India has a higher savings rate than its peers. For instance, data from the World Bank suggests that a typical emerging market has a savings rate of 24% when its per capita income is US$1,600. India, on the other hand, had a savings rate of 30% when its per capita income was at US$1,500 in CY13.
Despite this, India is characterised by a high cost of debt capital and poor accessibility to capital, as more than two-thirds of India’s household savings are held in physical form, which includes real estate and gold.
Physical savings instruments are preferred to financial savings instruments in India because of the following two reasons:
(1) Whilst the purchase of physical assets can be funded using black money, the purchase of financial assets cannot be funded using black money, and (2) Physical assets are perceived to be superior inflation hedge as against financial assets.
The outright preference for physical assets in India is evident from the fact that an overwhelming 65% of households in a middle-income country like India own the houses they live in whilst only 59% of households have access to banking services.
Furthermore, the preference for gold over bank deposits has become even more pronounced in the last few years, as the size of India’s black economy has burgeoned (owing to the rise in corruption) and as inflation rates have soared. Besides explicitly targeting the black economy, PM Modi also aims to expand the white economy. He plans to exponentially increase the number of households with access to banking services.
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