Household savings slide to decadal lows

Net financial assets of households have been declining consistently from 11.5% of gross domestic product (GDP) in FY21, to 7.2% the following year, and plummeting to 5.1% during FY23, according to data released by Reserve Bank of India (RBI).

Net financial assets are calculated by subtracting financial liabilities from overall financial assets. Household liabilities include loans from banks, and non-banking financial companies (NBFCs), among others, while assets include bank deposits, investments in financial institutions, life insurance, provident fund, currency, and other investments.

In 2022-23, the net financial assets of Indian households stood at 5.1% of GDP, the lowest in at least 23 years. The previous low was in FY15, at 7.1%, according to a September 2022 Motilal Oswal report. The pandemic year of FY21 witnessed a surge in household savings in India, reaching a peak of 11.5%, as the covid-led lockdowns restricted spending—a trend not limited to India alone.

“There has been a surge in household liabilities as banks and NBFCs pushed retail credit to consumers," said Madan Sabnavis, chief economist, Bank of Baroda.

In 2022-23, net financial assets declined to ₹13.8 trillion, compared to ₹17 trillion in 2021-22. During the same period, gross financial assets of households grew 14% from a year ago to reach ₹29.6 trillion. However, the financial liabilities witnessed a substantial 76% growth during the period, outpacing the growth in assets. The trend resulted in a decrease in net financial savings as a percentage of GDP.

India’s retail inflation, as measured by the consumer price index (CPI), came in at 6.83% in August, surpassing RBI’s flexible inflation target of 2-6% for two consecutive months. In its August monetary policy, RBI projected CPI inflation to hover at 5.4% for 2023-24. In FY23, retail inflation stood at 6.7%.

Robust credit growth to retail borrowers has resulted in a 57% year-on-year increase in household bank borrowings, while deposits witnessed 32% rise. In FY23, retail loans surged 21%, significantly higher than the 13% growth in FY22.

Banks’ retail loan growth, driven by growing demand for mortgages, has been a key driver for credit expansion in recent years, compensating for the sluggish demand for corporate loans. This trend persists despite RBI raising the repo rates by 250 basis points between May 2022 and February 2023. “I believe a decline in gross financial savings is more worrisome than the net number as it shows that you are saving less and consuming more," said Sabnavis.

Private final consumption, a key consumption indicator, improved in the recent quarter. This metric is defined as spending by resident households and non-profit institutions serving households on the final consumption of goods and services. According to a report by SBI Caps, private final consumption expenditure increased by 6% in Q1 of FY24, up from the 2.8% growth in the previous quarter. Nonetheless, experts said the 6% growth in private final capital expenditure needs to be looked at in perspective, as inflation would have played a role in it.

Past research by RBI showed while household borrowing plays a critical role, excessive leverage beyond sustainable levels may impact the health of India’s financial system adversely causing economic disruptions. In an article in RBI’s October 2022 bulletin, authors said owing to the development objectives, access to affordable credit for the household sector can alleviate liquidity constraint, and enable it to smoothen consumption.