Channelising Savings into Investments

A recent report of Parliamentary Standing Committee on Ministry of Statistics and Programme Implementation has worked out the cost of 572 projects, which have been pending across 13 central government ministries, at Rs 7147.13 billion and put the cost overruns at 20.70 per cent with Railway Ministry having the largest number of projects on hold (147 worth Rs 1261.74 billion).

The Standing Committee report once again brings to the fore the issue of governance deficit which has plagued the country since independence. It points towards the sluggish pace at which things move in the central government and the populism streak which makes the ministers announce unviable projects year after year. More than that it points towards the severe dearth of funds, which the Indian economy suffers from. From dedicated freight corridor to metro to rural development etc India looks up to World Bank, Japan or other developed nations for every other infrastructure and social welfare project.

Since the country can increase the current account deficit substantially only at the cost of showing red rag to international rating agencies and investors, clearly there is a need to pump in more domestic savings into investment on infrastructure and poverty alleviation projects. But the sad part is that the percentage of domestic savings in stocks has plummeted to the lowest levels in the last two decades. It was about 20 per cent in early 1990s when India embarked on the process of doing away with license raj. Presently only about 5 per cent of the domestic deposits are channelised into investment.

India can increase current account deficit in the balance of payments, which at present is ‘about 2% to 2.5% sometimes even 3%’ only at the cost of antagonising international rating agencies and investors.

“Household savings in stocks is really minimal. After the Lehman crashed (2008) it fell to as low as 2%. Now it is 5%. What have we been doing in 20 years of financial liberalisation and development? We seem to have had some kind of disintermediation, the savings are not going into investment avenues,” says Ashima Goyal, Professor with Indira Gandhi Institute of Development Research (IGIDR).

Goyal emphasises on improving the saving investment ratio (33:36%) to hike investment into schemes aimed at reducing poverty, malnutrition, MMR (Maternal Mortality Ratio). “The intermediation of savings into investment has to improve. Investment suffers if savings is not available to firms. In India more than 50% of the saving is in physical assets,” she adds seeking focus on infrastructure and pension savings. She applauds Swavalamban scheme under which the government would be putting in some money into whoever opens an NPS (National Pension System) account but regrets that the scheme has been under-publicised.

S S Tarapore, former Deputy Governor, RBI and Distinguished Fellow, Skoch Development Foundation, is sure “India will have to depend essentially on domestic savings to power its growth and will need various corrections in current fiscal monetary policies which do not foster savings.”

Tarapore is concerned that the banks have not been in agreement with the high inflation rate, have not increased interest rates on savings and ignored possible deregulation of the savings bank rate. “I am a little concerned at the tentative response of banks to the possible deregulation of the savings bank rate. If you are serious about financial inclusion how can you countenance banks not paying interest on no frill accounts?” Tarapore asks.

The former Deputy Governor of RBI is emphatic that India can ill-afford to increase current account deficit in the balance of payments which at present is ‘about 2% to 2.5% sometimes even 3%.’ “The question arises why can’t we in India run a current deficit of say 7-8 per cent of the GDP? Let me say this that if India were to try to go illustratively to a figure of 5-7% of the GDP the entire international rating agencies and investors would put out the red signals and they would give flight of capital,” he says. Talking about countries, which are running high current deficits, Tarapore argues that they can afford to do it ‘because their current receipt to GDP ratio or their interface with the world is a lot more.’ “They are kind of export oriented economies which we are not,” he reasons.

Indeed India’s domestic saving vis-à-vis any other markets in the world, are pretty meagre. And they are meagre because the policy makers in the country have failed to push the envelope when it comes to promotion of savings. “If you put the depository participants of NSDL and CSDL together and remove duplication, triplication and quadruplication, probably we have maximum 10-12 million people on a scale of 1.2 billion. We are basically scratching the surface and the fact is we have not even scratched the surface in 136 years,” rues Ashishkumar Chauhan, Deputy CEO, Bombay Stock Exchange (BSE). Since the planners have failed to penetrate the savings, wrong elements have taken over the field. “Since the organising activity is not available, many other types of participants – chit funds and loans against gold etc. – are getting into that taking advantage and actually giving a bad name to investments,” Chauhan points out.

