Savings - Saving and Financial Intermediation, Indian Financial System B Com Notes | EduRev

Indian Financial System

B Com : Savings - Saving and Financial Intermediation, Indian Financial System B Com Notes | EduRev

The document Savings - Saving and Financial Intermediation, Indian Financial System B Com Notes | EduRev is a part of the B Com Course Indian Financial System.
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A higher domestic saving rate makes larger investment possible in an economy and hence is a necessary condition for economic development. Also, in an open economy framework, domestic savings are supplemented by foreign savings.

Since foreign savings may imply liability to the domestic economy, it is necessary that domestic savings rates should be increased and resort to foreign savings should be minimised. Experiences indicate that a saving rate of up to 20 per cent is essential for any economy to achieve a respectable growth rate.

Rate of Saving:

Rate of saving is measured as a proportion of GDP at market prices. The rate of saving in India in 1950-51 was 10.2 per cent of the GDP. Over the next twenty years, its trend varied marginally, to touch a rate of 16.3 per cent in the year 1972-73. During the decade of 1970s, there was a significant improvement in the savings rate which rose to 26.0 per cent in 1979-80. In light of this, the late 1970s was referred to as the golden era in the Indian savings scene.

These rates of saving were not, however, sustained as it dropped substantially during the 1980s: it fell to 18.2 per cent in 1984-85. In the subsequent years, although it recovered somewhat to reach 22 per cent in 1992-93 arid reached its late 1980s level of 26.9 per cent in 1995-96, it declined again to below 25 per cent mark in late 1990s. The saving rate began to increase steadily in the 2000s with the Tenth Plan average (for 2002-07) registering 31.4 per cent.

The growth in saving is attributed to factors like:

i. Rising per capita income;
ii. Continued deepening of the financial system; and
iii. The diminishing share of agriculture in GDP.

Table 5.1: Rate of Gross Domestic Savings:

Savings - Saving and Financial Intermediation, Indian Financial System B Com Notes | EduRev

Sectoral Composition of Saving:

Domestic savings accrue from three sectors, viz.

i. Government or public sector
ii. Private corporate sector
iii. The household sector

The public sector includes government administration, departmental undertakings, government companies and statutory corporations. The private corporate sector comprises of non-government non-financial corporate enterprise. The rest is termed household sector. Thus, the household sector, being residual in character, includes a host of economic agents who engage in production/consumption activity as shown in Table 5.2 below.

Among the three sectors, as in most other countries, the household sector in India too contributes the bulk-more than two-third of the total savings. The government sector and the corporate sector contribute the balance, i.e. about one-third of total saving in the country.

Savings - Saving and Financial Intermediation, Indian Financial System B Com Notes | EduRev
Savings - Saving and Financial Intermediation, Indian Financial System B Com Notes | EduRev

Source of savings:

Main sources of savings in India are as follows:

(1) Household Savings:

The household sector is the largest contributor to domestic saving. It is important as it reflects how efficiently savings are converted into investment with the role of financial sector’s intermediation in the process. These sectors include the saving of:

(a) Households (families),
(b) non-Profit institutions like collage, hospitals, etc., and
(c) non-corporate business unit.

Household savings can be divided into three parts, as follows:

(a) Physical Assets:

The physical assets include housing, machinery, furniture, fixture and real estate.

(b) Financial Assets:

This takes the form of currency, bank deposits, shares and debentures, claims on government, mutual funds, national savings certificates, life insurance funds and provident and pension funds.

(c) The Unaccounted Savings of the Household Sector:

The unaccounted savings of the household sector are always kept in the form of gold, silver and durable goods on which information is very scanty. However, on the basis of estimates the proportion of these assets is placed in a range of 3 to 10 per cent of the GNP in any year.

(2) Government Savings:

Government savings come from surpluses of public enterprises and other public financial institutions. Government savings formed 7.4 per cent of GDP in the economy in the year 2008-09, which increased to 8.2 per cent in 2009-2010. Since then there has been a steady decline in government savings which touched 7.9 per cent in 2010-11.

Among the factors responsible for this trend, the most important are:

(a) Deterioration in the overall tax GDP ratio, and
(b) The increasing losses over time made by public sector utilities such as state Electricity and Water Boards, State Road transport Corporation, and the Railways.

(3) Private Corporate Savings:

The share of private corporate sector in total savings was 9.4 per cent in 2007-08. This, however, came down to 7.4 per cent in 2008-09. But it has been moving upwards since then, reaching at of 8.24 per cent in 2009-10.

In developed countries, the corporate sector has contributed, significantly to national savings, while it has not done so in India, in spite of the development within the secondary and tertiary sectors of the economy and the significant increase in manufactured output.

This is attributed to the following factors:

(a) Massive increase in the use of loan capital in Indian industry and the fall in the share of profits in factor incomes;
(b) Significant position of the unincorporated private sector in Indian manufacturing and commerce which is reflected in household savings and not in the ‘private corporate savings’; and
(c) The taxation policy, which discourages the accumulation of undistributed profits in companies and corporations coupled with a low profitability syndrome.

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