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Discretionary Savings and Investment Behaviour of Middle Class Households in

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 Discretionary Savings and Investment Behaviour
of Middle Class Households in India: Empirical
Evidence
S. C. Das*, Vivek Kumar**

Abstract Keywords: Savings and Investment Behaviour, Middle Class

Aims: The study is indented to understand the relationship Households, Banking Service, Indian Economy, and Financial
between the saving and investment behaviour among middle class Literacy
households. Secondly, dependency of discretionary savings and
JEL Code: E21, E22, and N3
investment behaviour on select control variables of middle class
households also been assessed.
Research Design & Approach: The study captured descriptive
research approach based on 200 respondents (100 Male &
100 Female) of different age groups, educational qualifications, Study Motivation
belonging to joint or nuclear family types; differentiated on the basis
of income & employment. The questionnaire used 14 statements The difference between total saving and committed saving
of saving and investment behaviour adopted from Bhushan (2014) can be defined as discretionary saving. In general this is
and Lusardi (2008) which measures the response on 5-Point Likert much smaller than committed saving, but much more
Scale. Two different important statistics namely Pearson Correlation volatile. Savings and investment behaviour is influenced
Matrix and Two- Way ANOVA have been used in accordance with
by sociological, psychological, demographical and
the needs of the data set and specified objectives.
economic factors. It is widely accepted in literature that
Results & Implications: Pearson correlation technique defines various economic factors (size of income, disposable and
that a total of 91 combinations of variables, around 39 are found discretionary income), individual differences, and family
to be highly significant (p<.01). Twelve (12) of them were found habits etc. strongly influence the saving and investment
significant at 0.05 level (p<.05) and remaining 40 are found to be behaviour of Indian Households. Banking Services &
insignificant (p>.05). Very few cases strong positive correlation
Savings instruments offer a safer option for storing wealth
can be seen in between indicators of discretionary savings and
than keeping money at home and can also be adopted as
investment behaviour. Saving behaviour is not dependent on type
of employment (main effect) and monthly income (main effect) is
mechanisms to reduce the temptation of utilizing cash
found statistically insignificant at 5% level of significance, whereas at hand; particularly for those who have present-based
in case of investment behaviour (Dependent Variable), only preferences (Abebe et al., 2016). India is truly a bright spot
monthly income shows statistically significant. Interaction effects in among emerging markets and it is also the fastest-growing
both the case found statistically insignificant. This paper examined economy in BRICS now and has exited the pejorative club
into the understanding of savings and investment behaviour of of ‘Fragile Five’ (CRISIL, 2015). The ongoing disinflation
middle class households which can be of great relevance to the is freeing up real incomes, and interest rates– especially on
policy makers and the government to anticipate and formulate small savings - turned positive in real terms. The significant
strategies to respond the varying saving and investment behaviour improvement in corporate profitability, essentially on
of the middle class investors. account of saving on input costs and more recently on

* Professor OB & HR, Faculty of Commerce, Banaras Hindu University, Varanasi, Uttar Pradesh, India.
Email: scdas@[Link]
**
JRF, Faculty of Commerce, Banaras Hindu University, Varanasi, Uttar Pradesh, India. Email: krvivekbhu@[Link]
 Discretionary Savings and Investment Behaviour of Middle Class Households in India: Empirical Evidence 27

