Indian Savers Risk Wealth by Sticking to 'Safe' Fixed Deposits
Overview
Indians overwhelmingly favor fixed-income investments like bank deposits and PPF, driven by structural government incentives and deep-seated cultural aversion to risk. This 'safe' approach, however, quietly impoverishes savers over decades as inflation and taxes erode purchasing power, benefiting banks and the government instead.
The Hidden Cost of Safety
For years, India has been anchored by a fixed-income mindset. Data starkly illustrates the consequence: a 44-year systematic investment in the Public Provident Fund (PPF), an esteemed fixed-income vehicle, yields approximately ₹60 lakh. The same investment in the Sensex over the same period could have ballooned to nearly ₹2.3 crore, a stark fourfold difference that separates comfort from genuine wealth.
Structural Incentives Fuel Fixed Deposits
The persistence of this preference isn't accidental. When citizens deposit money, banks channel a significant portion to the government via statutory liquidity and cash reserve ratios. This mandate requires banks to hold government securities and cash reserves, effectively creating a captive system for cheap government borrowing. From the government's standpoint, encouraging fixed deposits ensures a steady, low-cost capital pool, disincentivizing a shift towards potentially more volatile equity markets.
Small Savings Schemes: A Similar Model
Government-backed small savings schemes, including Post Office deposits, National Savings Certificates, and Sukanya Samriddhi accounts, operate on a similar principle. While offering attractive rates and sovereign guarantees, they essentially allow the government to borrow directly from citizens. The returns often merely keep pace with inflation after taxes, making capital preservation the primary outcome, not capital growth.
Cultural Conditioning Reinforces Risk Aversion
Beyond institutional incentives, cultural conditioning plays a significant role. Generations of Indians have been raised with a profound suspicion of risk. Modest, fixed returns are perceived as safer than potentially superior but volatile equity markets. This instinct, shaped by India's economic history where capital preservation often trumped growth, views the stock market as a speculator's domain.
The Gradual Impoverishment Trap
This confluence of institutional design and cultural bias creates a silent impoverishment for the average saver. While feeling secure, their purchasing power is systematically eroded by inflation and taxes. Banks, insurers, and the government continue to benefit from this steady flow of capital, leaving the saver perpetually behind, especially in retirement.
A Call for Awakening
While instruments like Systematic Investment Plans (SIPs) show some progress, the majority of household savings remain in fixed-income assets. The fundamental incentives and cultural preferences have not significantly shifted. The true risk, it is argued, is not volatility but inadequacy. Guaranteed low returns mask a subtler danger: a failure to build sufficient wealth over time. Savers must adapt to outpace the system, not expect the system to protect them.
