Savings and Investment

Dr. Tarun Das, Eco.Adviser. MOF

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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

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

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1.2 Trend of GDS as % of GDP
30.0 25.0

Ratio to GDP (%)

20.0 15.0 10.0 5.0 0.0 -5.0 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 200391 92 93 94 95 96 97 98 99 00 01 02 03 04

Household

Pvt.Corp

Public

Total

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1.3 Composition of savings (per cent)
S a v in g s in 1 9 9 0 - 9 1 Pu Pv t.C o r p b lic 12% 5%

S a v in g s in 2 0 0 3 - 0 4 P v t . C oPr up b lic 14% 1%

H o u s h o ld 83% H o u s h o ldPv t.C o r pP u b lic

H o u s h o ld 85% H o u s h o ld t . C o P p b lic Pv ru

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1.4 Composition of household
savings (% to total)
19- 1 9 09 19- 2 9 19 19- 3 9 29 19- 4 9 39 19- 5 9 49 19- 6 9 59 19- 7 9 69 19- 8 9 79 19- 9 9 89 19- 0 9 90 20- 1 0 00 20- 2 0 10 20- 3 0 20 20- 4 0 30 F ac l in n ia 4 5 5 6 4 9 6 0 6 1 4 9 6 1 5 5 5 5 5 1 4 9 4 9 4 5 4 7 P y ic l hs a 5 5 4 4 5 1 4 0 3 9 5 1 3 9 4 5 4 5 4 9 5 1 5 1 5 5 5 3 Tt l oa 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0

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1.5 Composition of household savings (percentage to total)
Per cent to Total 80 60 40 20 0
90 -9 1 93 94 -9 5 96 -9 7 98 -9 9 01 00 02 -0 3 92 -

19

19

19

20

Fin a n cia l

P h ys ica l

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19

19

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1.6 Composition of Households Financial Savings (in per cent to total)
I te m s 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 C u rre n c y 8 .9 1 0 .5 9.2 D e p o si ts 4 0 .9 4 1 .6 39.4 G o v t. c l a i m 1 7 . 4 2 0 .2 24 S h a re s 1 .7 0.1 1.1 C o n tr a c tu a l 3 1 . 1 2 7 .6 26.3 T o ta l 100 100 100

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C o n tra c tu a l G o vt.c la im C u rre n c y 0 10 20 30 40 50

Com pos ition of Fina nc ia l S a vings (%) 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5

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

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1.9 Composition of household financial assets (% to total)
Per cent to total 2 5 .0 2 0 .0 1 5 .0 1 0 .0 5 .0 0 .0
90 -9 1 93 94 -9 5 97 99 00 -0 1 92 96 98 02 03

19

19

B a n kd e p

L IC

PPF

SSC

20

19

19

19

20

S h a re s

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1.10 Trend of GDI as % of GDP
Trend of Investment
30.0 25.0 20.0 15.0 10.0 5.0 0.0 1 3 5 7 9 11 Years since 1990-91 Pvt.Corp Public Total 13 As % of GDP

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

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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

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1.13 Performance of Insurance Sector 1999 2004 Items
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%

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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$ -Life -Non-life 3.Ins. penetration (%) -Life -Non-life 16.4 12.9 3.5 2.88 2.26 0.62 74 36.3 25.1 11.2 3.33 2.30 1.03 71

54

44

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2. Factors affecting savings and investment a) Macro-economic Fundamentals b) Sound capital Market c) Inflation and interest rates d) Demographic transition
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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.

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2.2 Capital Market and Macro-economic Variables
500 400 300 200 100 0 1 3 5 7 9 11 Ye a r s s in c e 1 9 9 3 -9 4 B S E N -In d e x M S E -M .C a p GD P M3 GD I GD S Index with 199394=100

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2.3 Comparative development in India, China, Japan, USA in 2001
C o m p a ra tiv e d e v e lo p m e n t in I n d ia , C h in a , J a p a n , U S A in 2 0 0 1 I te m s U S A C h in a J a p a n I n d ia P P P A d ju s te d G N P ($7 8n1) 5 0 2 7 3 2 4 6 2 9 1 3 9B M a rk e t C a p ($ B n ) 1 3 8 1 0 4 6 3 2 2 5 2 1 3 1 M a rk e t C a p (% o f G1D 7 ) 4 5 3P 54 23 T u rn o v e r R a tio (% ) 2 1 0 8 6 81 226 N o .o f lis te d C o m p a n6 3 s5 5 1 2 3 5 2 4 7 1 5 6 5 0 ie P C G N P ($ ) 34280 890 35610 460 F E R ($ B n ) 130 220 402 49

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2.4 Factors influencing capital
(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.
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market

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

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2.6 Trends of Inflation and Nominal Interest rates (per cent
2 .0 0 Per cent 1 .0 5 1 .0 0 5 .0
-9 1 1 9 9 -9 1 3 9 9 4 -9 1 5 9 9 6 -9 1 7 9 9 8 -9 2 9 0 0 0 -0 1 2 0 0 2 -0 2 3 0 0 4 -0 5

0 .0
0 1 9 9

I fla n n tio PR L

2

D -3 R yr M rg a in

D -3 R yr+

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1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

2.7 Trends of Real Interest Rates and Bank Margins (per cent)
-0.8 -1.7 0.9 1.6 -1.5 3.9 6.9 6.4 4.1 5.7 1.6 4.4 1.9 -0.9 -1.8 -1.9 0.7 -0.7 0.9 1.6 -1.5 4.9 8.0 7.4 5.1 7.0 2.6 4.7 2.4 -0.1 -1.0 -1.1 6.2 2.8 8.9 10.6 2.5 8.4 9.9 9.6 7.1 8.7 4.3 7.9 7.4 4.8 3.9 3.8 6.3 4.0 8.0 9.0 4.0 4.0 2.4 2.8 2.5 2.4 2.3 3.4 5.2 5.3 5.3 5.3

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2.8 Trends of Real Interest Rates and Bank Margins (per cent)
15.0 10.0 Per cent 5.0 0.0
90 -9 1 92 -9 3 94 -9 5 96 -9 7 98 -9 9 00 -0 1 02 -0 3 04 -0 5

-5.0

19

19

19

19

19

20

20

D R -3yr

D R -3yr+

PLR

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Margin

25

2.9 Number of 60+ People in India
Year 1951 2000 2025 2050
Million

Ratio 5.4% 7.6% 12.7% 20.6%

20 77 168 326

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2.10 Share 60+ population in
total population
World Asia-Pacific China India Indonesia Japan 10.0 8.8 10.1 7.6 7.6 23.2 2000 2050 21.1 22.6 29.9 20.6 22.3 42.3
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2.11 Share of 65+
Region/ Country China Indonesia India Russian Federation Japan Rest of Asia Pacific Rest of world

population in world 65+ population
2000 20.9 2.4 12.0 4.3 5.2 11.7 43.5
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2050 22.8 3.5 16.0 2.0 2.7 16.0 37.1

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2.12 Share of 80+
Region/ Country China Indonesia India Russian Federation Japan Rest of Asia Pacific Rest of world

population in world 80+ population
2000 16.6 1.6 8.8 4.2 6.9 12.4 49.5
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2050 26.2 2.7 12.7 2.0 4.4 11.6 40.4

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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

60

India Asia

Percentage

Pacific 55 China

50

Republic of Korea

45

Japan

40 1950 1975 2000 2025 2050 Years

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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
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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

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• 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

2.16 Policy Options

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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

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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
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Thank you – Have a Good Day

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