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Unlocking Physical Assets  -  Way to Economic Development





NSN Reddy, Chief Manager, Andhra Bank, HO Hyderabad (



Gross Domestic Savings (GDS) play a vital role in the economic growth of a country since it facilitates to provide requisite financial resources to undertake various developmental and welfare programs. A high level of savings helps the economy to progress on a continuous growth path as investment is mainly financed out of savings. GDS is one of the important economic indicators to measure financial regulation and soundness of the country. Absence of required savings rate may lead to external dependence, which may jeopardize the interests of the Nation.

Evolution of Gross Domestic Savings:

Savings habit is an in-built culture of the Indian system and it has been growing consistently over the years. The GDS percentage to GDP has shown considerable improvement from 10% in 1950 to 33.70% in 2010, which is one of the highest globally. The evolution of GDS and its composition is furnished in Table no.1.

Table no.1 - Sectoral Share of GDS (%)












Public sector














Source: Central Statistical Organisation & RBI Reports                     *Quick estimates

It is interesting to note that while the share of corporate sector increased from 10% to 24% during 1950 to 2010, the share of public sector has come down to 6% from 18% during the said period. The buoyancy of corporate sector in post reform era could be one of the reasons for increased share of corporates in GDS. While there is increasing trend in saving rate, marginal decline is observed under household sector i.e. 72% to 70%.

Gross Domestic Savings & Role of Household Savings:

Notwithstanding the fact that the share of household savings to GDS is showing decline, still this segment is the significant contributor to GDS with 70% share. Indian households are among the most frugal in the world. However, commensurate capital formation has not been taking place as a lion’s share of household savings are being parked in physical assets compared to financial assets. The evolution of Household savings and its flow to Physical and Financial sectors over the years is furnished in table no.2.


Table no. 2   Deployment of Household Savings (%)









I. Financial








II. Physical
















The pattern of disposition of saving is an important factor in determining how the saved amount is utilized for productive purposes. The proportion of household saving in financial assets determines the channelisation of saving for investment in other sectors of the economy. However, the volume of investment of saving in physical assets determines the productivity and generation of income in that sector itself.

Post independence era has witnessed a significant shift in deployment of household savings especially the share of financial assets increased from 26.39% in 1950 to 54.05% in 1990 may be on account of increased bank branch network across the country coupled with improved awareness of investors on various financial / banking products. However, contrast to common expectations, the share of financial assets in total household savings has come down from 54.05% to 50.21% especially in post reform period i.e. 1990 to 2010 despite providing easy access and availability of banking facilities compared to earlier years. The increased share of physical assets over financial assets (around 4%) during the last two decades is a cause of concern requires focused attention to arrest the trend.

Traditionally, the Indians are risk-averse and prefer to invest surplus funds in physical assets such as Gold, Silver and lands. Nevertheless, considerable share of savings also flowing to financial assets, which includes, Currency, Bank Deposits, Claims on Government, Contractual Savings, Equities. The evolution of Household Financial Savings is furnished in table no.3.

Table no. 3  Household Financial Savings - Shares of Components  (%)






1. Currency





2. Bank Deposits





3. Non-Banking deposits





4. Contractual Savings





a) Life Insurance Fund





b) PF & Pension Funds





5. Claims on Government





6. Shares and Debentures





7. Units of UTI





8. Trade Debt (Net)





Financial Savings (Gross)





Source: Handbook of Statistics on the Indian Economy, RBI, 2006-07

The composition of household financial savings shows that the bank deposits (44%) continue to remain the major contributor along with the rise in the Contractual Savings, Claims on Government and Currency.

i) Currency – Normally, public keep a portion of their savings in the form of currency to meet their day-to-day / emergency requirements and the balance of savings will be held in the form of financial assets/physical assets. Though there was gradual decline in currency holdings by the households i.e. 13.79% in 1970s to 9.30% in 2007, still the present currency holding level with households appears to be on high side compared to other countries. The primary reasons for higher currency holdings could be absence of banking facilities in majority villages (5.70 lakh villages) as well as hoarding of unaccounted money in the form of cash to circumvent tax laws. Though, cash is treated as financial asset, in reality, a major portion of currency is blocked and become unproductive. Further, it associates counterfeit risk which is growing in our country. It is imperative to move towards cashless payment system to overcome risks associated with currency holding. However, this requires concerted and coordinated efforts by the Government, RBI and Banks.

ii) Bank Deposits - Historically, Bank deposits seemed to be the preferred choice mainly on account of its inbuilt features such as Safety, Security and Liquidity. The ownership of bank deposits data reveals interesting trends which are furnished in table no.4.