sales growth, is expected to boost corporate saving and the Indian middle class and creating enough opportunities
translate into investment spending going forward (RBI, in society to absorb these employees. From 1990 to 2000,
2016). Record inflows of foreign direct investment and the a very high proportion of Indian households’ savings were
surge of initial public offerings after a four-year lull seem invested in financial assets when compared to Physical
to be providing lead indications of this tipping point. The assets. From 2000 to 2007, more household savings were
total amount of Financial Savings made by households was routed to physical assets (Table: I). Interestingly in 2007-
Rs 8,194 billion in 2014. This is an increase of 18% when 08, more investments were made in financial assets. This
compared to financial savings of 2013. The total amount shows that retails/small investors participated in stock
of savings in physical assets was at Rs 12,123 billion, a markets when their valuations are at peak. The markets
decrease of around 5% when compared to previous year’s eventually crashed in 2008. From 2008 to 2014, physical
data. It is very clear that households’ savings are routed to savings are preferred to financial savings (Reddy, 2015).
investments in physical assets but the gap between financial More households have to be brought into the financial
savings and physical assets is slowly shrinking, which is a system. We should aim for a healthy mix of financial assets
very good sign for Indian Economy (Reddy, 2015). and physical assets. Channelling households’ savings into
the financial markets is imperative. Corroborating earlier
There is no official definition of the middle class in findings, our results showed that technical aspects of
Indian economy. The middle class not only categorises service quality increased customers’ satisfaction (Bitner
an income group, but also a political and social class and et al., 2000). Indian banks are adopting latest technology
a consumer market. Thus, quantifying this demographic to meet the challenges of speed, efficiency and changing
group can yield varying results (DBR, 2009). India customer demands and provide value added services to
accounts for 3% of the global middle class with 23.6 their customers. It includes e-banking systems and ATMs.
million people. It has the lowest threshold for a person to Under the Business Facilitator (BF) model, banks utilize
be considered middle class with annual wealth of $13,662 the network of intermediaries such as the NGOs, post
(Rs 737,748 or Rs 61,480 per month). With 23.6 million offices for banking services such as creating awareness
people, the Indian middle class holds almost a quarter of and educating on the financial products, collecting and
the country’s wealth at $780 billion (Rs. 5,070,000 crore). processing information of borrowers, selling banking
An increase in discretionary income is likely to boost products and financial services to rural households,
household spending on goods like consumer durables and etc. These user-friendly self-service technologies help
automobiles & services such as hotels and restaurants customers to perform banking transactions. It helps in
over 2010-11 to 2015-16 (CRISIL, 2011). obtaining information on purchasing financial products.
One key point to ensuring that the link between middle Below table gives us details about various investment
class growth and Indian economic growth continues to avenues under which households’ savings have been
strengthen is providing the right education and skills to invested.

Table 1: Financial Assets of the Household Sector (in Billion Rs.)

Non-Banking Life Insurance Provident & Shares & Total Financial

Year Currency Bank Deposits
Deposits Funds Pension Funds Debentures Assets
2009-10 969.40 3981.41 185.16 2598.21 1298.49 448.41 9897.98
2010-11 1371.31 5482.99 50.99 2101.02 1411.39 17.29 10798.67
2011-12 1062.42 5259.70 100.21 1956.73 956.92 173.36 9335.43
2012-13 1,115.21 5,750.80 172.66 1,820.97 1,240.20 437.90 10,244.52
2013-14 1,019.19 7,741.76 305.67 2,052.22 1,362.23 323.53 12,792.54
2014-15 1,317.11 5,792.95 274.36 2,347.16 2,008.35 570.73 12,356.22
Source: Handbook of Statistics on the Indian Economy-2015, RBI.
28 International Journal of Applied Marketing and Management Volume 1 Issue 2 2016

