Savings and Investment

Dr. Tarun Das, Eco.Adviser. MOF

Economic Situation by Dr. Tarun Das 1

Contents of this presentation

1. Trends of savings and Investment

2. Factors affecting savings
-- Macro-economic fundamentals
-- Performance of capital markets
-- Inflation and interest rates
-- Demographic transition

Economic Situation by Dr. Tarun Das 2

 1.1 Gross Domestic Savings
(as % of GDP)
Year Houshold Pvt.Corp Public Total
1990-91 19.3 2.7 1.1 23.1
1991-92 17.0 3.1 2.0 22.0
1992-93 17.7 2.7 1.6 21.8
1993-94 18.4 3.5 0.6 22.5
1994-95 19.7 3.5 1.7 24.9
1995-96 18.2 4.9 2.0 25.1
1996-97 17.0 4.5 1.7 23.2
1997-98 17.6 4.2 1.3 23.1
1998-99 18.8 3.7 -1.0 21.5
1999-00 20.9 4.4 -1.0 24.3
2000-01 21.6 4.1 -2.3 23.5
2001-02 22.6 3.6 -2.7 23.4
2002-03 23.3 3.8 -1.1 26.1
2003-04 24.3 4.1 -0.3 28.1

Economic Situation by Dr. Tarun Das 3

 1.2 Trend of GDS as % of GDP

30.0

25.0

20.0
Ratio to GDP (%)

15.0

10.0

5.0

0.0

-5.0 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003-
91 92 93 94 95 96 97 98 99 00 01 02 03 04

Household Pvt.Corp Public Total

Economic Situation by Dr. Tarun Das 4

 1.3 Composition of savings
(per cent)
Savings in 1990-91 Savings in 2003-04
Pvt.Corp Public
Pvt.Corp Public
12% 5% 14% 1%

Houshold Houshold
83%
85%

Houshold Pvt.Corp Public Houshold Pvt.Corp Public

Economic Situation by Dr. Tarun Das 5

 1.4 Composition of household
savings (% to total)
Fina ncial Physica l Total
1990-91 45 55 100
1991-92 56 44 100
1992-93 49 51 100
1993-94 60 40 100
1994-95 61 39 100
1995-96 49 51 100
1996-97 61 39 100
1997-98 55 45 100
1998-99 55 45 100
1999-00 51 49 100
2000-01 49 51 100
2001-02 49 51 100
2002-03 45 55 100
2003-04 47 53 100

Economic Situation by Dr. Tarun Das 6

 1.5 Composition of household
savings (percentage to total)

Per cent to Total 80

60
40
20
0

Financial Physical

Economic Situation by Dr. Tarun Das 7

 1.6 Composition of Households
Financial Savings (in per cent to
total)
Items 2002-03 2003-04 2004-05
Currency 8.9 10.5 9.2
Deposits 40.9 41.6 39.4
Govt.claim 17.4 20.2 24
Shares 1.7 0.1 1.1
Contractual 31.1 27.6 26.3
Total 100 100 100

Economic Situation by Dr. Tarun Das 8

Contractual

Govt.claim

Currency

0 10 20 30 40 50
Composition of Financial Savings (%)

2002-03 2003-04 2004-05

Economic Situation by Dr. Tarun Das 9

 1.8 Composition of household
financial assets (% to total)
Bankdep LIC PPF SSC Shares
1990-91 3.2 9.5 18.9 13.4 8.4
1991-92 2.6 10.3 18.4 7.1 10.0
1992-93 3.7 8.8 18.4 4.8 10.2
1993-94 3.3 8.8 16.9 6.3 9.2
1994-95 3.8 7.8 14.7 9.1 9.3
1995-96 3.2 11.2 22.0 7.7 6.9
1996-97 3.2 10.2 19.2 7.4 4.2
1997-98 4.3 11.3 18.8 12.9 2.6
1998-99 3.8 11.3 23.4 13.6 2.5
1999-00 3.5 12.1 22.8 12.3 6.5
2000-01 3.8 13.6 19.3 15.7 4.5
2001-02 3.9 14.2 16.8 17.9 3.3
2002-03 4.0 15.5 14.3 18.6 2.1
2003-04 4.3 14.9 13.0 17.7 1.8

Economic Situation by Dr. Tarun Das 10

 1.9 Composition of household
financial assets (% to total)

Per cent to total 25.0

20.0
15.0
10.0
5.0
0.0

Bankdep LIC PPF SSC Shares

Economic Situation by Dr. Tarun Das 11

 1.10 Trend of GDI as % of GDP
Trend of Investment

30.0
As % of GDP
25.0
20.0
15.0
10.0
5.0
0.0
1

11

13
Years since 1990-91

Pvt.Corp Public Total

Economic Situation by Dr. Tarun Das 12

 1.11 Composition of sectoral GDI (%)

1990-91 2002-03
A. Agriculture & allied 8.4 8.9
B. Industry 53.0 46.9
C. Services 38.5 44.2
--Trade, hotels 3.9 0.6
--Transport, comm. 11.7 10.8
--Finacial sectors 14.4 13.6
-- Govt,social,personal 8.5 19.2
D. Total GDI 100.0 100.0

