A straw in the wind

Financial sector regulators have begun taking some long overdue steps in August to claw back the savings of the household sector from the clutches of gold and real estate. Between them, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Reserve Bank of India have allowed mutual funds, insurance companies and banks to begin competing towards that end. These include measures like permission for a higher expense ratio and the bundling of insurance cover with mutual funds, and allowing insurance companies to lend against stocks. The first signs of whether these steps are bearing fruit will show in a negative development. The inflow into the small savings window of the government-run funds could slow down soon.

The effects on gold and real estate investment are more tricky. There has been a slowdown in the import of gold this fiscal, but for the numbers to show up as a consequent rise in financial savings, it will take till the end of this fiscal. Yet the return of competition in the financial sector to mop up household savings could turn out to be the happiest change in the Indian economy since 2007-08, when gross financial savings had peaked at 15.4 per cent.

Will this development overtake the almost certain slowdown in the overall growth numbers? Unlikely, but in a year when broader policymaking seems certain to go the way of the last fiscal, this is more than a straw in the wind. The slide in the India story, including the consequent downturn in the markets, had a lot to do with the virtual disappearance of domestic financial institutions as the flow of funds dried up for them. The next part of the story is more difficult, which is to get investment to rise again. The non-food credit from the banking sector is now at 16.6 per cent, less than 4 per cent from last year, and a reversal would need the policy paralysis to dissolve somewhat. Before the end of this week, the first quarter report card of the Indian economy will be released by the Central Statistics Office. The numbers cannot surprise on the upside, but the downside risks to the Indian economy could be moderated by these developments.

Source: www.indianexpress.com