A recent nationwide survey of over 60,000 households by National Council of Applied Economic Research (NCAER), New Delhi and Max New York Life has revealed that people in India do not plan for long-term future and keep away from investing in long-term instruments though they save for long-term goals such as emergencies, education and old age.

The book, 'How India Earns, Spends and Saves' launched by Deputy Chairman, Planning Commission, Government of India, Montek Singh Ahluwalia, Feb. 6, which contains the findings of the survey, reveals that this phenomena is not just confined to just poor or middle-class households, but is prevalent in rich households too.

The survey reveals that most Indians prefer keeping 65 percent of their savings in liquid assets like bank or post office deposits and cash at home, while investing 23 percent in physical investments like real estate and gold and only 12 percent in financial instruments.

For getting secure return on their earning, 51 percent of Indians put their savings in the banks while 36 percent of households still prefer to keep cash at home. The investment in post offices and other guaranteed return schemes and plans gets minor part of total savings. Only 5 percent of family put their money in post offices, while 2 percent buy insurance policies and 0.5 percent invests in equities.

Interestingly, though life insurance is among the most popular financial instruments (about 78 percent of the households are aware of life insurance), yet only 24 percent of households have a life insurance policy. The ownership is 38 percent among urban households but a low 19 percent among rural households.

The survey, which covered 342 towns and almost 2,000 villages across 250 districts and 2,255 wards, suggests that Indian households have a strong saving habit. While income level is an important factor in influencing the saving patterns of households, variations in savings behavior are equally decided by education level and occupation, said Dr. Rajesh Shukla, principal author of the report and Senior Fellow at NCAER.

According to the study, 83 percent of the households surveyed saved for emergency, while children's education (81 percent) was the other key priority. While only 69 percent households saved for old-age financial security, 63 percent households said they kept aside money to meet future expenses like marriage, births and other social ceremonies.

The study also notes that nearly 47 percent households saved to buy or build a house and a similar percentage saved to improve or enlarge their business. Only 22 percent households saved to buy consumer durable and 18 percent for meeting expenses towards gifts, donation or pilgrimage.

The survey findings confirm the wide disparity between urban and rural people. On an average, the urban Indian earns 85 percent higher than his or her rural counterpart, spends 71 percent more and saves nearly double - Rs.26,762 compared with Rs.11,613 - every year.

According to the survey, a person's occupation, education, age, location and landholding directly influence his or her income. Households with graduates earn 3.5 times more than those with illiterate ones, and incomes nearly double between the ages of 25 and 66.

While salaried class households, which constitute only 18 percent of the total households in the country accounted for greatest proportion of savings and are the cream of urban India, agriculturists with land are the richest in rural areas. Wage laborers are the poorest anywhere, comprising 62 percent of the lowest-income households.

The highest savings (in terms of per household) are in the 56-65 age group where savings are Rs.21,196 per household, or 25 percent of the annual income, the study notes.

The two main factors responsible for higher savings with growing age, according to the survey, are motivation to save and the need to meet old-age requirements.

The survey also suggests a direct link between the education and savings by pointing out that households headed by graduates had highest level of savings in both absolute terms and as a percentage of income.

The survey notes that households managed by persons in 56-65 age group, kept bulk (57 percent) of their savings in liquid assets, though they also invested the surplus funds in shares and debentures.

Interestingly, the survey reveals that the households headed by persons in the age group of 26-35 years, paid more insurance premium than their senior counterparts.

Households headed by graduates spent more on buying insurance around 10.2 percent, while merely 3.5 percent preferred investing in shares or debentures, the survey says.

Indians prefer to save money in 'in-house savings' rather than 'in banks or investment.' They save money for emergency and any mishappening, the study notes.

The reason behind this is because unlike in the western and developed countries, which have the system of social security that prevents the poor households from starvation and ill-social society by giving social protection and economic support, there is no social security in the country (India) for the citizens of the nation, the study explained.

The sample size included 63,016 households, equally divided between rural and urban areas.

The habit of savings is good, but the way of savings are not good enough as only a meagre part of total savings come under the government account that is not enough to conduct various plans properly, said Ahluwalia, commenting on the survey results.

The survey also reveals that 96 percent of the households cannot survive beyond a year on their current savings in case of loss of income due to some eventuality such as death or disability of the chief earner. However, a majority of those surveyed expressed confidence in their financial well-being. Lack of awareness of their financial preparedness for income loss predicated their ignorance of the more viable channels for long-term investment.

It is high time we must encourage savings among the people. We must encourage contractual savings in the form of provident funds or any other such modes, Ahluwalia said.

Insurance is the vehicle of savings, he added.

However, experts claim that government's policy of providing incentives for long-term savings is inadequate and hence, Indians lack appetite for long-term investment.

The current tax incentives do not encourage individuals to keep saving for 15-20 years as the tax benefits they get from a more flexible 1-2 years (investment in tax-saving mutual funds or bank fixed deposits) are just as attractive. Hence, we see millions investing for horizons of a few months or at best a few years, but rarely for their own golden years. Those who save more than the Rs.1 lakh limit are effectively taxed at both the entry and exit stages, explained Shikha Sharma, managing director and CEO, ICICI Prudential Life, the largest private-sector player in the Indian insurance market.

According to Sharma, a separate and additional ring-fenced limit of Rs.1 lakh for long-term savings, particularly pensions, should be introduced.

Her views are shared by Aviva India's managing director, Bert Paterson. We recommend a separate limit for deductions under Section 80C for long-term saving instruments like life insurance. The government should look at encouraging people to save for the long term, Paterson said.

According to Paterson, tax benefits on pensions and long-term savings need to be increased. The world over, he said, the development of long term saving instruments has been supported by tax exemptions.

In India if the government does not offer a separate tax benefit for pension investments of up to Rs.1 lakh, the salaried sections will be hit badly as the corpus on retirement will be insufficient, Paterson said.

Financial security is an essential element of inclusive growth. In a more dynamic labor market and in the absence of established state-provided mechanisms of social security, households in India increasingly need to look to financial instruments to meet their asset accumulation and old-age goals, said Suman Bery, Director-General, NCAER. Yet the pattern of financial asset accumulation is relatively primitive indicating a need for much greater awareness of the role that specific financial instruments can play in reducing financial vulnerability and enhancing financial security.

There is an urgent need for a financial literacy program to make people understand their options and financial needs at different life stages, said Analjit Singh, Chairman, Max India Ltd, commenting on the solutions for financial protection to meet both long-term financial needs and loss of main source of income. Life insurance is one of the most important financial instruments for financial security. In the rapidly changing Indian economic and social environment, life insurance products sold appropriately to the consumers not only create awareness of the changing reality but also help reduce their vulnerability and overall improve the long-term financial security of the individual, the family and thereby the nation.

Understanding household saving is of importance for several reasons. At the national level, household savings provide the main source of investment financing both for government and for the corporate sector. Rapid GDP growth leads to rising household income and higher saving rates. This is true for India as it has been elsewhere in Asia, a press release stated.

But for the individual household, saving is done in order to achieve specific short-term and long-term goals, notably financial security. Accordingly, the main goal of the Max New York Life-NCAER survey is to gain deeper insight into the motives for financial saving, the degree of financial security (or vulnerability) of Indian households, and the degree of sophistication that households bring to bear in their saving and investment decisions, it said.

(Rs.1 lakh = Rs.100,000)