Note: (i) life Insurance Find includes Central or State stock marketability, past performance of the firm’s stock,
Government employees’ insurance funds and postal government holdings, and the creation of organized financial
insurance funds. (ii) Shares and debentures include markets, religious reasons and family members’ opinions
investment in shares and debentures of credit/ non credit were identified as the most influencing investment factors
societies, public sector bonds and mutual funds (other by the author. Horioka and Wan (2007) in their research
than specified undertaking of the UTI). work established the fact that China’s household saving rate
has been high and rising and that the main determinants of
Empirical Review variations are the lagged saving rate, the income growth
rate, the real interest rate and the inflation rate. However,
they found that the variables relating to the age structure
Indian Evidence: The Indian Household of the population usually do not have a significant impact
Investors Survey on the household saving rate. The findings of the study of
The Indian Household Investors Survey (2005) Shrestha (2010) suggest that there is a need to focus on
conducted by the Society for Capital Markets Research & development policy which increases productive base of the
Development, Delhi emphasises the fact that investment economy in order to increase income growth and reduce
preferences among household investors have important unemployment in Nepal. It is also important to note that the
socio economic applications. Such preferences influence real interest rates have a positive influence on the private
the direction in which, and the channels through savings and can be taken as an important policy variable.
which, household financial savings would flow. Verma
(2007) in his study finds that savings unambiguously Evidence from Western Countries
determines investment in both the short run and long run.
Krishnamoorthy (2008) in his study concluded that all Pitelis (1984) supported the ideas that the household
salaried people were aware of bank deposits, PF schemes, sector does not save out of their current discretionary
insurance schemes, post office savings schemes, gold and income. They only appear to save out of their changing
however only few were aware of UTI. The middle class is income, and in the form of contractual saving such as Life
also increasing its share of financial investments and thus insurance and Pension Funds. Individuals do not always
providing new sources of capital for companies. Although act according to economic theory, however, particularly
household savings and investment rates as a % of GDP under conditions of risk and uncertainty (Clark and Strauss
have remained relatively the same over the past several 2008), a position supported by more recent empirical
years, investment in shares and bonds has risen over the research. Household savings are inextricably linked with
past several years. As the middle class recovers from the economic growth. In models ranging from simple Harrod-
crisis, this trend should continue (DBR, 2010). Another Domar formulations (Harrod, 1939; Domar, 1946) to
Indian study of Bahl (2012) showed that how much women more sophisticated formulations such as Lucas (1988);
were aware about the investment benefits and whether Romer (1986, 1989) and Mankiw, Romer and Weil
they invest their money or not, and if invested, how much (1992), savings directly affect economic growth, when
money is invested by them. Bhushan (2014) in his paper transformed into productive investments in physical and
stated that majority of the respondents park their money human capital (Deaton, 2012). The international evidence
in traditional and safe investment avenues. The share of suggests that domestic savings are particularly important
non-financial assets varies significantly between rural and in this context, as domestic savings and domestic
urban areas in India, by household characteristics (such investment rates appear to be highly correlated (Feldstein
as the education of the household head and the number of and Horioka, 1980). The study of Euwals et al. (2000)
children), and by wealth (Badrinza et al., 2016). concerning discretionary household of two members’
wealth found evidence for an impact of the husband’s
Evidence from other Asian Countries attitude, but no evidence for an impact of the wife’s
attitude. African economy is suffering from a supply side
Al-Tamimi (2006) investigated the most and least crisis and new investments by the corporate sector are
influencing factors on the United Arab Emirates investors’ required to improve the situation (Luis, 2016). The study
behaviour. Factors like corporate earnings get rich quickly, of Prinsloo (2000) stated that Private households in Africa
 Discretionary Savings and Investment Behaviour of Middle Class Households in India: Empirical Evidence 29

have been supplying a large volume of funds to financial sector funds, etc., life and non-life insurance schemes
markets, in this way probably dampening the relatively (Unit Linked Investment Plans (ULIPs), pension plans,
high real interest rates. The high level of inflation in children education plans, etc.). It further includes shares
South Africa over the long term caused distortions and debt securities offered by various entities, investments
which encouraged people to concentrate their personal in which are mainly facilitated by the brokerage houses.
saving in risk-avoiding institutions and financial assets in This has led to rising competition through introduction of
preference to riskier undertakings and fixed assets. innovative and attractive products, regulatory initiatives
and growth in the investor base along with increased
Burns & Dwyer, (2007) advocated in their study in New marketing activities in the financial sector.
Zealand that adequate income and money management skills
are important precursors to sound saving and investment The review highlights that consumers generally lack any
behaviours. They also reported that the difference between detailed knowledge or understanding of pensions and
household disposable income and household consumption investments, even though they are increasingly expected
has declined over the last two decades and now appears to to make their own financial provision for retirement.
be negative. On the other hand, household wealth has risen. They also tend to be risk averse (women in particular),
Arent (2012) found evidence for Western Germany that a and seek to minimise losses rather than maximise gains,
lower income expectation increases the overall saving even in relation to long-term investments such as a
rate. Adult financial literacy survey (2011) results revealed pension. While many people may rely on professional
strong positive associations between age and most of the financial advice to make pension purchase and investment
behavioural indicators from the age group 25-34 while decisions, research evidence from the UK and Australia
no such association was observed for age group 18-24. has highlighted concerns about the quality of advice
Household income also showed a relatively strong positive provided to individuals (e.g. from financial advisers)
association with financial control such as having savings (Collard, 2009). Most consumers in India do not work
and investments. Additionally, education had a strong in the organised sector and their wellbeing cannot be
positive association with choosing financial products and discerned from salary and wages data maintained by
staying informed (ANZ, 2011). From the study of Clark corporate houses. Many are not even salaried, but are self-
et al. (2013) reveals that knowledge of Australian investor employed or casual wage earners. Indian households have
behaviour and particularly their decisions regarding come a long way in the post-reform period, absorbing
investment savings and changes in their retirement dramatic changes to traditional thought processes
savings can be improved. There appears to be some key governing consumption and savings. It is necessary to map
demographic factors (gender, age, balance, and income) households in terms of their earning, spending and saving
associated with behaviour. The most compelling finding is patterns. The literature survey is disclosing the lack of
the lack of activity. sufficient work done in the area that relates the saving and
investment behaviour to the financial awareness. There
Research Gap and Problem is highly dearth of comprehensive study that signifies
the saving and investment pattern of Indian households.
In the past, traditional financial products were offered in Most of the part of evidence available is done in western
India through government initiatives by Public Sector countries except Bhushan (2014), Badrinza et al. (2016)
Banks (PSBs) is deposit account, credit account, Life & few others.
Insurance Corporation (LIC), and postal department
(recurring deposit, National Saving Certificate, Kisan Objectives and Hypotheses
Vikas Patra). However, in recent years with the advent
of liberalization of financial services industry, diverse The study has the following objectives:
financial products have been introduced through 1. To find out the relationship between the saving and
participation of private and foreign entities in addition to investment behaviour among middle class house-
the public sector enterprises. These include products such holds; and
as debit and credit cards by banks, open-end and closed-
2. To study the impact of demographic variables on
end mutual fund schemes like as Exchange Traded Funds
saving and investment behaviour.
(ETFs), Index Funds, Systematic Investment Plans (SIP),
30 International Journal of Applied Marketing and Management Volume 1 Issue 2 2016

