not encourage individuals to keep saving for 15-20 years as the tax benefits they get from a more flexible 1-2 years (investment in tax-saving mutual funds or bank fixed deposits) are just as attractive. Hence, we see millions investing for horizons of a few months or at best a few years, but rarely for their own golden years. Those who save more than the Rs.1 lakh limit are effectively taxed at both the entry and exit stages," explained Shikha Sharma, managing director and CEO, ICICI Prudential Life, the largest private-sector player in the Indian insurance market.

According to Sharma, a separate and additional ring-fenced limit of Rs.1 lakh for long-term savings, particularly pensions, should be introduced.

Her views are shared by Aviva India's managing director, Bert Paterson. "We recommend a separate limit for deductions under Section 80C for long-term saving instruments like life insurance. The government should look at encouraging people to save for the long term," Paterson said.

According to Paterson, tax benefits on pensions and long-term savings need to be increased. The world over, he said, the development of long term saving instruments has been supported by tax exemptions. "In India if the government does not offer a separate tax benefit for pension investments of up to Rs.1 lakh, the salaried sections will be hit badly as the corpus on retirement will be insufficient," Paterson said.

"Financial security is an essential element of inclusive growth. In a more dynamic labor market and in the absence of established state-provided mechanisms of social security, households in India increasingly need to look to financial instruments to meet their asset accumulation and old-age goals," said Suman Bery, Director-General, NCAER. "Yet the pattern of financial asset accumulation is relatively primitive indicating a need for much greater awareness of the role that specific financial instruments can play in reducing financial vulnerability and enhancing financial security."

"There is an urgent need for a financial literacy program to make people understand their options and financial needs at different life stages," said Analjit Singh, Chairman, Max India Ltd, commenting on the solutions for financial protection to meet both long-term financial needs and loss of main source of income. "Life insurance is one of the most important financial instruments for financial security. In the rapidly changing Indian economic and social environment, life insurance products sold appropriately to the consumers not only create awareness of the changing reality but also help reduce their vulnerability and overall improve the long-term financial security of the individual, the family and thereby the nation." "Understanding household saving is of importance for several reasons. At the national level, household savings provide the main source of investment financing both for government and for the corporate sector. Rapid GDP growth leads to rising household income and higher saving rates. This is true for India as it has been elsewhere in Asia," a press release stated.

Long-term goals, notably financial security. Accordingly, the main goal of the Max New York Life-NCAER survey is to gain deeper insight into the motives for financial saving, the degree of financial security (or vulnerability) of Indian households, and the degree of sophistication that households bring to bear in their saving and investment decisions," it said.

Source: http://www.ibtimes.com/articles/20080211/indian-investment.htm

China, India Savings May Help Asia Outperform Emerging Markets

Of this 30%, Indian household savings comprise about 25% with the remaining 5% being private corporate savings.

Asian financial markets led by China, India and Malaysia are likely to outperform other developing nations as higher savings help borrowers to weather the global economic slump, according to Bank of America Corp. analysts.

Chinese domestic savings total more than 45 percent of gross domestic product, supporting economic growth, Lawrence Goodman, head of emerging-market strategy at Bank of America in New York, wrote in a research note. Malaysia and India have private saving rates above 30 percent, he said.

Source: http://induslatin.com/2008/11/07/china-india-savings-may-help-asia-outperform-emerging-markets/

Higher savings, investment push India

Global emerging economies are experiencing record savings at a time when the developed world has been witnessing a decline in gross domestic saving rates. What's more, these savings are finding their way into capital investments, having a positive impact on the investment climate in countries like India and China.

The majority of emerging economies have higher gross domestic saving and gross capital formation rates compared with their developed counterparts. Higher savings and investment rates eventually help in boosting GDP. This is perhaps another reason why GDP is growing faster in the emerging world than in the developed world.

Data points to the fact that higher savings rates play a key role in boosting the investment climate in a country. Y-oy increments in aggregate savings help in providing capital to a country. This higher capital directly boosts investment activity. The banking sector is playing a key role in channelling household savings to investment projects.

A clear example of it is the recent growth in non-food credit in the country, which recorded 34% y-o-y increase in the current year so far.

Countries like the US, UK, and the EU have seen a major shift in their structure of national savings. For instance, almost two-thirds of the fall in savings rate in the developed world has been due to a fall in household and public savings. On the other hand, much of emerging Asia's saving rates have been driven by increases in both household and public saving rates.

India's household savings have grown considerably while China's growth in public savings has been significant. An IMF report found that a 1% increase in savings leads to a 0.85% increase in gross domestic saving as a per cent of GDP. The population demographics in India and most emerging economies is another reason for the recent trend in higher savings.

The majority of India's population is young and has a greater incentive to save compared to retired people who have a much lower incentive to save. This kind of behaviour is consistent with the Modigliani life cycle hypothesis. The hypothesis states that there will be little saving in early adult life, high saving at the middle and end of working life, and then negative saving after retirement.

It is important to note that a large chunk of the population in developed countries is close to the retirement age, and has a lesser incentive to save. An IMF research paper found that a 1% increase in the elderly-dependency ratio in industrial countries would over time reduce savings by about 1.5% of GDP. This is proof of the role of demographics in the aggregate saving behaviour in a country.

http://www.articlearchives.com/economy-economic-indicators/economic-indicators-gross/1861561-1.html

Survey Shows Gender Divide In Savings Habits

Female-headed households in urban sector have a better track record of savings than the households headed by males. However, the trend is reverse in rural areas where male-headed households are more inclined to savings, says a study, “Household savings and investment behaviour in India”, conducted jointly by the National Council of Applied Economic Research (NCAER) and Economic and Political Weekly Research Foundation.

Talking to FE, Dr Basanta K Pradhan, project director and chief economist, said, “survey has revealed that poor people also save, the general perception about their income and spending habits notwithstanding”. The other important finding of the study, he said, was that interest rate variations on the savings instruments do not influence savings. This also explains why persistent lowering of coupon rates on small savings instruments over the years was not having any impact on growth in savings.

The study, which is based on 1994-95 data, also points out that gold and jewellery is the preferred mode of investment/saving in rural areas, especially among the high-end savers.

Their urban counterparts, however, prefer consumer durables over jewellery. At the all India level, the high-end savers have more liking for gold and jewellery as compared to consumer durables.

Revealing its findings on gender differentiation, the study said 7 per cent of households in rural as well as urban areas are managed by females. The rate of savings of the female-headed households at all India level was found to be marginally higher than male-headed households savings rate. The interesting aspect of the finding was divergent pattern witnessed in rural and urban areas. According to the study, “the average income, savings per household and rate of savings were much lower in rural areas for the female-headed households and an exactly opposite trend was found in urban areas.”

More than 50 per cent of the households headed by females in urban areas were engaged in salary-earning whereas, in rural areas, a majority of female-headed households were wage earners. This, according to study, explains the differential savings rate.

The study also points out that per capita income of female-headed households was higher than male-headed households both in rural and urban areas due to lower family size of female-headed households. The per capita savings of female-headed households was higher by 29.7 per cent at all India level corresponding to 21.2 per cent in per capita income as compared to male-headed households.

Source: The Indian Express