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Mint Explainer: What plummeting household savings mean for the economy

The fact that income levels are stagnant and people are borrowing to spend should worry the government as it means the current consumption growth is unsustainable (Photo: Bloomberg)
The fact that income levels are stagnant and people are borrowing to spend should worry the government as it means the current consumption growth is unsustainable (Photo: Bloomberg)

Summary

  • A high savings rate is a prerequisite for high economic growth

Financial savings of India households have fallen to a five-decade low, according to data released by the Reserve Bank of India on September 18. This has many potential ramifications. It could slow down economy growth, for one. Mint delves deeper into the development.

Has there been a change in how Indian households approach finances?

Yes. They have been saving less and borrowing more to spend. The net financial savings of Indian households, which includes bank deposits, stocks, bonds and insurance policies, dropped to 13.8 trillion in 2022-23, or 5.1% of GDP. This was the lowest savings rate in 47 years. In 2020-21 household savings were at 22.8 trillion or 11.5% of GDP. The worrying part is the increase in household liabilities, which have shot up by 76%. Borrowings (personal, auto and home loans) have risen sharply.

(Graphic: Satish Kumar/Mint)
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(Graphic: Satish Kumar/Mint)

What’s causing this change?

There are many potential reasons. First, household income has either stagnated or fallen in recent years. At the same time inflation – in food, fuel, healthcare and education – has risen consistently. This has eaten into households’ disposable income and impaired their ability to save. However, a smaller surplus has not stopped people from spending on consumer goods, services, gold and real estate. Private consumption increased by 7.5% in 2022-23 and by 6% in the first quarter of 2023-24 as people borrowed to fund their purchases. That explains why borrowings from banks rose by 57% and retail loans increased by 21% in 2022-23 over the previous year.

Is rising consumerism a reason?

It is indeed a critical factor. Consumerism, which got a leg-up thanks to the post-pandemic spending spree, continues to be fuelled by things like EMIs, cash-back schemes and so on. Household liabilities have thus risen by 11 trillion in just 12 months. As a percentage of GDP, they grew by 5.8% in 2022-23 – the second annual growth in India’s history after 6.7% in 2006-07.

What are the implications of this?

A high savings rate (including both financial and non-financial or physical assets such as gold, real estate, etc) is a prerequisite for high economic growth. In 2022-23, though the savings rate (30.2%) was higher than the 28.8%) recorded in 2021-22, it was at least six percentage points lower than the optimal level required for 8% or higher economic growth. The savings rate was high in 2004-12, peaking at 37% in 2010-11. That was when India saw rapid economic growth.

Should the government be worried?

The government has tried to dispel fears, claiming people have shifted their investments to non-financial assets. But the fact that income levels are stagnant and that people are borrowing to spend should worry the government as it means the current consumption growth is unsustainable. If consumption falls going forward, it will hurt growth. The government depends on financial savings to fund its infrastructure spending. Lower savings means it will have to rely on volatile foreign capital. Also, financial savings are the principal means of funding the government’s fiscal deficit.

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