Economic Situation by Dr. Tarun Das 13

 1.12 Performance of Financial Sectors
Item Mar-96 Mar-98 Mar-04
1.No.of foreign banks 33 42 33
2.New private banks 9 9 10
3.Gross NPA ratio 24.8 16.0 7.2
4.Net NPAs ratio 10.7 8.2 3.0
5.Op. profits ratio 1.6 1.8 2.7
6.Net profits ratio 0.2 0.8 1.1
7.CRAR (Capital adequacy ratio) No. of Banks
-- Below 9% 31 6 2
-- 9 to 10% 10 16 1
-- Above 10% 43 71 87
8.Number of banks 84 93 90
Economic Situation by Dr. Tarun Das 14
 1.13 Performance of Insurance Sector
Items 1999 2004
1.No.of public insurers in life ins. 1 1
2.New private insurers in life ins. 0 13
3.No.of public insurers in non-life ins. 5 6
4.New private insurers in non-life ins. 0 8
5.Insurance penetration 1.9 3.3
(premium as % of GDP)
6.Market share of private cos. (%)
---- Life insurance 0 22
---- Non-life insurance 0 20
7.Annual GR of premium (2000-05)
---- Life insurance 35.1%
---- Non-life insurance 14.4%
Economic Situation by Dr. Tarun Das 15
 1.14 Comparative position of insurance
in India and China in 2003
Items India Rank China Rank
1.Share in global life 0.81 18 1.94 8
insurance premium
-Share in total business 78.5 69.2
2.Insurance density -US$ 16.4 74 36.3 71
-Life 12.9 25.1
-Non-life 3.5 11.2
3.Ins. penetration (%) 2.88 54 3.33 44
-Life 2.26 2.30
-Non-life 0.62 1.03
Economic Situation by Dr. Tarun Das 16
 2. Factors affecting savings
and investment

a) Macro-economic Fundamentals
b) Sound capital Market
c) Inflation and interest rates
d) Demographic transition

Economic Situation by Dr. Tarun Das 17

 2.1 Macroeconomic
Fundamentals
• Macroeconomic stability and efficient capital
markets depend on each other.
• Both promote savings, investment and
effective allocation of resources.
• Capital markets provide basic infra-structure
to access savings and promote investment.
• Both the real sector and financial sector are
crucial to promote overall economic growth.
• Sound macroeconomic policies are the first
defense against any financial crisis.

Economic Situation by Dr. Tarun Das 18

 2.2 Capital Market and Macro-
economic Variables
500
400 BSE N-Index
Index with 1993-

300 MSE-M.Cap
94=100

200 GDP
100 M3
0 GDI
1

11
GDS
Years since 1993-94

Economic Situation by Dr. Tarun Das 19

 2.3 Comparative development in India,
China, Japan, USA in 2001
Comparative development in India, China, Japan, USA in 2001
Items USA China Japan India
PPP Adjusted GNP ($Bn) 9781 5027 3246 2913
Market Cap ($Bn) 13810 463 2252 131
Market Cap (% of GDP) 137 45 54 23
Turnover Ratio (%) 210 86 81 226
No.of listed Companies 6355 1235 2471 5650
PC GNP ($) 34280 890 35610 460
FER ($Bn) 130 220 402 49
Economic Situation by Dr. Tarun Das 20
 2.4 Factors influencing capital market
(a) Sound macroeconomic management,
(b) Sustained economic and industrial growth,
(c) Strict fiscal prudence & monetary discipline,
(d) Control of inflation rates,
(e) Liberalisation of Industry, Trade, Investment,
(f) Liberal policy of FDI and portfolio investment,
(h) Gradual convertibility on capital account,
(g) Successful management of external sector,
(g) Control on short-term external borrowing.

Economic Situation by Dr. Tarun Das 21

 2.5 Trends of Inflation and
Nominal Interest rates (per cent)
Inflation DR-3yr DR-3yr+ PLR Margin
1990-91 10.3 9.5 11.0 16.5 6.3
1991-92 13.7 12.0 13.0 16.5 4.0
1992-93 10.1 11.0 11.0 19.0 8.0
1993-94 8.4 10.0 10.0 19.0 9.0
1994-95 12.5 11.0 11.0 15.0 4.0
1995-96 8.1 12.0 13.0 16.5 4.0
1996-97 4.6 11.5 12.6 14.5 2.4
1997-98 4.4 10.8 11.8 14.0 2.8
1998-99 5.9 10.0 11.0 13.0 2.5
1999-00 3.3 9.0 10.3 12.0 2.4
2000-01 7.2 8.8 9.8 11.5 2.3
2001-02 3.6 8.0 8.3 11.5 3.4
2002-03 3.4 5.3 5.8 10.8 5.2
2003-04 5.5 4.6 5.4 10.3 5.3
2004-05 6.4 4.6 5.4 10.3 5.3
2005-06 6.5 4.6 5.4 10.3 5.3

