MOSL: Fuel or Engines (Economy)-Total savings to be lower in FY17 despite higher financial savings

​Fuel or Engines (Economy): Total savings to be lower in FY17 despite higher financial savings; Higher savings must to reap demographic dividend

“Fuel or Engines” is our new monthly product, in which we intend to expand our consumption v/s investment theme. This is an extension to our ‘India 2020’ report released in June 2016.

Households’ net financial savings (NFS) grew only marginally from 8% in FY16 to 8.2% in FY17. Notwithstanding demonetization, while gross financial savings (GFS) did not witness any unusual increase – as expected, the composition of GFS changed significantly. We also continue to believe that total domestic savings (TDS) fell further from the reported 32.2% of GDP in FY16 to ~30% in FY17, primarily due to lower households’ physical savings and private corporate savings. With current account deficit (CAD) at 12-year low of 0.7% of GDP, India’s investments rate fell to a 13-year low of ~31% of GDP last year. In 1QFY18, investments rate was 32.5% of GDP, similar to that in 1QFY17, primarily supported by more than doubling of foreign savings/borrowings, as domestic (implied) savings fell to 28.6% of GDP, lower than ~31% of GDP in 1QFY17. Continuous fall in savings rate, especially given India’s demographic profile, is concerning – we hope it is transitory. With households’ income growing slowly, their consumption must also grow slowly to allow savings to rise. Till then, the Indian economy will continue to be driven by consumption, hurting future potential output and keeping inflationary fears alive.