Chennai: Over the last decade, equity participation and SIP investments in mutual funds by retail investors have surged from around 3% to nearly 15-20% of Gross National Disposable Income (GNDI). The stock markets have also been on a bull run for much of the past decade. Yet, net household financial savings have declined from about 7.9% of GNDI in FY16 to 5.8% in FY24. Sachin Sawrikar, Managing Partner, Artha Bharat Investment Managers finds that the removal of Section 80C income tax deduction for Public Provident Fund (PPF) and National Savings Certificate (NSC) under the new tax regime, rationalisation of income tax and GST rates have given more focus on credit-fuelled consumption. The consequent drop in savings raises concerns not only for households but for the durable economic growth of the country.
India has witnessed a spectacular rise in stock market participation, SIP investments and mutual fund ownership over the last decade. Yet net household financial savings are lower than what they were a decade ago. How do you explain this apparent contradiction?
It looks like a contradiction because two things are happening at the same time. Households are putting more money into equities and mutual funds, which is a very positive development. At the same time, they are borrowing more through personal loans and housing loans. When these two trends are combined, the net household saving rate appears lower even though people are investing more actively. Another important factor is the change in taxation policy with the introduction of the new tax regime. Earlier, under Section 80C, almost everybody invested up to ₹1.5 lakh in tax-saving instruments to claim deductions. That created a universal savings habit. The new tax regime has several advantages, but it removed this incentive without replacing it with anything equivalent. The result is that consumption has received a boost, but the habit of compulsory saving has weakened. If you look at PPF, NSCs and other tax-saving instruments, both the number of subscribers and the amount mobilised have declined. We are not encouraging the younger generation to develop the habit of long-term saving, and that is something policymakers need to revisit.
People earlier invested in PPF and life insurance mainly for tax deductions. Since tax incentives are no longer as significant under the new tax regime, has this affected life insurance purchases as well?
To some extent, yes. Personally, I never considered Section 80C to be the most efficient way of saving, but it was universal and encouraged disciplined investing. As far as insurance is concerned, I do not recommend insurance products that combine savings and protection. People should ideally buy pure term insurance that protects the family’s financial future in case something happens to the earning member. In that sense, it is actually a positive trend if people are moving away from savings-linked insurance products and investing more through mutual funds, which are generally a more efficient avenue for wealth creation.
Household liabilities have risen sharply over the past decade. Is India’s growth increasingly becoming credit-fuelled rather than income-led, and is that a concern?
Yes, this deserves much greater attention from policymakers. India’s household debt-to-GDP ratio has increased from around 20% to nearly 45%, which is a substantial jump. That increase in borrowing is supporting consumption-led growth. Even in the United States, GDP growth is largely driven by consumption, supported by housing loans, credit cards and personal loans. India appears to be moving in that direction. While financial savings remain sizeable in absolute terms, net household financial savings have declined significantly, and that should concern everyone. For sustainable long-term growth, an economy needs strong household savings. Borrowing can support consumption, but savings remain equally important because they provide the capital required for investment and future growth.
Bank deposits have fallen from nearly 50% of GNDI to around 35%. Does this pose risks for households and for the banking system’s ability to fund credit growth?
The banking sector is certainly being affected, but banks also need to innovate. Deposits earning 6-7% interest are no longer viewed as an efficient savings option by many investors. Banks therefore need to create more attractive products, including structured deposits and other savings instruments. As people increasingly allocate money to SIPs and other investment products, banks will have to adapt. They also need to expand more aggressively into Tier-II and Tier-III cities, where households still have a stronger preference for fixed deposits than investors in metro cities. Investment behaviour is changing, and banks must realign themselves accordingly.
Could this eventually affect banks’ ability to finance credit growth?
Banks will eventually adapt because we have seen similar transitions globally. They may have to offer higher returns to attract deposits, which could compress their net interest margins. That means banks will need to become more productive and improve operational efficiency to maintain profitability. Indian banks have historically benefited from very high CASA ratios, giving them access to relatively inexpensive funds. That advantage may gradually decline as investors become more financially aware and allocate their money more efficiently. Banks therefore need to make themselves more attractive to ensure deposits continue to flow into the system.
SIP investments have grown significantly over the past few years. Does this indicate that household wealth is rising meaningfully?
