Who moved my savings? The conundrum of declining savings post-demonetisation

Contrary to what preliminary RBI data indicated, the financial savings rate in fiscal year (FY) 2017 declined post- demonetisation even as the deposits in banks grew in droves, noted a report, adding the gains from deposits were not enough to compensate for the sharp fall in currency holdings during the same period. 
 
The overall national savings rate also fell, primarily on account of a drop in household savings, it said.  
 
"The overall national savings rate fell to 30 per cent in FY17 from 31.3 per cent in FY16. Majority of the reduction came from household savings dropping to 16.3 per cent in FY17 from 17.8 per cent in FY16," said Kotak Economics Research. 

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The report further pointed out that surprisingly the financial savings rate also fell to 6.8 per cent in FY17 from 8.2 per cent in FY16 even as physical savings rate remained steady at 9.2 per cent. 
 
Notably, in-line with general expectations of households’ savings profile post demonetisation, the preliminary data released by the Reserve Bank of India (RBI) had indicated that financial savings rate increased to 8.2 per cent in FY17 from 7.9 per cent in FY16, but the final figures suggested otherwise. 
 
However, the positive effect of demonetisation can be seen in the ‘productive’ financial savings (financial savings ex-currency), which increased sharply after having been stagnant over the past few years, said Kotak Economics. 
 
Nevertheless, a relatively muted ‘productive’ financial savings profile is expected in FY18, especially in deposits, the Kotak report added. 

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Meanwhile, there was no commensurate increase in private consumption even as the household savings rate steadily declined. 
 
Higher tax outgo could be a reason, the report explained. Net indirect taxes (indirect taxes net of subsidies) as a proportion of GDP have steadily increased over the past few years. 
 
"We do note that only tax dynamics may not be enough to explain savings-consumption dynamics. Private consumption’s share in GDP as well as the private consumption mix has remained fairly stable over the past few years. Expenditure remains skewed towards food and beverages though shares on health and education has increased," the report said.