Economic Situation by Dr. Tarun Das 22

 2.6 Trends of Inflation and
Nominal Interest rates (per cent
20.0
Per cen t
15.0

10.0

5.0

0.0

Inf lation DR-3yr DR-3yr+

PLR Margin

Economic Situation by Dr. Tarun Das 23

2.7 Trends of Real Interest Rates
and Bank Margins (per cent)
1990-91 -0.8 0.7 6.2 6.3
1991-92 -1.7 -0.7 2.8 4.0
1992-93 0.9 0.9 8.9 8.0
1993-94 1.6 1.6 10.6 9.0
1994-95 -1.5 -1.5 2.5 4.0
1995-96 3.9 4.9 8.4 4.0
1996-97 6.9 8.0 9.9 2.4
1997-98 6.4 7.4 9.6 2.8
1998-99 4.1 5.1 7.1 2.5
1999-00 5.7 7.0 8.7 2.4
2000-01 1.6 2.6 4.3 2.3
2001-02 4.4 4.7 7.9 3.4
2002-03 1.9 2.4 7.4 5.2
2003-04 -0.9 -0.1 4.8 5.3
2004-05 -1.8 -1.0 3.9 5.3
2005-06 -1.9 -1.1 3.8 5.3

Economic Situation by Dr. Tarun Das 24

 2.8 Trends of Real Interest Rates
and Bank Margins (per cent)

15.0

10.0
Per cent

5.0

0.0

-5.0

DR-3yr DR-3yr+ PLR Margin

Economic Situation by Dr. Tarun Das 25

2.9 Number of 60+ People in India

Year Million Ratio

1951 20 5.4%
2000 77 7.6%
2025 168 12.7%
2050 326 20.6%

Economic Situation by Dr. Tarun Das 26

2.10 Share 60+ population in
total population
2000 2050
World 10.0 21.1
Asia-Pacific 8.8 22.6
China 10.1 29.9
India 7.6 20.6
Indonesia 7.6 22.3
Japan 23.2 42.3
Economic Situation by Dr. Tarun Das 27
2.11 Share of 65+ population
in world 65+ population
Region/ Country 2000 2050
China 20.9 22.8
Indonesia 2.4 3.5
India 12.0 16.0
Russian Federation 4.3 2.0
Japan 5.2 2.7
Rest of Asia Pacific 11.7 16.0
Rest of world 43.5 37.1
Economic Situation by Dr. Tarun Das 28
2.12 Share of 80+ population
in world 80+ population
Region/ Country 2000 2050
China 16.6 26.2
Indonesia 1.6 2.7
India 8.8 12.7
Russian Federation 4.2 2.0
Japan 6.9 4.4
Rest of Asia Pacific 12.4 11.6
Rest of world 49.5 40.4
Economic Situation by Dr. Tarun Das 29
 2.13 Ratio of Working
Population
Figure VIII: Dynamics of working age population in selected economies
Population aged 15-59 for selected Asia-Pacific economies 1950-2050

70

65

India
60
Asia
Pacific
Percentage

55
China

50 Republic of Korea

Japan
45

40
1950 1975 2000 2025 2050
Years

Economic Situation by Dr. Tarun Das 30

 2.14 Implications of
population ageing
• Decline of share of working age population in
Asia from 62% in 2025 to 58% in 2050
• Higher consumption
• Lower savings, investment and growth
• Lower contributions to pension funds, but
increase of number of pensioners
• Higher expenditures on pensions, old age health
care, institutional and social care
• Rising demand for medical services for old age
and high medical cost
Economic Situation by Dr. Tarun Das 31
 2.15 Impact on Capital
Markets and Insurance
• Shift from Pay As You Go pension system to
defined contributory pension schemes
• Emergence of pre-funded private and public
pension systems and insurance schemes
• Strengthening of health insurance schemes
• Professional and innovative management of
pension, provident and insurance funds
• On the other hand, lower savings may have
adverse effects on capital and share markets

Economic Situation by Dr. Tarun Das 32

 2.16 Policy Options
• Multi-pillar pension schemes- mandated
publicly managed defined benefits scheme,
privately managed and funded defined
contribution scheme and retirement
provisions on a voluntary basis.
• Increase retirement age
• Limit early retirement windows
• Autonomy in the management of pension,
provident and insurance funds
• Make pensions portable and improve labour
market flexibility
• Contributory medical insurance schemes
Economic Situation by Dr. Tarun Das 33
 2.17 Implications for Managers
 World is now a global village- insurance,
pensions, provident funds are being opened for
foreign investors
 There is need for more emphasis on external
factors
 Knowledge and information technology (IT) are
the most valuable assets
 Wider choice of resources- domestic/ foreign,
debt/ equity/ portfolio etc.
 Greater Risk- Currency, exchange rate, interest
rate, commodity prices, markets
 Emphasis on decentralisation, consultation, and
risk sharing
Economic Situation by Dr. Tarun Das 34
2.18 To strengthen Systems for
 Management information system (MIS)
 Asset-Liability Management (ALM)
 Good corporate governance
 Adopt international best practices
 Performance Audit
 Policy Audit
 Identification, assessment, monitoring
and management of risk

Economic Situation by Dr. Tarun Das 35

 Thank you –
Have a Good Day

Economic Situation by Dr. Tarun Das 36