New Delhi: Household and private sector savings are important for any healthy economy, but what exactly drives these savings in India? A research paper published last week found empirical evidence for what may seem like common sense to answer – savings are primarily affected by inflation and access to banking.
for them StudyPublished in Peer-Reviewed Journal International Review of Economics and Finance, Researchers Soumya Kanti Ghosh, chief economist at State Bank of India, and Hiranya K Nath of Sam Houston State University in Texas, USA, analyzed 50 years of India’s macroeconomic, demographic, financial and external sector (exports and imports) data . ,
They analyzed data from 1960 to 2016, which showed that real per capita income – or income on an inflation-adjusted basis – and access to banking facilities are the most important determinants of savings in India. Saving is defined as the amount of income left over after consumption expenditure.
Through their analysis of these data, the scholars reached three important conclusions.
One is that an increase in real per capita income leads to an increase in household and personal savings – essentially, as people earn more in real terms, they save more.
The second is that inflation reduces both household and private savings. And the third finding is that access to banking is a strong determinant of household and personal savings in the long and short run.
“These results suggest that policies intended to raise per capita income, lower inflation rates and increase access to banking will go a long way in increasing private savings in India,” the paper said.
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How Income and Inflation Affect Savings
According to the study, per capita income plays an important role in driving private savings in the long run.
The authors write that a one percent increase in per capita income leads to a 0.37 percent increase in the private savings rate over the long run.
The researchers found that higher income can boost savings even in the short term.
“Even in the short run, the effect of change in per capita income on change in the savings rate is positive and statistically significant. Thus, in India, an increase in current income is important for higher private savings,” the report read.
However, the study also revealed a negative relationship between savings and inflation in India.
The authors noted that a 1 percentage-point increase in inflation resulted in a 1.23 percentage-point decrease in the private savings rate in the long run. The assumption here, of course, is that all other factors remain the same, or what is called ceteris paribus,
The authors cite two possible hypotheses to explain the inflation-saving relationship. One is that people are trying to maintain their current spending levels amid rising prices, and the other is uncertainty about the future value of their current assets.
“It appears that as inflation rises, people stop saving in order to maintain a certain level of spending,” the paper said. “It may also indicate that higher inflation creates uncertainty about the future value of accumulated savings and lowers the expected rate of return on savings and thus people save less.”
The study found that as the “dependency ratio” increases, the rate of savings also decreases. This ratio represents the proportion of dependents, such as children and senior citizens, compared to the working-age population.
The report states, “These results suggest that as the number of young and older people increases relative to the working-age population, the latter group has to spend more to support the larger dependent population, Which reduces their savings. “Can leave little room with less flexibility to mobilize resources over shorter time horizons but to spend more of their income on those dependent groups.”
Similarly, studies have shown that bank density – the number of banks available per person – is inversely related to savings. That is, a large number of individuals per bank usually leads to a reduction in savings, while a higher density of banks per unit of population increases savings.
Why does savings matter?
The importance of savings lies in their ability to spur investment in the economy.
When people set aside money to increase its value, they contribute to the creation of wealth, ultimately improving the lives of more people.
The study acknowledged that post-liberalisation, India has seen a steady increase in per capita income since 1993 and that the historic move to open up banks in both rural and urban India may be responsible for increasing bank access.
In their policy recommendations, the authors said that macroeconomic policies aimed at increasing productivity, reducing inflation and increasing real income can help raise the savings rate in India. He also said that policies that facilitate “spread of banking” will “help in mobilizing savings”.
(Edited by Asawari Singh)