The study has developed two generous hypotheses concerned as the source of secondary information.
namely: (H01) Firstly, saving and investment behaviour of
Indian middle class households are not correlated; (H0), Study Measures and Research Methods
and secondly, insignificant impact of control variables on
middle class households saving and investment behaviour. An integrated structured questionnaire is prepared in
order to measure the correlation of Financial Behaviour
Survey Procedures and Sample and Financial Awareness as questionnaire contents
with demographic information of individuals. The
The Primary data has been collected from the Varanasi questionnaire consists of 2 demographic characteristics
City and the study tends to be exploratory in nature. The of individuals i.e. Type of Employment, and Family
sample comprises of 200 respondents (100 Male & 100 Income. The questionnaire used 14 statements of saving
Female) of different age groups, educational qualifications, and investment behaviour that is adopted from Bhushan
belonging to Joint or Nuclear family types; differentiated (2014) and Lusardi (2008) categorised into Saving
on the basis of income & employment. Sample is selected Behaviour and Investment Behaviour 7 statements each
on the basis of random sampling method. Secondary data (table-II). The survey instrument measures the response
has been collected from the various published reports of on 5-Point Likert Scale. Two different important statistics
RBI annual reports, Different books, Magazines, Research namely Pearson Correlation Matrix and Two Way ANOVA
Papers, National and International Reports, Articles, have been used in accordance with the needs of the data
publications etc. Internet and electronic data has also been set and objectives specified.

Table 2: Study Construct

Sl. No. Variables Description

(1)Special events saving (2) Emergency saving (3) Regular Contribution to Saving,
I. Saving Behaviour (7) (4) Saving money before spending, (5) Keeping track of spending, (6) Cutting Down
Expenses occasionally, (7) Insist to save.
(1)Risk for investment (2) Evaluating financial product, (3) Comparing financial
II. Investment Behaviour (7) product, (4) Gathering Information, (5) Satisfaction in decisions, (6) Maximum re-
turn in short term (7) Maximum return in long term.
III. Respondent’s Profile (2) (1) Type of employment, (2) Monthly Income.
Source: Lusardi (2008, 2011b), Bhushan (2014) and module devised by OECD (2012)

Data Analysis and Discussions than 3, which means that the respondents are ‘Disagree’
to these variables. Variables like SES, RSC, SBS, KTS,
From table-III, we can see that the mean score of saving and CDE, IS, RI, EFP, CFP, GI & SWD demonstrate their
investment behaviour variables ranges from 2.64 to 4.08. means more than 3 but less than 4, which implies that the
The scale used for the study depicts 5 as ‘Strongly Agree’, respondents are more or less ‘Agree’ to these variables.
4 as ‘Agree’, 3 as ‘Neutral’, 2 as ‘Disagree’ and It can be The mean score of variable ES is more than 4 which
observed that the mean score of MRST & MRLT are less measures the response to ‘Agree’.

