Home / Economy / Rural term deposits fall for first time in eight years

Every three months, the Reserve Bank of India (RBI) declares region wise data for term deposits. As of 31 March, the total term deposits of commercial banks in India rose 8.42% to 86.4 trillion from a year earlier.

Term deposits are money that depositors keep in a bank for a specific period. Fixed deposits and recurring deposits are examples of term deposits.

While there are no major surprises at the overall level, when we look at the data region-wise – rural, semi-urban, urban and metropolitan – a few interesting inferences can be made.

Take a look at the following chart. It plots the total growth/contraction in outstanding term deposits in commercial banks in rural India.

Depleting Savings
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Depleting Savings

As of 31 March, the total outstanding term deposits with banks in rural India contracted by 1.05% to 6.99 trillion from a year earlier. This is the first time in eight years that term deposits in rural India have contracted.

As can be seen clearly from the graph, the rate of growth in term deposits in rural India has fallen rapidly over the last year. In March 2020, it was at an all-time high of 21.4%, and it has since then come down dramatically.

A simple explanation for this lies in the negative economic impact that the spread of the Covid pandemic has had on rural India. With lockdowns and curfews in place through a significant part of the year in urban India, economic activity has been negatively impacted. Many people working in India’s urban centres send money to their homes in villages. With economic activity having been affected, so must have their incomes and the money they send home. Many people who moved back home from urban to rural India when the pandemic first broke out still haven’t returned. This impacted their incomes and, in turn, their savings and possibly explains the contraction in rural savings.

The other possible reason may be that their savings must have depleted because of expenses to treat of covid, given that a large part of the health spending in India is out of pocket. In answer to a question in the Lok Sabha in July 2019, the government said: “As per National Health Accounts (NHA) Estimates 2015-16, the household’s out of pocket expenditure on health accounts for 60.6% of total health expenditure in the country."

In another answer to a question in the Lok Sabha in February 2020, the government pointed out that per capita spending on health in 2016-17 stood at 4,381. Of this, the government had spent 1,418. This means that in 2016-17, Indians had met more than two-thirds of the health expenses, on average, from their resources. It is safe to assume that this ratio is worse in rural areas, where the health system is substantially weaker.

Of course, this data is for normal times, not for a pandemic year, like the last financial year was. In the pandemic year, health expenditure has gone through the roof for those who have had to incur it, needing them to dip into their savings. This should be another reason behind the contraction in rural savings. It will be interesting to see this data as of 30 June, as and when it is released, given that the worst impact of the second wave of covid was in April and May.

A similar trend is visible when it comes to outstanding term deposits in semi-urban areas, which have grown by just 4.02% to 11.93 trillion as of March 2021. This is the slowest growth in eight years.

Growth in term deposits in metropolitan regions continued to remain robust at 11.45%. The outstanding term deposits grew to 48.89 trillion. This is only the second time in five years that the growth in term deposits in metropolitan areas has been double digits. The last time this happened was in the year ended 30 June 2019, when term deposits had grown by 11.13%. This must primarily be on listed companies delivering very record-breaking profits between July 2020 and March 2021.

All this strengthens the argument of a K-shaped recovery that quite a few analysts and economists have been discussing, where one part of the economy is doing very well and another part isn’t.

It also questions the narrative of rural India not having been impacted much by the first wave of covid. While agriculture as a sector did well, all rural India isn’t only about agriculture. The share of other sectors in the economic output of the rural sector has gone up over the decades.

According to a November 2017 discussion paper by the Niti Aayog, agriculture in rural income was at 39%. Given that a few years have passed since the discussion paper was published, the ratio would have only fallen since then.

The point being that while agriculture did well, the other sectors in rural India didn’t. And that, in turn, is possibly reflected in the contraction in term deposits.

Vivek Kaul is the author of Bad Money.

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