Headline SIP numbers are certainly encouraging, and I am happy to see that. However, another aspect often goes unnoticed. A large number of investors discontinue their SIPs. In several months, particularly around March and April, the number of SIPs being stopped can exceed the number of new SIPs being started. Many investors begin with a one-year commitment and fail to continue. For wealth creation, what matters is consistency over a long period. Moreover, the average assets under management per investor are still relatively small and not yet large enough to make a meaningful difference to household wealth. Sustained investing is the key.
India wants to maintain GDP growth of around 7-8% in the coming years. How important are household savings in financing this growth?
They are extremely important. To sustain this level of economic growth, India’s savings rate should ideally be around 35% of GDP. Currently, it has fallen closer to 30%, and policymakers need to focus on improving it. While greater participation in equities is positive, the government also benefited earlier from savings instruments such as PPF and NSC, which provided an important source of long-term funds. If those collections decline, the government has to borrow more from the market. Increased government borrowing can crowd out private investment. Even within companies, we see younger employees increasingly opting out of provident fund contributions because they do not perceive immediate benefits. Earlier, almost everyone participated because tax incentives encouraged long-term savings. Tax benefits remain an important driver of household saving behaviour.
Does the government need to introduce more savings instruments, particularly for younger investors?
Yes, but the key challenge is making those instruments attractive. Today, PPF and provident fund offer returns of around 7-8%, comparable to bank deposits. Young investors increasingly aspire for equity-like returns of 12-15%. The question is how to encourage them to invest in long-term savings instruments despite these expectations. PPF offers a 15-year horizon, while provident fund effectively runs until retirement. These are exactly the kinds of long-term savings vehicles that strengthen both households and the broader economy.
Are there successful international examples of encouraging long-term savings?
Yes. In the United States, for example, there is the 401(k) retirement savings system. Virtually every long-term savings product there carries tax incentives. Even in a highly taxed economy like the US, the government continues to provide tax benefits for retirement savings. While simplifying the tax regime and encouraging consumption are valid policy objectives, savings are equally important. Long-term savings cannot be encouraged unless investors receive meaningful incentives.
Looking ahead to 2030, what worries you more—a slowdown in household savings or a slowdown in consumption?
Without any doubt, it is the decline in savings. If consumption slows, governments have several policy tools. They can increase public expenditure, build infrastructure or introduce stimulus measures to revive demand. But if household savings continue to decline, replacing those savings becomes much more difficult. Savings provide the foundation for sustainable economic growth. Current data should be treated as an early warning. We have not yet reached a crisis, but the decline in savings is significant enough to deserve immediate attention.
How can India strike a balance between promoting financialisation through equities while also encouraging long-term savings?
These objectives are not naturally in conflict. The problem is that policy changes have encouraged investors to move almost entirely towards SIPs. India’s overall savings pool remains broadly similar, growing mainly as more people enter the workforce. The timing is important. The sharp increase in SIP investments coincided with the removal of Section 80C incentives. While some of that money has moved into equities, a substantial portion has also gone towards consumption. GST collections clearly indicate stronger consumption. The government simultaneously reduced tax-saving incentives, rationalised income tax rates and lowered GST on several consumption items. Together, these measures made consumption relatively more attractive than saving. The concern is that once people lose the habit of compulsory saving, rebuilding that discipline becomes extremely difficult. Earlier, tax-saving instruments effectively delivered much higher post-tax returns. Someone in the highest tax bracket effectively earned an 11-12% tax-free return after considering the tax savings, even though the stated interest rate was around 8%. Such policy incentives need to be reconsidered.
Equity markets are inherently cyclical. If markets correct after a prolonged bull run, could investors move away from equities?
Market cycles are inevitable, but over the long term equities have historically generated higher returns than most alternative investments. That is why investors need to continue their SIPs even during periods of market weakness. As India’s economy grows and household wealth expands, investors will naturally diversify internationally, just as investors in developed economies have done. At present, Indians spend roughly $30-35 billion annually under the Liberalised Remittance Scheme, but only about $3-5 billion goes into overseas investments. Most of the money is spent on travel, education and healthcare. Over time, international investments are also likely to become a more significant component of household portfolios.
Household savings are not just important for individual financial security; they are equally critical for the country’s long-term economic growth. While the financialisation of savings through mutual funds is a positive structural trend, sustaining long-term household savings remains essential for financing investment, supporting government borrowing without crowding out private capital, and ensuring durable economic growth.
Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: deccanchronicle.com