Table no.4 – Composition of Ownership of Bank Deposits (%)






Var. over 1990








Corporate (Private)






Financial sector






Household (Ind./Trusts/Prop.)






Foreign sector





Source: RBI Reports

Traditionally, the Household sector has been playing a leading role in the landscape of bank deposits followed by the Government sector. However, the last two decades has witnessed significant shift in ownership of Bank deposits. While there was improvement in Corporate and Government sectors’ share by 8.30% and 7.20% respectively during the period 1999 to 2009, household sector lost a share of 13.30% in the post reform period. Reduction of Household share and increase of corporate share in total deposits is an interesting phenomenon, which calls for in depth analysis as it is an indication for skewed distribution of income across the various segments.

Despite considerable shift in ownership of deposits, the Household sector continues to be the leader with a market share of 58.30%, which speaks of the importance of this segment in resource mobilization.

Fixed Deposit is one of the most important instruments for risk-averse investors as it carries a relatively higher rate of interest when compared to the savings bank deposit, besides providing safety, security and convenience to the depositor. 

Notwithstanding the availability of various embedded features such as DICGC cover up to 1 lakh, waiver of penalty for premature cancellation of deposits, exemption of interest income on fixed deposits from TDS who submits 15G or 15H, tax exemption schemes and Recurring Deposits where total interest income is exempted from TDS, the retail term deposits are not growing to the desired level especially during the last few years.

The existing tax laws such as TDS, mandatory submission of PAN, 15G/H and other associated operational issues appears to be working as a disincentive to the growth of retail depositors, which calls for focused attention by the Government and Regulators on the following pertinent issues.


Ø  Income on bank deposits beyond a point is taxed as interest income (TDS), where as income on bonds is taxed as capital gains. This puts bank deposits at a disadvantage position compared to Bonds in attracting relatively higher income group segment. Hence, the interest income on deposits may be treated on par with Bonds or alternatively the TDS threshold limit may be increased from the existing `10000/- to `20000/- in the light of the prevailing inflation environment.


Ø  Submission of 15G or 15H at the time of opening of the account may be treated as submission for the entire tenor of the deposit.


Ø  Furnishing PAN proof especially by the exempted categories may require re-examination as it is adversely affecting the depositors of rural/semi-urban who normally do not possess PAN.


Ø  With regard to deposits made by the individuals having agricultural income, a declaration in form no.61 (IT act) can be obtained and submission of PAN dispensed with.


Ø  Auto renewal of deposit is to be made mandatory to enable the depositors not lose interest for the intervening period.


Ø  Whenever there is an upward revision of interest rates, a provision shall be made for automatic renewal of the existing deposits.


Ø  Though, banks are offering “Tax Saver” scheme to the customers to avail tax exemption under section 80C of IT Act, majority of the eligible bank clientele are not aware of the product and thereby the product has not taken-off in most of the banks. The visibility of the product needs to be improved through proper advertisement. To make the product more attractive, the lock-in period may be reduced to 3 years from the existing 5 years.


Ø  Recurring Deposits, the traditional term deposit product, is having a unique feature that the entire interest amount is exempted from TDS. It is the only domestic term deposit which enjoys tax exemptions. Despite having best features, the product could not reach the targeted segments and is slowly fading in the market.


