I thought Avid reader is different but the email id told me they are the same people. I don’t think it matters if you share your name on the web. It hardly matters.

Anyways, thanks for the comments. I am with you on the fact that it is not right to let poor invest in risky assets. Infact I show how vulnerable they are and invest as index rises and vice-versa whereas finance theories would suggest the opposite. So we need fianncial literacy. But in a country where you do not have basic literacy, financial lietracy is far-off.

The government did try and convert the gold into financial assets by asking people to depsoite their gold and get interest.

I dont think we have been near equilibirium. The present capital flows have been so much that we have become an IC and this is posing numerous problems for RBI.

About your suggestions and conclusions, I am not sure if it is prudent encourage people to invest/speculate in riskier assets. Ordinary people are not in general savvy investors. They will end up losing their savings and lose trust in the financial system. This in turn might lead to social problems.

A lack of trust in the system in general is a big problem. I recently read that Indians are the people buying up huge amounts of gold. Part of the reason is our affinity for the metal but another big reason is that people have learnt the habit of saving for a rainy day and keeping their savings hidden from the state (and thus the world.) This may have to do with the difficulties our ancestors faced under colonialism and occupations. Changing these deep-rooted cultural notions might be difficult and moving people to risky assets may be counterproductive in the long run as people would clam up even more from their bad experiences.

One of the ways in which countries like Korea and Taiwan (and now arguably China) have developed is to take the relatively safe savings of ordinary people, pay them sub-par returns and directly lend out the capital at reduced costs to the private sector. This is in a way a transfer of savings. They were applied under what were dictatorships and are not advisable or even possible in India.

I really don’t have any suggestions for policy remedies except maybe to find a way to harness the hidden savings (in gold, land etc) in financial instruments than be then deployed into investments.

I think the fact that India oscillates between Saving Constrained and Investment Constrained means that it runs near equilibrium. Am I wrong in assuming that and being happy about it? Will this make RBI’s life easier with no need for letting the rupee rise? If the trend continues, will it mean that the Indian economy will slow down?

Thanks for the paper