Table 3: Correlation Matrix of Saving & Investment Behaviour (Descriptive Statistics & Pearson Correlation)

Mean SD SES ES RSC SBS KTS CDE IS RI EFP CFP GI SWD MRST MRLT
I. Special events 3.84 1.0 1
saving (SES)
II. Emergency Sav- 4.08 .937 .464** 1
ing (ES) (.000)
III. Regular Saving 3.85 .950 .276** .318 1
Contribution (RSC) (.000) (.000)
IV. Saving before 3.91 .872 .317** .292** .292** 1
Spending (SBS) (.000) (.000) (.000)
 Discretionary Savings and Investment Behaviour of Middle Class Households in India: Empirical Evidence 31

Mean SD SES ES RSC SBS KTS CDE IS RI EFP CFP GI SWD MRST MRLT
** ** **
V. Keep track of 3.81 1.058 .133 .193 .257 .482 1
spending (KTS) (.061) (.006) (.000) (.000)
VI. Cutting down 3.97 .899 .340** .296** .194** .374** .257** 1
exps (CDE) (.000) (.000) (.006) (.000) (.000)

VII. Insisting to 3.91 .990 .177* .089 .145* .211** .107 .307** 1
save (IS) (.012) (.208) (.040) (.003) .130 (.000)
VIII. Risk for 3.30 1.240 .067 .040 .064 .068 .028 .073 -.026 1
investment (RI) (.344) (.576) (.368) (.336) (.690) (.307) (.717)
IX. Evaluation of 3.98 .835 .067 .144* .185** .093 .125 .186** .143** .230** 1
Financial Products (.343) (.042) (.009) .189 (.077) (.008) (.044) (.001)
(EFP)
X. Comparison of 3.87 .965 .076 .173* .159* .116 .157* .186** .218** .202** .681** 1
Financial Product (.282) (.014) (.025) .102 (.027) (.008) (.002) (.004) (.000)
(CFP)
XI. Gathering Infor- 3.88 .961 .063 .067 .183** .100 .105 .245** .146* .234** .584** .653** 1
mation (GI) (.377) (.346) (.009) (.160) (.139) (.000) (.039) (.001) (.000) (.000)
XII. Satisfaction 3.60 1.008 -.024 .071 .147* .140* .056 .062 .264** .161* .394** .358** .363** 1
with decisions (.736) (.316) (.038) (.049) .434 .382 (.000) (.023) (.000) (.000) (.000)
(SWD)
XIII. Max return in 2.64 1.139 -.104 .056 .079 -.146* -.016 .076 .049 .071 .154* .124 .114 .117 1
Short term (MRST) (.141) (.433) (.265) (.039) (.821) (.286) (.488) (.319) (.029) (.080) (.108) (.098)
XIV. Max return in 2.68 1.202 -.047 -.022 .099 -.135 .035 -.006 .088 .257** .302** .235** .304** .251** .417** 1
Long term (MRLT) (.509) (.760) (.165) (.057) (.623) (.935) (.214) (.000) (.000) (.001) (.000) (.000) (.000)
**
Correlation is significant at the 0.01 level (2-tailed).
*
Correlation is significant at 0.05 the level (2-tailed).

In a study of Evans (1996) suggests describing the positive weak or very weak correlation. From a total of
correlation strength verbally for the absolute value of ‘r’, as 91 combinations of variables, 39 are found to be highly
he considers it an effect size. A strong positive correlation significant (p<.01). 12 of them (i.e. SES-IS, ES-EFP,
can be seen in EFP & CFP (r=.681, p<.001) and CFP & GI ES-CFP, RSC-IS, RSC-SWD, SBS-SWD, SBS-MRST,
(r=.653, p<.001). A moderate positive relationship (Table: KTS-CFP, IS-EFP, IS-GI, RI-SWD & EFP-MRST) were
III) is found between SES & ES (r=.464, p<.001), SBS & found significant at 0.05 level (p<.05) and remaining 40
KTS (r=.482, p<.001), EFP & GI (r=.584, p<.001) and are found to be not significant (p>.05).
MRST & MRLT (r=.417, p<.001).

