MUMBAI: Financial market regulators have impressed upon Finance Minister Arun Jaitley the urgency to take quick measures to shore up savings. They are understood to have suggested the government to consider raising the investment limit of Rs 1 lakh — better known as “80C deductions” in tax parlance — for individuals and hindu undivided families (HUFs).
The most commonly used tax saving provision in the law allows these categories of taxpayers to lower their taxable income by a maximum of Rs 1 lakh. This, according to the Reserve Bank of India (RBI) and other regulators, should be scaled up in order to arrest the slide in savings — a key macro-economic concern in recent times.
The matter cropped at the Financial Stability and Development Council ( FSDC) meeting on Saturday afternoon when Jaitley met heads of all financial services and market regulators. The country’s savings have dipped to a nine-year low amid spiraling inflation, drop in profits of businesses and the inclination of household savers to buy more gold and park less money in traditional financial instruments.
The savings rate in the economy has slipped from a high of little more than 38 per cent of GDP in 2008 to 30.1 per cent in 2012-13. Since households constitute the largest source of savings, there is an increasing feeling that the 80C deduction limit should be increased and redefined.
Besides the low absolute ceiling of Rs 1 lakh in an era of high inflation and shrinking savings, there is a string of financial instruments competing as tax-saving products.
These financial instruments include National Savings Certificates (sold by India Post), employees provident fund, public provident fund, repayment of capital on home loan, life insurance premium and equity linked saving schemes sold by mutual funds. It is perceived that the government may also explore measures to encourage retail investment in equities through equity-linked products.
More so, with the Rajiv Gandhi Equity Savings Scheme (RGESS) which was announced in the 2012-13 Budget for first time retail investors in equity market, falling short of expectations.
But while channelising retail savings into equity could be a slow and continuous effort, the immediate agenda is improving the flow of financial savings by the household sector.
Indeed, commercial banks have been forced to keep interest rates at a comparatively higher level to attract deposits and pay off maturing liabilities with new deposits. This has been one of the reasons for their inability to lower interest rates on loans. And, as inflation surged and markets stayed volatile, physical assets like gold and properties drew investors.
A household buying gold lowers its financial assets like bank deposits and cash in hand, and the savings moves across the border and gold is imported. Instead, if households had put money in deposits, shares and units of mutual funds, it could prepare the grounds for domestic capital formation as and when sentiment improves.
Net financial savings of households have fallen from 12 per cent in the years prior to 2011-11 to 8 per cent in 2012-13, according to government data. It’s this disturbing trend – reflected in a decline in financial assets and rise in physical assets in the portfolio of savers – that the government may try to reverse.