Sanjay Jain, 46, thought he knew the real estate sector well. Because that’s what he had done most of his life. His family is in the construction business. They take up residential projects on contract. And, for the Delhi-based civil engineer, nuances of the construction economy came naturally. Understandably, that’s where he invested all his savings. “I thought I had good knowledge of the sector,” he says. About six years back, nudged by his financial planner, he started experimenting with equity. Incidentally, just around that time the real estate sector had begun to hurt and Jain’s bias for equity steadily rose. Today, he is a convert. From 95% of his savings in real estate in 2010, 60% is in equity. “Real estate has been doing badly. I also realise it is a very opaque and unregulated sector. The equity market in contrast is quite well regulated, thanks to Sebi (Securities and Exchange Board of India),” he says. This shift was not easy. Initially, stock market volatility bothered him. Adverse news reports on companies would sway the stock market overnight and spoil his mood. “With real estate, you don’t get such daily updates,” he says. However, over time, he has got better at dealing with the swings. And now, even if the real estate sector bounces back to previous peaks, he’s unlikely to return to it. “Equity is an important part of my portfolio,” he says. Realty, Gold Lose Shine For India’s over $2-trillion economy, such a shift is significant. The greed for gold in the world’s largest market is abating. Real estate hungry Indians are doing a rethink. And what Jain in Delhi is experiencing is now beginning to show up in national data, too. The household savings rate in India has been slowing down over the last few years. More significantly, the buckets in which Indians are salting away their hard earned money are changing. Breaking a three-year slide, savings in financial assets — bank deposits, stocks, insurance, mutual funds and pension funds — are rising. After peaking at 12% in 2009-10, financial savings as a percentage of India’s gross national disposable income (GNDI) had dipped to a low of 7% in 2012-13. That trend has now reversed. RBI estimates that the savings in financial assets in 2014-15 moved up to 7.5%. And by all indications, the uptick continues in 2015-16 as well (see Household Savings in Financial Assets are Once Again Rising). In contrast, savings in physical assets (like real estate and gold), an old favourite among Indians, are down. From a high of 14.8% in 2011-12 it came down to 10.4% in 2013-14 (the latest period for which government data is available). Even gold demand has been ebbing — from a high of 1,006 tonnes in 2010, it came down to 842.7 tonnes in 2014, according to data from the World Gold Council. Gold as an investment class is losing shine too. Between January and September 2015, demand for gold as an investment dipped by 10% vis-a-vis the previous year — from 150 tonnes in 2014 to 134.4 tonnes in 2015. While in numbers the savings shift from physical assets to financial assets may look marginal, there are many reasons why analysts, the government and economists are giving the trend a warm welcome. “This is a significant shift,” says Rashesh Shah, chairman, Edelweiss Group, a financial services conglomerate. Instead of putting money in relatively idle physical assets (land and gold), Indians are now opening up to putting their money in more productive financial assets. Availability of domestic capital will reduce Indian economy’s dependence on foreign capital. “It will contain the impact and volatility that money from foreign institutional investors brings in,” Shah adds. Experts see this as just the start of a longterm shift. “We expect this shift (from physical to financial assets) to gain momentum,” says Mahesh Nandurkar, executive director, CLSA, a brokerage and investment group. There are both cyclical and structural reasons why Nandurkar says so. But more on that later. First, here’s why the growth of financial savings is so critical for the Indian economy. More Than Just Savings The Economic Survey this year talked about the structural problems in the Indian banking system. It worried about how high inflation since 2007 had led to negative real interest rates, resulting in sharp reduction in household savings. Historically, the Indian economy has leaned heavily on household savings for gross capital formation or, simply put, investment. Household savings have two components — financial and physical. While savings in physical assets are relatively less efficient and not easily available to the banking system, financial savings are more productive and critical for the economy. Hence, a reversal in household financial saving trends is a welcome progression for the Indian economy. To be sure, domestic savings play a critical role in catalysing growth in developing economies. “Most Asian Tigers have grown their