A very weak negative correlation also can be observed in Results of Two-way ANOVA
SES & SWD (r=-.024, p>.05), SES & MRST (r=-.104,
p>.05) SES & MRLT (r=-.047, p>.05), SBS & MRST The actual result of the two-way ANOVA – namely,
(r=-.146, p<.01), SBS & MRLT (r=-.135, p>.05), KTS & whether either of the two independent variables or
MRST (r=-.016, p>.05), CDE & MRLT (r=-.006, p>.05) their interaction is statistically significant – is shown in
& IS & RI (r=-.026, p>.717). Rest of the cases show a the Tests of Between-Subjects Effects table, as shown
below:

Table 4: Test of Between-Subject Effects (Dependent Variable: Saving Behaviour)

Source Type III Sum Degree of Mean Square F Sig. Partial Eta
of Squares Freedom Squared
Corrected Model 8.196* 19 .431 1.327 .171 .123
Intercept 1118.399 1 1118.399 3439.213 .000 .950
Type of Employment .789 3 .263 .809 .491 .013
Monthly Income 1.306 4 .327 1.004 .407 .022
32 International Journal of Applied Marketing and Management Volume 1 Issue 2 2016

Source Type III Sum Degree of Mean Square F Sig. Partial Eta
of Squares Freedom Squared
Type of Employment * Month- 5.037 12 .420 1.291 .227 .079
ly Income
Error 58.534 180 .325 *R Squared=.123 (adjusted R squared =
.030)
Levene’s Test of Equality of Error Variances*
F df1 df2 Sig.
.902 19 180 .581
Tests the null hypothesis that the error variance of the dependent variable is equal across groups.
*Design: Intercept + type of Employment + Monthly Income + type of Employment * Monthly Income

A two-way between-groups analysis of variance was categorised into 5 groups (Group 1: below 5000; Group 2:
conducted to explore the impact of Type of Employment 5000-10,000; Group 3: 10,000-15,000: Group 4: 15,000-
and Monthly Income on Saving Behaviour. Subjects were 20,000 & Group 5: Above 20,000). The main effect for
divided into 4 groups according to their employment type of employment [F (3, 180) =.809, p=.491], Monthly
type (Group 1: Government employees; Group 2: Private Income [F (4,180) =1.004, p=.407] and the interaction
employees; Group 3: Self Employed & Group 4: Not effect [F (12, 180) =1.291, p=.227] did not reach statistical
employed). According to Monthly Income subjects are significance (Table-IV).

Table 5: Test of Between-Subject Effects (Dependent variable: Investment Behaviour)

Source Type III Sum of Degree of Mean Square F Sig. Partial Eta
Squares Freedom Squared
Corrected Model 14.860* 19 .782 2.029 .009 .176
Intercept 903.427 1 903.427 2344.352 .000 .929
Type of employment 1.198 3 .399 1.036 .378 .017
Monthly Income 4.255 4 1.064 2.761 .029 .058
Type of employment * Monthly 5.542 12 .462 1.198 .287 .074
Income
Error 69.365 180 .385 *R Squared=.176 (adjusted R squared=
.089)
Levene’s Test of Equality of Error Variances*
F df1 df2 Sig.
1.285 19 180 .198
Tests the null hypothesis that the error variance of the dependent variable is equal across groups.
*Design: Intercept + type of employment + monthly income + type of employment * monthly income

There is a statistically significant main effect on Investment Implications of the Study

Behaviour for Monthly Income [F (4, 180) =2.761,
p=.029]; however, the effect size is moderate (partial eta From the above analysis it can be said that ‘Type of
squared=.058). The main effect for type of employment [F Employment’ & ‘Monthly Income’ along with their
(3, 180)=1.036, p=.378] and the interaction effect [F(12, combined effect, do not have any significant effect on
180)=1.198, p=.287] did not reach statistical significance the ‘Saving Behaviour’ of the respondents; whereas,
(Table: V). ‘Investment Behaviour’ of respondents is only affected
significantly by individual effect of ‘Monthly Income’.
 Discretionary Savings and Investment Behaviour of Middle Class Households in India: Empirical Evidence 33

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