Wednesday, October 5, 2016

Increasing savings

Gulzar has good post on increasing use of Jan Dhan Accounts that were opened for the poor with great effort by Governments (http://gulzar05.blogspot.in/2015/06/increasing-utilization-of-jdy-accounts.html). He suggests three means of increasing usage of banking by the poor. Firstly, having multi-tiered accounts with each tier being used for a different purpose, instituting a lottery prize for Jan Dhan account holders and increasing commitment of the poor to save for a purpose by increased incentives to saving.

I think he would like to see outcomes where the poor increase their savings and use the same for expenses more 'capital' in nature, thereby laying a path for coming out of poverty. None can fight this objective and we would like this to happen. However, as Gulzar himself laments, the same is not happening. He feels that one of the reason for the same is that the poor have too many needs and all they earn goes to meet their immediate needs. He is certainly right and i feel that unless the incomes of the poor increase, their savings rate would remain depressed.

Gulzar has offered suggestions on increasing savings rate even when the poor have low incomes. The effectiveness of the measures like those would be reasonably significant only when pushed with great vigour by Governments.

This assumes that it is possible to reduce non essential expenditure on festivals and functions and reorder spending priorities in favour of spends which are  'capital' in nature. I feel that governments would run into huge resistance in attempting this as they work against inherent human biases and behavior. All of us would have experienced the same when attempting to change behavior in ourselves. I have certainly found it difficult. One of the examples that i am willing to admit publicly is that as a graduate student in the US, i found it far more gratifying to use extra income to buy a good meal rather than to save for a rainy day.

I am not sure if significant savings can be achieved unless the incomes of the poor increase.

1 comment:

  1. Agree with the larger point that in the aggregate "significant" savings cannot be achieved unless incomes of poor increase. But that is an outcome and we are talking about pathways to get to that outcome.

    Improving incomes is about a series of complementary things happening (some public policy and most others driven by the individual and socio-economic conditions). I would argue strongly that enabling access to financial instruments that the poor need and helping them overcome their cognitive biases are two such areas where public policy can potentially help. It is of course a different matter that the effectiveness will vary across areas. We, the non-poor, today take for granted the importance of things like a bank account in our own prosperity.

    About the political economy, there is nothing mandatory about this. Let banks open such accounts and offer such products, put in place communication strategies, and let the market emerge. The example of micro-finance in instructive. Once governments created a platform called SHGs, it was private enterprise that led to the massive microfinance eco-system that we see today.

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