Ø  Floating Interest Rate Deposits - Floating rate term deposits are a variant of the fixed deposits offered by banks. The interest rates on offer are linked to the bank’s base interest rate, which varies with the benchmark rate revisions. During phases of high inflation, such as now, these deposits are a good option, as interest rates are expected to rise. However, it fraught with risk in falling interest rate scenario.

iii) Contractual Savings comprises of investments in LIC policies, Pension funds etc., which are of long term in nature especially to meet the retirement needs.

a) Life Insurance Funds: The individuals have been showing interest in LIC investments progressively and the share of this segment is on rise. The reasons for growth of LIC funds is on account of increased awareness about the importance of life coupled with intense competition from private players in the recent years.

b) Pension funds: The absence of government guaranteed social security scheme is forcing the individuals to save and invest in Pension funds to take care of post retirement life. The increased life expectancy and decline of the joint-family system are also the reasons for opting pension funds by the individuals. However, the total pension fund assets are low (6% of GDP) compared to emerging economies.

iv) Claims on Government, which comprises Government Bonds, Small Savings, National Saving Certificates have emerged as the most secure/safest instruments by the households especially for risk-averse investors such as fixed income or salaried persons, who wish to have a stable return over time.

v) Equities are the best option for wealth creation, as over the long term they have given the highest return among all asset classes. Despite the expansion of the securities market, a very small percentage of house-holds savings is channelised into this sector, which is evident from the low level of demat accounts i.e. 1.17 crore of which the active traded accounts are below 10%. Prolonged subdued conditions in the secondary market, high priced public issues and poor performance of mutual funds are also reasons for suboptimal interest of retail investors in equity market. However, favorable demographics, rising incomes and the resultant socio-economic changes will continue to drive the equity savings rate higher in the ensuing years.  However, it is important to build institutions that serve the market.

Physical Assets

In the post independence era, Indian financial system was characterized by poor infrastructure and low level of financial deepening. Savings in physical assets constituted the largest portion of the savings compared to the financial assets in the initial years of the planning periods. While rural households were keen on acquiring farm assets, the portfolio of urban households constituted consumer durables, gold, jewelry and house property.

Despite the fact that the household savings have been gradually moving from physical assets to financial assets over the years, still 49.79% of household savings are wrapped in unproductive physical assets, which is a cause of concern as the share of physical assets to total savings are very high in the recent years compared to emerging economies. This trend needs to be arrested as scarce funds are being diverted into unproductive segments.

i) Real Estate - The present dominance of physical savings over financial savings for the household sector may be on account of booming residential property market, increasing loan financing for housing and high salaries in finance and IT enabled sectors. Of course, investment in Real estate sector can be treated as productive provided construction activity is commenced within reasonable time, but it is regrettably note that many investors just buy and hold it for speculation leading to unproductive investments.

The increased young earning segment is considering Real Estate investment as best option to park their funds. The average risk-averse wage-earners prefer residential investment as it would provide them with better inflation hedge compared to any financial assets. There is an imperative need to have broad-based and deep rooted rule of law to ensure that these locked in capital are put to productive use.

ii) Gold - India is a country with heterogeneous cultures but the love of gold is universal across the length and breadth of the country. Gold is the only item that has been bought as an asset by members of every class in Indian society as it is viewed as a symbol of power and wealth. India has probably the largest fascination with gold than any other country in the world with a share of 9.50% of the world’s total gold holdings. The World Gold Council believes that they are over 18000 tonnes of gold holding in the country. More impressive is the fact that current demand from India alone consumes 25% of the world’s annual gold output. Large amount of capital is blocked in gold which resides in bank lockers and remain unproductive.

While Metro / Urban people keep their savings in Gold to protect their investments from rising inflation besides this option being a simple form of wealth accumulation, it is a safe investment avenue to rural Indians since majority of them do not have access to formal banking channels to save their money. It is a fact that, in the rising inflationary environment, Gold serves as a store of wealth, providing a strong alternative to bank fixed deposits and fulfilling the precautionary savings motive.

Strategies to unlock Physical Assets

Indian economy would grow faster if the capital markets could attract more of the nation's savings and channel them into more productive areas, especially infrastructure. If the Indian market can develop and evolve into a more mature financial system, which persuades the middle class to put more of its money into equities, the potential is mind-boggling. To channelise a portion of physical assets into financial assets, it is imperative on the part of the Government and regulators to focus attention on the following vital issues:

i) Gold Exchange Traded Funds (ETFs)

The importance of gold is usually attributed to a strong taste for gold on account of attributes such as simple, safe and liquid asset besides acting as good instrument to hedge against inflation. Even though investing on gold is lossless, it is a step backward as the investors may not get regular income unlike Fixed Deposits, Mutual Funds and Bonds.