Despite the insurance companies doing a good job in telling people why they should save and invest, the financial services coverage remains limited to a small section of the population. Plus not much has changed in the area of pension and provident fund. “The EPFO still reaches a modest number of account holders working in the organised sector. The new pension scheme has made a small beginning but we have a lot more to do,” claims Ravi Narain, MD & CEO, National Stock Exchange (NSE).

Narain feels there is a need to change attitude as people in India have historically focused either on loans or savings through bank account and not paid enough attention to financial investment products that are central to reducing vulnerability to shocks. “The inability of a household to take risks is a key factor that stops from being able to change jobs, moving to a new place or starting a small business.”
Apparently, the government and financial institutions need to adopt a multi-pronged approach to direct more savings into investments. This would involve education of investors and intermediaries, facilitating their access to financial services and using community-based organisations like Self-Help Groups as a via media between banks and the local population. It would include designing products and practices, which suit our economy and stop worrying about the 3% which we raise through running a current account deficit to cover the savings-investment ratio. At the same time, it would involve creation of proper physical infrastructure.

India’s domestic saving vis-à-vis any other markets in the world, are pretty meagre because the policy makers in the country have failed to push the envelope when it comes to promotion of savings.

India will have to depend essentially on domestic savings to power its growth. We need correction in fiscal monetary policies which do not foster savings.” S S Tarapore, Distinguished Fellow, Skoch Development Foundation

“Financial inclusion in my mind envisages four things, the ability to save money and earn a return above inflation, the ability to get credit when needed and the ability to protect oneself from the risks faced in the course of earning one’s livelihood,” says Narain adding that ‘the most wellunderstood area is physical infrastructure, whether it is road, power, education, healthcare.’ He is sure that creation of access to financial services would be like creating physical infrastructure where there is none.

“Financial inclusion to me means four things, the ability to save money, earn a return above inflation, ability to get credit and ability to protect oneself from the risks.” Ravi Narain, MD & CEO, National Stock Exchange

Narain also emphasises on evolution of products as well as institutions in order to accelerate growth in the pension sector. He is of the view that the micro institutions can be aggregated to foster common man’s access to markets. Raghuram Rajan committee has suggested the creation of tiered structures where local community based organisations will service their communities and in turn have accounts with larger and more conventional institutions. These in turn will use the market to hedge and trade their risk on their balance sheet

“We had a two pronged strategy (for investor awareness seminars). One was investors’ education and the other one was education of the intermediaries.” Gagan Rai, MD & CEO, National Securities Depository Limited

The government and financial institutions need to educate investors and intermediaries, facilitate their access to financial services and use community-based organisations like Self- Help Groups as a via media between banks and the local population.

The education of investors and intermediaries has paid handsome dividends to National Securities Depository Limited (NSDL). The company has attracted over 12 million investors who have opened demat accounts with it. It has so far conducted 1,200 investor awareness seminars, attended by 133,000 people. Presently, the company conducts the seminars in 11 different languages. “This (the awareness seminars) has given us a tremendous growth opportunity and of about 27,900 pin codes in the country we have addresses today where 23,200, i.e., 83 per cent of the pin codes are covered by the demat account holders, which means we are reaching people below poverty line and offering them the facility to invest in the capital market,” claims Gagan Rai, MD & CEO, NSDL. Besides educating investors, training intermediaries, the NSDL also conducts compliance-training programmes for the internal auditors of the Depository Participants.

A big reason for why India needs to push benefits of the financial market to the doorstep of common man at a much faster rate is that the country is going to add 15 million youngsters into the job market every year in next 20 years. Since most of these youngsters would stay in nuclear families, they would need to invest for their old age pensions, for their children’s education, for their health and other activities like housing etc. “We need to go literally 50 to 100 times if we have to cover all these people and that is where we need to have tremendously accelerated programme of creating those people who can actually service the masses,” demands Chauhan.

A good part of the story is that today consumers have access to a wide variety of financial instruments such as shares, bonds, mutual funds, ETFs, commodities, derivatives etc. And the central government has realised the need for removing complexities of financial laws and establishing a standarised regulatory regime. The government has recently set up a financial sector legislative reforms council through which all laws and acts will be analysed which will help simplify laws thereby creating a rather conducive environment for investors.