Why do Indian Households Invest?

Why do Indian  Households Invest?

Capital gains, which are “… an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase
price”, is the primary purpose for household investing.

Thus, capital gains closely followed by lifestyle improvement are the key motivations for investing while liquidity needs and home buying also play crucial roles.

Additionally, since there are almost no investment opportunities (as opposed to savings schemes) that allow for tax savings, this factors significantly lower in the list. With just 3% of Indians paying income taxes, the indifference towards tax savings schemes may also be a consequence of the insignificant tax net.

While investment rationale, that is, “Why do I invest?” is a crucial element of the survey, key drivers of broader financial savings (in both investment and other financial instruments), that is, “What Drives Me to Save?” is also an important question that needs to be explored.

The distribution of savings amongst households by income levels. The economic reasoning behind the linear income-savings hypothesis is logical and derives directly from basic development economics. Since all additional income is expended to supplement basic needs, lower income groups have a higher marginal propensity to consume.

This claim as the data shows that 85 percent of those in the < `20,000 income range have savings less than 40 percent of annual income. Once the threshold of basic needs is crossed, households start saving for future contingencies or for investment returns.

The SIS data supports this hypothesis; in urban India, the limit is above or around the Rs. 20,000 per month level. The data also reveals that middle-class households in the Rs. 20,000 to Rs. 50,000 range, followed closely by the Rs. 50,000 to Rs. 1 lakh income group, have a higher marginal propensity to save.
Unexpectedly, the figures disclose that 80% of households with monthly income greater than 1 lakh also have savings less than 40% of annual income.

While this seems to go against the linear income-savings hypothesis, it is crucial to keep in mind that this high- income segment may have social safety nets (like insurance, family support, etc.) that allow them to have a lower “precautionary demand for savings”.

Additionally, with just 3% of Indians paying income taxes, the top tier of the high-income group are arguably less keen to disclose their incomes and savings.


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