Moneycontrol PRO

Fall in household savings due to investment in gold: PMEAC

The sharp drop in net financial savings of households is linked to enormous increase in the import of gold says the PMEAC report.

April 24, 2013 / 09:45 AM IST

Moneycontrol Bureau

India's domestic savings rate for 2012-13 could be around 30.8 percent of GDP, the same level as it was in the previous fiscal, says the Prime Minister's Economic Advisory Council’s report reviewing the economy's performance in 2012-13.

After touching a peak of 36.8 percent in 2007-08, India’s domestic savings rate has been steadily declining, with fall in net financial savings of households being one of the key factors. Net financial savings of households is now down around 8 percent from 11-12 percent in the years prior to FY11.

"The sharp drop in net financial savings of households is linked to another unfortunate development, which is the enormous increase in the import of gold," said the PMEAC report. However, the report makes no mention of high inflation as being one of the causes.

The following extracts from the PMEAC report explains how gold is responsible for a decline in the domestic savings rate, which is the sum total of government savings, private sector savings and household savings.

"When a household buys gold, it reduces its financial assets (bank deposit, cash in hand etc.) and since the product is imported, the payment eventually leaves the country, leading to an export of a potential financial saving.  If instead of buying gold, the household exchanges its cash for financial assets like a bank deposit, insurance policy, mutual fund, bond, share or real estate, (a) financial resources remain in circulation within the economy, and (b) the asset is included as part of domestic savings and to that extent enhances domestic capital formation.

The fall in the net financial savings of households from 11–12 per cent in years prior to 2010-11 to a mere 8 per cent in 2011-12 and 2012-13 is an outcome of the deployment of financial savings into investment in gold. This reduces the domestic financial resources available for supporting capital formation at home, while at the same time increasing the merchandise trade and current account deficits."

first published: Apr 23, 2013 01:09 pm