Source- The Week

Driven by consumerism, Indian middle class is forgetting the habit of saving

2015 is an important year for homemaker Madhavi Katuri. Both her daughters, Shreya and Srishti, will be applying to foreign universities. Household budgets will have to be pruned, sacrifices made and vacations forgone. The educational expenses will be financed through savings in mutual funds and fixed deposits along with education loans. Madhavi's husband, Srinagesh, a business development professional, says a decade ago it would have been easier on his pocket to send the children abroad. For most of the past decade, India reeled under inflation, especially the spiking food cost. A study by Indicus Analytics, a leading data analytics firm, shows how urban India's spending habits changed in the last decade. If a middle-class family with an annual income of Rs 1.5 lakh to Rs 10 lakh spent about 25 per cent of its income on food in 2004-05, the spending on food rose to more than 32 per cent in 2013-14. These families have been steadily spending more on egg, fish, meat, milk and milk products, fruits and vegetables since the beginning of the millennium. “The biggest expense in our monthly household budget is the cost of vegetables, fruits and protein,” says Madhavi. India's expanding population of young, salaried professionals has an appetite for fast-moving consumer goods. Spending on processed food, for instance, has risen by 30 per cent in a decade. “The middle class population is typically aspirers. There is always an inner urge to catch up to the higher layer. This is clearly reflected in increasing expenditure share of FMCG and durable products over time,” says Dripto Mukhopadhyay, chief economist and head of microeconomics, Indicus Analytics. But there is some good news. Thanks to better public transport, the conveyance cost of urban India came down to 6.7 per cent from 13.5 per cent in 10 years. And better health insurance coverage has helped the middle class tackle accident, disease and old age more efficiently. While it spent 3.7 per cent of its income on medical expenses in 2004-05, ten years later it spent 2.6 per cent. Urban India is spending more on consumer services, fuel and electricity. Objects of vanity, such as clothes, shoes and personal care, are also money grossers. If the middle class spent about 14 per cent of its annual earnings on consumer services 10 years ago, today it spends more than 16 per cent. Higher spending of course means lower savings. Households in the Rs 1.5-10 lakh income bracket saved 6 per cent of its income in 2004-05. The figure dropped to 5 per cent in 2009-10 and returned to 6 per cent in 2013-14. “A decade ago, in spite of inefficiency, banking was a roaring business primarily because of savings accounts. But today Indians want to spend more and banks have to resort to commercial spending,” says Ajeet Khurana, who prepared a financial literacy programme for the National Stock Exchange. “This could cause a financial sector disaster in future as in the US, and dwindling savings actually have repercussions on the entire economy of the nation.”