What determines private and household savings in India?

Abstract

Using data from 1960 to 2016, this paper examines the determinants of private and household saving behavior in India. The results indicate that per capita real income and access to banks are significant determinants with favorable impacts on private as well as household saving rates in short as well as long run. Further, as inflation accelerates, the uncertainty about the future value of their accumulated savings and expected real rate of return discourage households and other private agents from saving. A desire to maintain a certain level of real expenditures also contributes to this decrease in saving rate. An increase in dependent population reduces private and household saving rates in the short run while it increases the private saving rate in the long run. The results further indicate that a rise in the real interest rate increases household saving rate in the short run but reduces both private and household saving in the long run. It does not seem to have any significant impact on total private saving in the short run. Additionally, increased corporate saving tends to reduce household saving in both time horizons. Further, both private and household saving rates have declined significantly after the global financial crisis. Finally, any deviation from the long run equilibrium for saving rates dissipates rather quickly. Overall, these results seem to suggest that policies intended to increase per capita income, lower inflation, and increase accessibility to banking will go a long way in increasing private and household saving in India.