Financialisation of household savings can fund private capex: Goldman Sachs

The report titled 'Changing Contours of Indian Household Savings' notes that within financial savings, allocations are shifting from banks to non-banks, especially into retirement savings

Contrary to the conventional mode of saving in physical assets like real estate, household savings in India are getting increasingly financialised, implying that the infrastructure asset creation could be funded without widening the current account deficit (CAD) or increasing external vulnerability, a latest report released by Goldman Sachs said on Wednesday.

The report titled- ‘Changing contours of Indian household savings’- also notes that within financial savings, allocations are shifting from banks to non-banks, especially into retirement savings, and the total assets under management (AUM) of retirement savings, insurance, and mutual funds grew at an average rate (CAGR) of 15 per cent, thus outpacing growth in bank deposit (9 per cent CAGR) over the last ten years.

“However, Indian household savings allocation towards non-bank assets is well below the developed markets and emerging markets like Korea and Taiwan, and we see this trend continuing in the coming years,” the report notes.

Besides helping fund the capex cycle, this increased financialisation of savings is also leading to pension funds and insurance companies buying long-duration government bonds given their long-term investment horizon. Since, these investors are less susceptible to immediate withdrawals which helps manage volatility, this has resulted in a flat government bond yield curve in India, which is expected to persist.

“The increase in AUM of long-duration investment entities, like insurance and pension funds, has been supplemented by larger issuances of longer-dated bonds by central and state governments, which have been bought by these investors, resulting in a flat government bond yield curve in India,” the report notes.

Goldman Sachs projected that the net financial savings of Indian households are expected to increase to 6 per cent of the gross domestic product (GDP) in FY24 from 18-year low of 5.1 per cent in FY23, mainly driven by higher gross financial savings (12.5 per cent of GDP as compared to 11.0 per cent in FY23) and a higher bank deposit growth (11 per cent in FY24 as compared to 9.4 per cent in FY23).

The report also notes that due to the financialisation of savings, while the supply of long-dated sovereign bonds has increased, the corporate bond market has a low share of long-dated issuance, which is vital for funding infrastructure assets.

“Much of the infrastructure creation in recent years has been led by significant capital expenditure by the Central government. As the government aims to consolidate its fiscal position and vacate space in the bond market, in our view, it is important that the corporate bond market is incentivised to move towards long-dated issuance, so that long-term savings from pension and insurance are channelled into infrastructure asset creation. In our view, a starting point can be to incentivise long-dated issuance from the quasi-government or public-private partnership entities,” the report says.

The report notes that this shift of financial savings towards non-banks has been aided by financial inclusion, increase in digital infrastructure, demonetisation and product innovation among others.