Question

 

With reference to the Indian economy, consider the following statements:

 

1. A share of the household financial savings goes towards government borrowings.
2. Dated securities issued at market-related rates in auctions form a large component of internal debt.

 

Which of the above statements are correct?

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

 

Answer

 

The correct answer is C. Both 1 and 2

 

In the fiscal year 2018, approximately 50.8% of households' savings were allocated to financial assets, with physical assets accounting for 48.1% and gold/silver ornaments comprising 1.1% of total savings. Among financial assets, deposits with banks emerged as the most significant form, followed by insurance funds, mutual funds, and currency. These investments play a crucial role in supporting government borrowings as insurance companies and mutual/provident funds are major investors in government securities.

 

Internal Debt is a component of government borrowings that encompasses various forms of loans obtained through the open market, compensation and other bonds, and similar instruments. It also includes borrowings facilitated by treasury bills, including those issued to State Governments, Commercial Banks, and other Investors. Additionally, non-negotiable, non-interest bearing dated securities issued to International Financial Institutions are also classified as part of Internal Debt.

 

The allocation of households' savings across different asset classes reflects their preferences and risk appetite. Financial assets offer the potential for returns through interest, dividends, or capital appreciation, making them an attractive choice for many households. Deposits with banks provide a safe and easily accessible investment option, while insurance funds and mutual funds offer opportunities for long-term growth and diversification. Currency holdings serve as a medium of exchange and a store of value.

 

Meanwhile, physical assets hold their own appeal, with households allocating a significant portion of their savings to tangible assets such as real estate, land, vehicles, and other durable goods. These assets not only provide utility but also act as a hedge against inflation and economic uncertainties.

 

Gold and silver ornaments, although forming a small fraction of households' savings, hold cultural and traditional significance in many societies. They are often seen as a store of wealth and a symbol of prosperity and are valued for their aesthetic appeal.