New Delhi [India], September 1 : Households globally are increasingly shifting from physical assets to financial assets, and India is no exception.
According to a recent report by Goldman Sachs, India is experiencing a steady shift towards financial assets, driven by steady per-capita income growth, favourable demographic trends such as declining dependency ratios, and improved access to financial services. However, it is still lagging behind other economies.
Experiences from other countries demonstrate that tax incentives and government-sponsored savings schemes, particularly for non-bank instruments, play a crucial role in shifting savings towards financial assets.
India's steady per-capita income growth and ongoing financial market development present considerable opportunities for greater financialisation of household savings in the years ahead, it said.
It projects India's household financial savings to average around 13 per cent of GDP over the next ten years, as a base case, versus an average of 11.6 per cent of GDP observed in the previous ten years.
"Our projections are underpinned by steady financial development, along with our estimates of inflation around the RBI's target of 4.0 per cent over the forecast horizon," the report read.
In the best-case scenario, household financial savings could average around 14% of GDP over the next decade. In contrast, in the bear-case scenario, household financial savings could average around 11.5% of GDP over the next ten years.
This growth, according to the Goldman Sachs report, will translate into cumulative inflows of around USD 9.5 trillion into financial assets over the next decade, out of which it expects a significant portion (USD 4 trillion or more) to be allocated to long-term savings instruments, such as insurance, pension, and retirement funds.
"We expect robust inflows in equities and mutual funds to continue (around USD 0.8 trillion), while we project bank deposits to attract around USD 3.5 trillion," it noted.
"This scale of inflows reflects India's transition from physical to financial asset allocation, mirroring patterns observed in other countries as incomes rise and financial systems mature," it added.
Broadly, Goldman Sachs sees three key implications of higher household financial savings in India.
Firstly, this will provide a stable funding base for India's corporate capital expenditure cycle without materially widening the current account deficit.
Secondly, this is likely to support long-duration bond markets, anchor long-end sovereign bond yields, and prompt the issuance of longer-term quasi-sovereign or corporate bonds, which can facilitate infrastructure financing.
Ultimately, this is likely to expand retail participation in capital markets further and boost demand for professional wealth management services.
According to the report, the household's decision to allocate its savings between financial and physical assets depends on several factors, including income, inflation, interest rates, risk preference, and access to financial markets.
In advanced economies, there has been a clear shift towards financial assets, with households increasingly investing in capital markets, pension funds, and insurance products.
In contrast, many emerging markets still allocate a higher proportion of savings to physical assets, such as real estate and gold, indicating significant potential for further financialization of savings.
At lower income levels, households tend to favour physical assets, viewing them as safer stores of value. As incomes grow and financial systems mature, there is a gradual diversification into financial assets, which generally offer greater liquidity and, in some cases, higher returns.
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