economy on the back of domestic savings,” says Abheek Barua, chief economist, HDFC Bank. China, a big saver, has always had a current account surplus. The importance of foreign capital in boosting growth in pre-industrial economies was examined in detail in a 2006 research paper done by Raghuram Rajan,(now governor of the RBI), Eswar Prasad (a professor at Cornell University and senior fellow at the Brookings Institution) and Arvind Subramanian (India’s chief economic adviser). The conclusion was that developing economies (such as China, Korea and Malaysia) that relied less on foreign capital — and more on domestic capital — have grown faster in the long run. And that excessive reliance on foreign capital may also have harmful consequences for the economy, it highlighted. “We know that economic growth fuelled by domestic savings is more efficient, less volatile and more durable,” says Barua. And it is for these reasons that the relative shift of household savings towards financial assets is being cheered all round. There are two important reasons why this trend will likely gain momentum in future. One is cyclical and the other is structural. Let’s look at the cyclical factors first. Welcome, Low Inflation Over the last two years, some critical macroeconomic shifts — thanks to some deliberate steps by the government and the RBI — have helped. Amid high inflation, the average real rate of return on deposits has been on a downward spiral — often negative — since 2007 till about early 2013 (see India’s Economic Environment has Changed). “In a high inflation climate it makes sense for people to invest in physical assets that give better returns. Low inflation has reversed that,” says DK Joshi, chief economist at ratings and risk firm Crisil. Unsurprisingly, taming inflation has been one of the most important agendas for RBI governor Rajan. Today, the real rate of returns has bounced back to around 3.56%. The divide in the urban-rural economies may have, at least in part, contributed to the shift towards financial assets. The rural economy has a natural bias for physical assets whereas it is the urban economy that mostly contributes to whatever financial savings Indian households make. “Remember, the past boom in physical assets like real estate and gold also coincided with the boom in the rural economy,” says Barua. Now, the trend has reversed. The rural economy is under stress reeling under bad monsoon and droughts. Relatively, the urban economy is faring well with even car sales looking good. “This impacts financial savings positively,” says Barua. Almost simultaneously, real estate and gold — Indians’ favourite asset classes — have been hurting and giving poor returns. Somasundaram PR, managing director (India), World Gold Council, says today India has over 22,000 tonnes of gold in household savings, which would be worth over Rs 60 lakh crore. Gold prices have been on an upward spiral since 2002 when they were hovering around Rs 4,836 per 10 gm. Prices peaked in 2012 at Rs 28,639 before beginning to decline (see …As Physical Assets like Real Estate and Gold Begin Losing their Shine), indicating demand is on the wane. “In the next five years, gold cannot give the kind of returns it gave in the last 10 years,” says Ajay Srinivasan, director, industry research, Crisil. If gold is losing lustre, the state of India’s real estate sector is worse. Financial planners across cities are reporting that their clients do not want to make any more investments in property. Delhi-based Rajiv Bajaj of Bajaj Capital and Bengaluru-based Lovaii Navlakhi, founder and managing director of International Money Matters, say their clients are shifting focus to the stock market. Mumbai-based financial planner Sujata Kabraji adds that, for a long time, her clients after buying a home would save money to buy a second house as an investment. Over the last 20 months, many have sold off their second property and put the sales proceeds in the financial market. “They realised that it is not as profitable as they imagined. And the hassle of maintaining a second home is too much,” Kabraji says. That may explain why the all India Index (residential) of real estate consultancy Jones Lang Lasalle, which stood at 100 in 2008, had moved marginally to 131 by September 2015. “Prices are rising very gently. We expect just a single-digit price rise per annum for the next few years in the residential sector,” says Ashutosh Limaye, head (research), Jones Lang Lasalle. The real estate sector today can no longer absorb black money the way it once used to, says Anirudha Taparia, managing partner, IIFL Private Wealth. In many cities such as Delhi, Noida and Gurgaon, governments have raised circle rates (the minimum value at which the sale or transfer of a property can take place). So much so that in some pockets like Delhi’s Defence Colony and Vasant Vihar, market rates today are lower than the circle