(a)

Attached with this report is data collected on personal disposable income, Consumption, Savings, Spending on various consumption items (namely food, gross rent, clothing, fuel & power, appliances & furniture, Medical care, Transport & Communication, Recreation and education), distribution of household savings between financial and physical assets and composition of their financial savings portfolio (namely in the form of changes over the years in currency, bank deposits, non-banking deposits, life insurance, provident funds, claims on the Government, shares & debentures, units and net trade debt). With regards to the data collected and analysed, the following points should be noted: Data Source Handbook of Statistics on Indian Economy, 2010-11 (Table 1 for personal disposable income, 3a for Consumption, 10 for Financial, physical and total savings and 11 for Portfolio of savings). In addition data sent by course instructor on the breakup of consumption expenditure was used. All values are in current prices. Data collected is from 1970-71 to 2010-11. Regression analysis was performed using Microsoft Excel wherever applicable and the summary outputs are attached in the appendix. In all cases the equations were significant at the chosen level of significance.

(b) The Keynesian consumption function is given by:

Where,

= Autonomous Consumption = Marginal Propensity to consume C = Consumption = Personal Disposable Income

Based on the data collected, the OLS method was used to estimate the values of the parameters and determine the Consumption function in the Indian context as:

This implies that on the average during the studied period, a unit increase in personal disposable income would lead to 76% of it being consumed

The Keynesian savings function is given by:

Where,

= Autonomous Savings = Marginal Propensity to save S = Savings = Personal Disposable Income

Based on the data collected, the OLS method was used to estimate the values of the parameters and determine the Consumption function in the Indian context as:

This implies that on the average during the studied period, a unit increase in personal disposable income would lead to 29% of it being saved. Note: There is certain discrepancy in the two equations estimated, as is inevitable when attempting to do so with independent data. Ideally the Savings equation should be a mirror of the consumption equation and should be:

The following plot illustrates the movement of consumption with rising levels of Personal Disposable Income in the studied time period

Consumption, Personal Disposable Income vs Time

6000000 5000000 4000000 3000000 2000000 1000000 0 1970-71 1972-73 1974-75 1976-77 1978-79 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 Consumption Personal Disposable Income

The illustration shows that Indians have always had a very high MPC, i.e, increases in personal disposable income were almost entirely consumed. However since liberalization the two trends diverge implying that, since the 90s, Indians have been saving a substantially greater portion of their income.

(c) In studying the disaggregate level consumption data and examining the variation in MPC for each category of consumption, I have chosen to bifurcate the data in pre-1990 and post-1990 as the disposable income rose substantially after the economic liberalization. Having bifurcated the data, I have used the OLS to estimate the regression equation relating each of the consumption categories to the disposable income of the two periods, to finally derive the MPCs of the different categories before and after the economic liberalization: Category Food MPC 0.42 (pre 1990) MPC 0.33 (post 1990) Rent 0.08 Clothing Power 0.04 0.03 Furniture Medical Trans 0.03 0.03 0.08 Recreation Education 0.002 0.01

0.04

0.02

0.02

0.02

0.06

0.10

0.001

0.02

(d) The following plot illustrates the movement of total savings over time as well as that of physical and financial savings in the period under study:

Savings vs Time
1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 1970-71 1972-73 1974-75 1976-77 1978-79 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 Financial Savings Physical Savings Total Savings

The illustration clearly shows a significant jump in the growth of savings since the time of economic liberalization. The reasons for this are twofold in my opinion: i. Since liberalization, the rate of increase in the GDP and indeed the PDI has been substantially more than before, requiring citizens to consume a smaller portion of it to maintain the same standard of living There have opened more avenues for channelling savings that has incentivized citizens to save.

ii.

(e) The distribution of household savings between physical and financial assets has been very stable over the entire economic history of India.

Savings Fraction vs Time

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

1970-71

1998-99

1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

2000-01

2002-03

2004-05

2006-07

Financial Savings Fraction

Physical savings fraction

About 60% of savings on average have always been invested in physical assets such as land, cattle or gold, and 40% in financial assets. (f) The following plot illustrates the changing pattern of household savings held in various financial assets during the period under study
500000 400000 Bank deposits 300000 Non-banking deposits 200000 100000 0 1970-71 1973-74 1976-77 1979-80 1982-83 1985-86 1988-89 1991-92 1994-95 1997-98 2000-01 2003-04 2006-07 2009-10 -100000 Life Provident Claims on Government

Currency

Overall there has been substantial increase in the savings in financial assets since the economic liberalization which caused an overall increase in domestic savings and instilled greater confidence in the financial and banking sector because of phased reforms, deregulation and granting of permission to private and foreign players to enter this sector. Claims on Government gradually declined in importance as bank deposits, life insurance and provident funds emerged in the new millennium as the most popular channels for savings in financial assets.

2008-09