RBI Grade B Officers Aug 2014 Paper

Directions (81-90) : Read the following passage carefully and answer the questions based on it. Some words have been printed in bold to help you locate them while answering some of the questions.
 Gross Domestic Savings (GDS)play a vital role in the economicgrowth of a country since it facilitatesto provide requisite financialresources to undertake various developmentaland welfare programs.A high level of savings helps theeconomy to progress on a continuousgrowth path as investment ismainly financed out of savings.GDS is one of the important economicindicators to measure financialregulation and soundness of thecountry. Absence of required savingsrate may lead to external dependence,which may jeopardize theinterests of the Nation.
 Savings habit is an in-built cultureof the Indian system and it hasbeen growing consistently over theyears. The GDS percentage to GDPhas shown considerable improvementfrom 10% in 1950 to 33.70%in 2010, which is one of the highestglobally. It is interesting to notethat while the share of corporatesector increased from 10% to 24%during 1950 to 2010, the share ofpublic sector has come down to 6%from 18% during the said period.The buoyancy of corporate sector inpost reform era could be one of thereasons for increased share of corporatesin GDS. While there is increasingtrend in saving rate, marginaldecline is observed underhousehold sector i.e. 72% to 70%.
 Notwithstanding the fact thatthe share of household savings toGDS is showing decline, still thissegment is the significant contributorto GDS with 70% share. Indianhouseholds are among the mostfrugal in the world. However, commensurate capital formation hasnot been taking place as a lion’sshare of household savings are beingparked in physical assets comparedto financial assets.
 The pattern of disposition ofsaving is an important factor in determininghow the saved amount isutilized for productive purposes. Theproportion of household saving infinancial assets determines thechannelisation of saving for investmentin other sectors of the economy.However, the volume of investmentof saving in physical assetsdetermines the productivity andgeneration of income in that sectoritself.
 Post-Independence era has witnesseda significant shift in deploymentof household savings especiallythe share of financial assets increasedfrom 26.39% in 1950 to54.05% in 1990 may be on accountof increased bank branch networkacross the country coupled withimproved awareness of investors onvarious financial / banking products.However, contrast to commonexpectations, the share of financialassets in total household savingshas come down from 54.05% to50.21% especially in post reformperiod i.e. 1990 to 2010 despite providingeasy access and availabilityof banking facilities compared toearlier years. The increased share ofphysical assets over financial assets(around 4%) during the last twodecades is a cause of concern requiresfocused attention to arrestthe trend.
 Traditionally, the Indians arerisk-averse and prefer to invest surplusfunds in physical assets suchas Gold, Silver and lands. Nevertheless,considerable share of savingsalso flowing to financial assets,which includes, Currency, Bank Deposits,Claims on Government,Contractual Savings, Equities
 The composition of householdfinancial savings shows that thebank deposits (44%) continue toremain the major contributor alongwith the rise in the Contractual Savings,Claims on Government andCurrency.
 Though there was gradual declinein currency holdings by thehouseholds i.e. 13.79% in 1970s to9.30% in 2007, still the present currencyholding level with householdsappears to be on high side comparedto other countries. The primary reasonsfor higher currency holdingscould be absence of banking facilitiesin majority villages (5.70 lakhvillages) as well as hoarding of unaccountedmoney in the form ofcash to circumvent tax laws.Though, cash is treated as financialasset, in reality, a major portionof currency is blocked and becomeunproductive.
 Bank deposits seemed to be thepreferred choice mainly on accountof its inbuilt features such as Safety,Security and Liquidity. Traditionally,the Household sector hasbeen playing a leading role in thelandscape of bank deposits followedby the Government sector. However,the last two decades has witnessedsignificant shift in owner- ship of Bank deposits. While therewas improvement in Corporate andGovernment sectors’ share by 8.30%and 7.20% respectively during theperiod 1999 to 2009, household sectorlost a share of 13.30% in the postreform period.
 In the post independence era,Indian financial system was characterizedby poor infrastructure andlow level of financial deepening. Savingsin physical assets constitutedthe largest portion of the savingscompared to the financial assets inthe initial years of the planning periods.While rural households werekeen on acquiring farm assets, theportfolio of urban households constitutedconsumer durables, gold,jewellery and house property.
 Despite the fact that the householdsavings have been graduallymoving from physical assets to financialassets over the years, still49.79% of household savings arewrapped in unproductive physicalassets, which is a cause of concernas the share of physical assets tototal savings are very high in therecent years compared to emergingeconomies. This trend needs to bearrested as scarce funds are beingdiverted into unproductive segments.
 Of course, investment in Realestate sector can be treated as productiveprovided construction activityis commenced within reasonabletime, but it is regrettably note thatmany investors just buy and hold itfor speculation leading to unproductiveinvestments.
 India has probably the largestfascination with gold than any othercountry in the world with a shareof 9.50% of the world’s total goldholdings. The World Gold Councilbelieves that they are over 18000tonnes of gold holding in thecountry. More impressive is the factthat current demand from Indiaalone consumes 25% of the world’sannual gold output. Large amountof capital is blocked in gold whichresides in bank lockers and remainunproductive.
 Indian economy would growfaster if the capital markets couldattract more of the nation’s savingsand channel them into more productiveareas, especially infrastructure.If the Indian market can developand evolve into a more maturefinancial system, which persuadesthe middle class to put moreof its money into equities, the potentialis mind-boggling.