rates. And in others, even if market rate is higher, the gap has substantially narrowed. Three years back, the circle rate for residential plots in Noida sector 105 was Rs 35,000 per sq metre and the market rate hovered around Rs 1,10,000. Today, the circle rate has gone up to Rs 55,000 per sq metre even as the market rate has slipped to around Rs 80,000 per sq metre, says Arjun Kumar of Indus Global Space Solutions, a real estate advisory firm. The government initiatives around financial inclusion, digital transactions and curbing the cash economy too should channel lot more money into the financial sector. India is among the most cash-intensive economies in the world with a cash-to-GDP ratio of 12%, almost four times that of countries such as Brazil and Mexico. The government is pushing for a cashless economy. It just announced that under the Digital India campaign, 90% of the financial payments received by the government will be digitised. It wants to offer a range of tax concessions to reduce the cost of creditdebit cards and online payments. Financial inclusion too will play a role. RBI has allowed 11 companies to open payment banks. According to a recent report by PricewaterhouseCoopers, thanks to the Jan-Dhan Yojana, India’s unbanked population more than halved from 557 million in 2011 to 233 million in 2015. True, 36% of the 192 million accounts under the Jan-Dhan Yojana have zero balance and may not be transacting but it can only get better as government perseveres with initiatives like direct account transfer of subsidies. The much-anticipated goods and service tax, too, will help curb tax avoidance and generation of black money. Similarly, the noose is tightening around bigticket cash purchases. These are critical steps that will boost financial savings in India. But there are some deeper structural changes too that will reshape the way Indians save and invest. India’s liberalisation children have been entering the workforce. Over the long term, expect them to bring new ideas about saving and making money. Structural Shift Ravi Malik, 54, a doctor by profession, always earned well and saved well and invested mostly in land parcels. “We were passive investors, happy just flipping when price appreciated,” he says. His son Ritesh Malik, 26, also a doctor by training, thinks differently. “He is not interested in metals (gold) or land and is not happy flipping. He constantly talks about value addition,” says the father. So on the land parcels in Delhi that the Malik senior bought, the son has built boutique hotels and coaching institutes that generate cash and help appreciate the land value much faster. “They were passive investors. We are more active,” says Malik junior who left his medical practice to focus on his startups. “As an investment option, I find real estate very opaque. There are issues around black and white money. I don’t want to deal with all that hassle,” he says. Besides his own startups, he has invested in a small portfolio of early-stage ventures. He also invests in stock markets, though not much in mutual funds which he finds unattractive. He enjoys researching and betting on smaller, undervalued stocks trading in single digits (penny stocks) and exiting when they have appreciated. Not too far away in Noida, ADA Ratnam, a senior executive in an MNC, and his son Karan Ratnam, 20, are also trying out different things, In 2012, when Karan was in class X, Ratnam senior opened a separate account, transferred Rs 5 lakh into it and let his son get a few early and first-hand lessons in making money. “My deal with him was — here is Rs 5 lakh. The gains and losses are all yours. Go learn,” he recalls. He thought instead of spending time playing those virtual games, which teenagers typically do, his son would be better off playing the real game of investing. Four years on, and many wins and losses later, Karan has become a pro of sorts in equities. The corpus has grown to Rs 8.5 lakh. “That’s not bad. I know Karan by now has learnt well how to invest and make money,” he says. They will be helped by people like Sudhakar Ramasubramanian, chief executive (wealth & online business), Aditya Birla Customer Services. He launched a one-stop portal MyUniverse in 2012 where people can track their portfolio and invest for a small fee of Rs 500. The firm has got 2 million registered users who are not as financially savvy as they are digitally, most of them in the 25-40 age bracket. About eight months back, he launched a mutual fund platform called Zip-Sip where it takes just two minutes to create a portfolio and invest. “We wanted to do what etailers have done to shopping. Make it so simple,” he says. The initiative has got a good response. ZipSip is doing 8,000-9,000 systematic investment plans (SIPs) every month, becoming the eighth largest SIP seller. With initiatives like this, expect more of the likes of Karan and Ritesh to tread a similar path.