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B. Venkatesh

THE 2002-03 Budget has made it less attractive to save. You will receive only a 10 per cent tax rebate, instead of 20 per cent earlier, if you invest in small savings/life insurance, and only if your income is less Rs 5 lakh. This has prompted some experts to state that the Government has adopted this strategy to encourage us to consume more.

What is the link between consumption and savings? To start with, both are components of our income.

You first spend a good portion of your income to meet your current consumption; it is only the remaining amount that goes towards savings.

So, how do you balance current consumption and savings? Suppose you want to buy a car for, say, Rs 10 lakh.

You feel that a similar car may not cost more than Rs 10.5 lakh in a year's time.

If you do not buy the car, you can invest in a bank fixed deposit that earns 7.5 per cent. What will you do?

The car, based on your estimate, will cost only 5 per cent higher after a year, whereas a one-year bank deposit will fetch you 7.5 per cent. You, thus, earn 2.5 per cent for postponing your decision to buy a car.

The postponing of your current consumption, thus, translates into savings.

What if in the above case, the cost of postponing your decision to purchase the car still costs 5 per cent, but a one-year bank deposit earns you only 4.5 per cent?

You may be less motivated to postpone your decision to purchase the car, and save. The reason?

You actually lose 0.5 per cent by postponing your current consumption.

Now, with the removal of tax rebates, returns on savings will be lowered, meaning you will earn less by postponing your current consumption.

And that, experts contend, will prompt you to consume more.

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