RBI report on demonetisation: Financial savings in insurance, shares rise

Demonetisation reduced the currency in circulation by 2.1%, but deposits rose from 4.8% to 7.3%

The government’s decision to demonetise Rs 500 and Rs 1,000 notes on November 8 seems to have increased inflows into the financial sector, such as insurance products and shares. The Reserve Bank of India’s (RBI) Annual Report shows that the contribution of insurance funds in household financial savings reached a six-year high of 2.9 per cent of the Gross National Disposable Income (GNDI) in 2016-17. Net financial saving was up from 7.8 per cent to 8.1 per cent. But, the growth of 30 basis points (bps) was lower than 2015-16 when it rose by 60 bps. 

Investments into shares and debentures increased by 90 bps from 0.3 per cent to 1.2 per cent during the financial year. At the Business Standard Mutual Fund Cafe held recently, Sundeep Sikka, chief executive officer, Reliance Nippon Life Asset Management, had said that while the decline in the interest rate and slowdown in real estate and gold as asset classes had led to a sharp rise in the mutual fund inflows, another big factor for inflows into the industry was demonetisation. 

“Demonetisation was a big positive which came our way. I think the kind of growth that the industry has seen since November was never expected,” Sikka said. 

Demonetisation reduced the currency in circulation by 2.1 per cent, but deposits rose from 4.8 per cent to 7.3 per cent. According to the report, higher financial savings were mainly supported by a lower inflationary scenario, as also by portfolio adjustment from physical to financial assets by households.

 

At the same time, household liabilities rose sharply, from 3.1 per cent to 3.7 per cent, the highest since 2011-12.

“Consumption as a driver of growth has been associated with low growth multipliers and ‘half-life’, with some evidence that side effects such as rising household indebtedness could turn out to be growth-retarding in the medium-term,” the report warned. 

According to it, in recent years, growth of the gross domestic product (GDP) growth in India has been consumption-led, more so in FY14 and FY17. In such a phase of growth, consumption grows faster than GDP, either in nominal or real terms, so that the consumption-to-GDP ratio increases over time or alternately, real consumption growth exceeds real GDP growth.

Consumption-led growth can arguably lead to a slackening of future growth if it entails growing imbalances due to limits to capacity creation, and rising debt burdens, particularly for households.