Savings fuel India's post-pandemic spending spree
3 min read 28 Sep 2022, 12:50 AM ISTPeople dip into savings as inflation erodes purchasing power.
PremiumMUMBAI : Indian households’ savings rate fell to the lowest in five years in the year ended 31 March as people drew on their savings to indulge in a post-pandemic spending spree, even as inflation eroded their purchasing power.
Gross financial savings of households stood at 10.8% of India’s gross domestic product in FY22, falling sharply from 15.9% in FY21, when GDP contracted, and 12% each in the previous three fiscal years, data from the Reserve Bank of India showed.
With inflation hitting low-income households the hardest, economists expect these families to forgo discretionary purchases if income levels fail to increase.
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While many Indians managed to save money in the early days of the pandemic, worried about covid’s impact on their health and jobs, they went on a revenge spending spree as the pandemic’s impact faded, depleting the savings they amassed even as income growth remained weak.
The household savings rate had substantially increased in the initial period of covid when it reached 21% of GDP in the June quarter of 2020-21, as people had few avenues to spend during the lengthy lockdowns.
“The pent-up demand scenario has ensured that people are spending. However, a situation where people are still spending despite not enough income being generated and not enough jobs being created indicates that they are dipping into their savings," said Madan Sabnavis, chief economist of Bank of Baroda.
Inflation and pent-up demand have contributed to higher levels of nominal consumption, lowering people’s ability to save, Sabnavis said. In addition, the surplus system liquidity infused in the wake of covid led to a decline in interest rates on deposits. The weighted average term deposit rate on outstanding deposits for banks, at 6.45% in February 2020, stood at 5.07% in May and has risen to 5.22% in July. “Households also include small and medium enterprises who anyway were financially challenged," he said.
Inflation, measured by the Consumer Price Index, eased to 6.71% in July after peaking at 7.8% in April but quickened to 7% in August. Since inflation is expected to stay above the monetary policy panel’s target of 2-6% for three quarters in a row, the central bank will have to write to the government in October, explaining its inability to meet the target.
To be sure, the gross savings number also appears lower than previous years because financial liabilities—a part of gross savings—stood at a multi-year low of 2.5% of GDP. Analysts at Motilal Oswal Financial Services found this sharp drop in household liabilities perplexing.
Household savings include bank and non-bank deposits, life insurance funds, provident and pension funds, cash, investments, and small savings. Granular details of gross financial savings showed the share of deposits was at 27.2% of the entire pie in FY22, the second-lowest in 50 years, analysts at Motilal said in a note on 26 September. Interestingly, the share of insurance, provident, and pension funds rose to 40%. The share of small savings is estimated to have hit a 16-year high of 13.3%, and the share of risky assets—shares and debentures—was also at a five-year high of 8.9% of gross financial savings.
“One of the primary causes of this sharp reduction in gross savings will be higher inflation. Without a strong revival in savings, any pickup in investments will drive the current account deficit, and therefore, India must strive to push savings higher to achieve higher growth on a sustainable basis for a long period of time," analysts at Motilal Oswal said.
The banking sector’s credit growth has outpaced deposit growth for some time now, and lenders have had to introduce certain limited-period deposit offers to woo customers. To figure out the sensitivity of deposits to interest rate changes, SBI Research looked at yearly data for 32 years from 1991 to 2022. In a report on 23 September, it said deposits in buckets ranging from three to five years are most sensitive to interest rate changes, followed by short-term deposits below one year. The one-to-three-year bucket was found to be the most stable deposit, it found.
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