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Business News/ Money / Personal Finance/  How joblessness eats into household savings
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How joblessness eats into household savings

The dent on India’s savings rate will eventually affect investments into areas the country needs badly
  • Given that consumption rates are estimated to have risen in FY19 to 59.5%, the savings rate may have fallen again this fiscal. 
  • Another factor driving savings down is an increase in household indebtedness (Mint)Premium
    Another factor driving savings down is an increase in household indebtedness (Mint)

    MUMBAI : Savings is a private virtue but a public vice," said renowned British economist John Maynard Keynes.

    In India, savings have become less and less of a private virtue, with consumption rates rising and savings rate of households falling. What’s more, while getting access to reliable jobs data has become increasingly difficult, economists point out that high unemployment rates are also to be blamed for the drop in financial savings rates.

    According to Ambit Capital Pvt. Ltd, there could be further erosion in the country’s savings to gross domestic product (GDP) ratio if the unemployment problem is not addressed. “The strong correlation between savings ratios and employment growth is not just a phenomenon that holds true with respect to India, but in fact can be seen in the context of other emerging markets as well," it said in a note to clients.

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    “We wonder if the decline in overall savings rate is due to some combination of (a) continued high consumption by households, (b) low job creation in general and (c) increase in financial liabilities of households to support short-term consumption," analysts at Kotak Institutional Equities said in a note to clients.

    While other analysts and economists broadly concur, they were unwilling to be quoted, given the lack of data on jobs. More than 100 economists and social scientists recently protested the government’s interference with agencies that gather statistics, amid a cloud over the release of India’s jobs data.

    Where the data is fairly conclusive is that the domestic savings rate has fallen from 34.6% of GDP in FY12 to 30.5% in FY18, data collated by Kotak shows. The fall in the household savings rate has been sharper, from 23.6% to 17.2% during the same period, as the chart above shows.

    Meanwhile, household consumption as a percentage of GDP rose by nearly 3 percentage points to 59% in FY18. Given that consumption rates are estimated to have risen in FY19 to 59.5%, the expectation is the savings rate may have fallen again.

    Another factor driving savings down is an increase in household indebtedness. This has risen from 3.3% of GDP in FY12 to 4.3% in FY18. “This is not a healthy trend and also, not sustainable," said Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities. “From a long-term perspective, this might mean India will have to increase its foreign borrowings if it wants to sustain investment above the domestic savings rate."

    A lot more has to be done than just trying to create more jobs. “Our analysis shows that one of the problems with respect to India is to do with skill mismatch between what the employer wants and what the employee can offer," Madhur Jha, head of thematic research at Standard Chartered Bank, said in an email. “Creating jobs will only solve the supply side problem but on the demand side, skills of workforce have to be further enhanced. In Asia, Malaysia, the Philippines and Indonesia do comparatively better on skills development. India and Thailand lag, as do countries in Sub-Saharan Africa."

    On India’s widening skills gap, Jha says in a recent report: “Only 6% of the labour force has formal vocational training, much lower than 60% for most industrialised nations. India needs to train around 10 million people annually, but currently has the capacity to train just 4.5 million."

    It has often been pointed out that government spending on education in India is inadequate. Unless there is a meaningful increase in the outlay on education and development of skills, the problem will not disappear in a hurry.

    Elevated unemployment levels have social repercussions as well, warn Ambit’s analysts. States in India characterized by a high youth unemployment ratio and higher crime rates show that if employment rates are not raised, then social unrest will become a big problem in India over the next five years," Ambit said in the note.

    Of course, unemployment may only be one piece in the puzzle. The influence of consumption and debt may be much higher. “Consumption has increased at a faster pace compared with growth in household income. It is possible that households feel more confident about the future and are thus willing to save less," says Kotak’s Prasad. In other words, the haves seem to be spending beyond their means, while the have-nots—the unemployed—appear to be rising in number. Unless addressed, this dual hit on the savings rate will affect investments into areas India needs.


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    ABOUT THE AUTHOR
    Pallavi Pengonda
    Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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    Published: 18 Mar 2019, 12:24 AM IST
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