DEMONETIZATION A BIG BOON

Demonetization will continue to excite commentary for a long time to come. Given that it was perhaps the biggest ‘natural experiment’ (as data crunchers would describe it) ever carried out, it will probably take several years before the outcomes can be evaluated with analytical rigour.

However, one area where there has been an unmitigated positive impact of demonetization is a sharp move towards financialisation of household savings in India. What has been the impact till now? And why is financialisation of savings a desirable outcome for development? The shift in savings behaviour is starkest when evaluated in terms of the savings mix – physical- versus- financial savings. Households save in both financial products (bank deposits, insurance, mutual funds and equities) as well as in physical products (primarily real estate).

For only the second time in nearly two decades, the share of financial savings has outstripped physical savings in financial year 2017. This of course can be attributed to multiple reasons – the slowdown in real estate being a crucial one – but the trend-break on account of demonetization has been rather stark to be merely a coincidence. Next, let’s look at the shift in both the headline numbers as well as the mix in household financial savings.

Household financial savings, that had been stuck at 10 per cent range (of Gross National Disposable Income, GNDI) for a long time, have perked up smartly by a full 1per cent to 11.8 per cent for the financial year ending March 2017.

The big shift has been in deposits, as can be expected post-demonetization. But there has also been a massive shift in the ‘Shares, Debenture and Mutual Funds’ category, from 0.3 per cent to 1.2 per cent. Micro-level data on Mutual Funds, Alternative Investment Funds (AIF) and Portfolio Management Services (PMS) flows suggest that there has been an even greater pickup in flows in financial year 2018. Total Assets under Management (AUM) of Mutual Funds grew from Rs. 16 lakh-crore in Oct 2016 (the demonetization month) to Rs 23 lakh-crore today, a growth of nearly 50 per cent. Cumulative insurance premium collections -- during November 2016 to January 2017 -- increased by 46 per cent over the same period of the previous year.

A very large number of new investors in MF have come from what are described as Class B and C cities/towns in the country, reflecting the emergence of a new generation and class of financial market participants.

In short, what the financial sector saw post demonetization wasn’t a one-time event, but a structural break-out that has deepened and widened the financial market in India. Both the key outcomes -- greater financialisation of savings and the shift within financial savings to capital market instruments (equities, bonds, mutual funds) -- have far-reaching impact in the manner in which India funds its growth. To take one example, Systematic Investment Plans (SIP) in Mutual Funds, whose numbers and value went up dramatically after demonetization, today generate domestic equity flows of Rs. 5,000-6,000 crore every month, or Rs. 75,000 crore every year.