Ask any economist whether an economy that saves and invests is better than one that borrows cheap and spends. The reply will be that while both will show a good rate of growth for a temporary period. However, the former's growth model will be more sustainable. Also without any debt burden the 'saving economy' will remain fundamentally robust.
Now like our neighbours in China, Indian households too have had the inherent tendency to save. Even before the concepts of 'saving' and 'investing' were known in economic parlance, Indians accumulated gold. Not just as means of financial security but also to pass down generations. However, Indian savers do not seem to have got their due in terms of return on savings.
The fact is that the trend of investing in financial assets like stocks has been very short lived in India. Several scams, lack of transparency, mis-selling by brokers and mutual funds, corporate frauds etc have eroded whatever little trust Indians had in stock markets post 2002. The risk averse savers then chose to park money in bank fixed deposits. But those who chose to not diversify their investments ended up losing money than generating wealth!
As per the data put forth by the Urjit Patel Committee (RBI), fixed deposits have lagged the returns from gold and real estate for most of last 5 years. Even prior to that fixed deposit returns caught up with that on gold only in FY08. And when compared to consumer inflation, it seems that only gold that has offered any real returns.
Here we would hasten to add that this data is incomplete in the absence of stock market returns being plotted against that on gold. For stocks too have managed to offer substantial inflation adjusted returns over the past 10 years. However, since most Indian savers have given the stock market rally a miss, for them it has been a wealth eroding decade rather than a generating one!
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| Source: RBI, Urjit Patel report *Weighted average term deposit rates of banks across maturities |
The lesson here is that Indian savers must learn to diversify their investment across asset classes. And while there is a certain degree of risk associated with each asset class, including stocks, realty and gold, they ultimately help keeping the portfolio returns positive. Most importantly, given the long term growth potential of the Indian economy, savers giving the stock markets a miss, may lose out on one of the most lucrative asset classes. A careful selection of investments coupled with appropriate Asset Allocation can help Indian savers undo the damage to their portfolio over the past decade.
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