Dr. Tarun Das, Eco.adviser. Mof

Savings and Investment Dr. Tarun Das, Eco.Adviser. MOF

Economic Situation by Dr. Tarun Das

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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

Ratio to GDP (%)

25.0 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

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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

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

Pv t.C o rPu p b lic 12% 5%

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 oP ldv t . C o Pr pu b lic

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1.4 Composition of household savings (% 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

Financial 45 56 49 60 61 49 61 55 55 51 49 49 45 47

Physical 55 44 51 40 39 51 39 45 45 49 51 51 55 53

Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100

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Fin a n cia l

20

02 -0 3

01 00 -

20

98 -9 9

19

96 -9 7

19

94 -9 5

19

93 92 -

19

90 -9 1

80 60 40 20 0

19

Per cent to Total

1.5 Composition of household savings (percentage to total)

P h ys ica l

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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

Bankdep 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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B a n kd e p

L IC

PPF

03 02 -

20

00 -0 1

20

99

19

98 -

97 96 -

19

94 -9 5

19

93 92 -

19

90 -9 1

2 5 .0 2 0 .0 1 5 .0 1 0 .0 5 .0 0 .0

19

Per cent to total

1.9 Composition of household financial assets (% to total)

SSC

S h a re s

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1.10 Trend of GDI as % of GDP

13

11

9

7

5

3

30.0 25.0 20.0 15.0 10.0 5.0 0.0 1

As % of GDP

Trend of Investment

Years since 1990-91 Pvt.Corp

Public

Total

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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

54

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36.3 25.1 11.2 3.33 2.30 1.03

71

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 Economic Situation by Dr. Tarun Das

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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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500 400 300 200 100 0

B S E N -In d e x M S E -M .C a p GD P M3 11

9

7

5

3

GD I 1

Index with 199394=100

2.2 Capital Market and Macro-economic Variables

Ye a r s s in c e 1 9 9 3 -9 4

GD S

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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 ($9 7B8n1) 5 0 2 7 3 2 4 6 2 9 1 3 M a rk e t C a p ($ 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 G1D3 7P ) 4 5 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 n6ie3 s5 5 1 2 3 5 2 4 7 1 5 6 5 0 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

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

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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 15.0 10.0

2 1 9 9

0

-9 1

0.0

-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

5.0

1 9 9

Per cent

20.0

Inflation

DR-3yr

PLR

Margin

DR-3yr+

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2.7 Trends of Real Interest Rates and Bank Margins (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

-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

5.0

D R -3yr

D R -3yr+

PLR

04 -0 5

20

02 -0 3

20

00 -0 1

20

98 -9 9

19

96 -9 7

19

94 -9 5

19

19

90 -9 1

-5.0

92 -9 3

0.0

19

Per cent

10.0

Margin

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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%

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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+ 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

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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

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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

India

60

Percentage

Asia Pacific 55 China

50

Republic of Korea

Japan

45

40 1950

1975

2000

2025

Economic Situation by Dr. Tarun Das

2050

Years

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

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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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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

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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 Economic Situation by Dr. Tarun Das

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Thank you – Have a Good Day

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