Gold ETFs are the exchange traded funds (open ended) managed by mutual funds where the money collected from investors is invested in standard gold bullion and investors will be allotted units which will be listed on a stock exchange. An investor can buy and redeem the units either directly from the mutual fund, subject to certain stipulations, or from the stock exchange. Investing in gold or other precious requires special attention to the logistics issues such as insurance, storage, moving, and reselling, along with many others. Gold ETF funds provide a method for investing in gold that eliminates these issues. The Gold Exchange Traded Fund (ETF) will purchase a large amount of gold, maintaining the physical metal in storage. Gold ETFs address the operational issues besides providing tax concessions like capital gains and wealth tax.

Despite many advantages still these funds have not got the required attention and buying of physical gold has been growing unabated. These products require focused attention to popularize in the market to channelise household savings from physical to financial assets. One-time amnesty schemes to bring in the stock of physical assets and providing guaranteed returns.

ii) Real Estate Investment Trust (REIT)

A transparent and stringent regulatory mechanism need to be placed to control speculation in Real Estate market, thereby household savings will flow to productive sectors.  In this direction, the regulator may examine to introduce Real Estate Investment Trusts (REITs) which operates on the principle of a Mutual Fund - collecting funds from investors and deploy the funds in real estate assets mainly in residential / commercial properties and pay the rent collected from properties to shareholders as dividend. Normally, the returns on these investments in Asia are about 6-12%, higher than the yields on government bonds. SEBI, the market regulator, need to play catalytic role in introduction of REIT instrument in India.



iii) Financial Inclusion

Brick and mortar expansion of the banking system is going to find it difficult to reach large sections of the population purely for commercial reasons. Branchless banking as a concept is emerging very strongly and likely surpasses conventional bank branches either by using Information & Communication Technology services or by forging linkages with third party organizations like Business Correspondents (BC), Micro-Financial Institutions etc. RBI may examine allowing NBFCs to become BCs for increased penetration in to the market to convert household savings in to financial assets. With this it is possible to provide banking services in un-banked areas especially outreach rural clientele in a most cost effective way. Technology will drive innovation and especially mobile-banking technology can be a very valuable tool in providing access to banking products in remote areas at the lowest transaction cost. ATMs cash dispensing machines can be modified suitably to make them user friendly for people who are illiterate and semi-literates. However addressing financial inclusion requires holistic approach on the part of banks in creating awareness about financial products, education, offering counseling on savings and credit.  Financial Inclusion provides an avenue for bringing the savings of the poor into the formal financial intermediation system and channel them into investment.

iv) Financial Security

In India, Social security is negligible compared to developed nations. The absence of social security scheme, gradual vanishing of joint family system together with increasing life expectancy is forcing the individuals to save reasonable amounts in contractual savings preferably pension funds. Hence, households with long-term perspectives need adequate returns on their savings. It is the responsibility of the Government, Regulators, Banks and NGOs to spread the concept of financial security among households to meet their present and future emerging financial needs to maintain the reasonable living standards.

Physical asset and financial asset markets are somewhat segmented in India, given the greater use of black money in physical asset markets (Real Estate, Gold etc.). This makes difficult for the physical asset investors to shift to financial assets. Investments in physical assets neither contributes any value addition to GDP nor helps in economic development instead it has become haven for black money holders facilitating tax evasion, which is detrimental to nation’s interest.

Unlocking the physical assets is the need of the hour as substantial scarce financial resources are blocked in unproductive assets (Gold and Real Estate) at a time when the country is in dire need of funds to channelise into productive sectors to achieve desired GDP and economic growth.

In order to channelise the household savings in to productive sectors and to arrest the menace of increased diversion of block money in to physical assets, there is an urgent need to adopt two-pronged strategy through offering incentives who invest in financial assets besides implementing stringent laws to monitor the transactions pertains to physical assets.




Important Notice :  [The articles written by author contains only the academic view of the writer and purely for discussions and updation of the knowledge of the bankers.   The views expressed in the articles may not at all be subscribed by the organisation where the author is working and / or]