It might sound incredible but it was indeed on a train journey, during some interesting interactions with people from diverse backgrounds that I realized that Indian culture played and still plays a very important role in saving the Indian economy from the economic crisis. Before you shrug your shoulders at me for drawing a spurious correlation, let me bring out some facts, which one would not disagree to/with.
Over two decades of unprecedented increases in asset (homes, bonds and equities) values, with their resultant “wealth effect” (use the assets like ATMs to draw down cash), coupled with historically low interest rates and a booming economy, had driven Americans to spend as though there were no tomorrow. Now, battered by a collapsing housing market, asset values that have plummeted to their depths (wiping out household net worth at an alarming rate), and an economy in deep recession, Americans appear to have dusted up their piggy banks and resumed the long forgotten habit of saving for the rainy day.
On the flip side, analyze the scene in India. The domestic savings rate or the ratio of gross savings to GDP is estimated to have touched a record level of 29.1 per cent in 2004-05. This implies an increase of 5.5 percentage points since 2001-02. Overall, the rise in the savings rate has coincided with an increase in the rate of growth of GDP over the last three years, suggesting that the economy is transiting to a sustainable, higher growth trajectory.
It is this difference in the saving and consumption pattern that differentiates the success path in the two economies. If one would then ask me where culture comes into picture, my answer would simply be the reasons why men/women in India save. Saving in India is not only due to absence of a social security net, but mostly it is for purposes unknown in the western culture. In India, a father saves for his daughter’s wedding, a mother saves for her child’s education, the son saves for his parent’s world trip during their retirement and each earning individual buys a life insurance policy to leave a fortune for their family. The love and connection, which is imbibed in individuals in India, makes a lot of difference in the saving pattern in Indian households. When one member of the family saves for the rest, the ‘rest’ then feel obliged to return back with positive vibes most of the times and hence builds mutual expectation, which carries forward the trend.
In a McKinsey survey conducted in March 2009, 90 percent of the US respondents said that their households had reduced spending as a result of the recession—33 percent of them “significantly” so. US consumers have responded to the global economic crisis by curtailing their expenditures, paying down debt, and saving more—all logical responses to a recession. Latest figures indicate that household savings in the US touched 6.9% of their after-tax income in May 2009, up from minimum 2.5% in 2005.
At such a junction, when I think back, I sometimes wonder, that may be an accelerated saving rate in the US would have absorbed the housing market collapse to some extent. Sometimes I even wonder, that may be if the western economy felt more for their people and stayed more closely together in bigger families (rather than firms alone in the financial sector entangling themselves into a big family), probably then, the economy would not have seen such a recession!!!
[Image courtesy: http://trak.in/wp-content/uploads/2008/02/indian-savings-earnings.jpg]