Home / Politics / Policy /  Household savings grow highest in 7 years, but it’s mainly in cash

Mumbai: After a long hiatus, the gross financial savings of the household sector, as a proportion of disposable income, saw a sharp rise in 2017-18, shows the RBI’s annual report. Household financial savings as a percentage of gross national disposable income (GNDI) rose from 9.1% in 2016-17 to 11.1% in 2017-18, the highest in at least the last seven years. As the RBI report points out, household financial savings are the most important source of funds for investment in the economy.

That’s the good news. The bad news is that a major part of this increase was in currency. The accompanying chart has the details. As the chart shows, currency holding of households in 2017-18, as a percentage of GNDI, was the highest since 2011-12. As Gaurav Kapur, chief economist at IndusInd Bank said, “after the shock of demonetization, households are rebuilding their cash levels."

Note that the household sector in the national accounts is a catch-all term that includes, apart from individuals, all non-government, non-corporate enterprises like farm and non-farm businesses, unincorporated establishments such as sole proprietorships and partnerships and non-profit institutions like charitable trusts, religious endowments and educational institutions. To a large extent, therefore, it will reflect conditions in the informal sector, in the millions of small farms and shops and micro businesses across the country.

The second bit of good news, from the point of view of the markets, is that households’ holdings of shares and debentures showed a sharp jump in 2017-18, doubtless due to the buoyant conditions in the stock markets.

However, financial liabilities of households too have increased, as a proportion of disposable income. This is evident from the fact that much of bank lending in recent times has been to the personal sector. The upshot: net financial savings of the household sector was 7.1% of GNDI in 2017-18. The RBI report says, “As per the Bank’s preliminary estimates, net financial assets of the household sector increased to 7.1% of GNDI in 2017-18 on account of an increase in households’ assets in the form of currency, despite an increase in households’ liabilities."

While the 7.1% of GNDI level of net household financial savings is higher than net household financial savings in demonetization-hit 2016-17, it is still substantially lower than the 8.1% of GNDI notched up in 2015-16. Indeed, it’s even lower than the rate of net financial savings in 2012-13, when GDP growth was very low.

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