We must incentivize household savings for fast economic growth

We must incentivize household savings for fast economic growth
We must incentivize household savings for fast economic growth


This is key to getting them rising amid a falling share of the ‘young’ in the working-age population.

Prime Minister Narendra Modi has given a clarion call for India to become a developed country by 2047 when we celebrate 100 years of India’s independence. Achieving this objective requires real income to grow at 8% per annum over the next 25 years; significantly higher than the approximately 6% growth achieved over the last 25 years. If we accomplish this, India will become only the fifth country in the world since 1970, in addition to China, Botswana, Korea and Singapore, to grow its real income in excess of 7% year-on-year over a 50-year period.

One of the prerequisites for achieving faster growth is to invest more in factories, machinery and infrastructure, among other things. Going by historical evidence, we need to invest about 4.5% to 5% of gross domestic product (GDP) to clock 1% GDP growth; thus, realising 8% growth will require investments worth 35%-40% of GDP. Close to 90% of this capital requirement will need to be financed domestically, and a big chunk of it through the household sector. Hence, one of the key pivots for achieving faster growth is for households to save more. This becomes even more important since household savings declined by 7% of GDP between 2010 and 2017 and have only recently begun to look up, marginally. Pushing household savings is, thus, critical to achieve accelerated growth on a sustained basis.

Household savings in India had been steadily increasing since independence, from around 7% of GDP in 1951 to 13% by 1981 to its peak of 25% in 2010. However, since then, it has declined to 18% in 2017. This is unprecedented since the maximum decline in the post-independence period has not been more than 2%. Hence, a 7-8% decline is not a usual fluctuation, but has structural underpinnings. Part of this decline can be attributed to slowing GDP growth over the last decade or so; households save more when incomes increase at a faster pace and vice-versa. However, this alone is not a good enough explanation, since India has gone through slower GDP growth phases in the past as well without witnessing such a steep decline in household savings.

We argue in our paper, ‘India’s New Growth Recipe: Globally Competitive Large Firms’, published by the Centre for Social and Economic Progress in December 2022, that one of the structural reasons for this reduction in household savings is an unnoticed demographic shift towards a declining share of the ‘young’ in the working age population. We define the population between 15-44 years as ‘young’ and it is the share of this cohort that is steadily declining in the working age population—from 77% in 2001 to 73% by 2021 and likely to decline further to about 70% by 2031. Since it is the ‘young’ who traditionally save the maximum, their declining share acts as a dampener on overall household savings.

This demographic shift may come as surprise for a country that is universally considered to be one of the youngest in the world, with a median age of around 29 years, compared to 38 years for China and 33 years for Brazil. Nonetheless, a declining share of the ‘young’ is very much on and is one of the key structural drivers pushing down household savings.

There are strong empirical and rational reasons to believe that household savings peak when the head of the household reaches around 45 years of age. For example, in the US, savings peak when the head of the household reaches 40-45 years of age and in Singapore, working adults in their 20s save 35% of their income, in contrast to 29% saved by working adults in the age group of 55-65 years. India is no exception. According to some estimates, the savings of Indian households as a proportion of their income drop by about 8%-10% once the head of the household crosses 45 years of age.

This saving behaviour is intuitive as well, since at this age, big-ticket expenses like the marriage of children, expenses for higher studies, among others start kicking in, requiring households to dip into their savings pool. Marriages are one of the biggest expenses in a typical Indian household; they can cost up to six times a family’s income, thus requiring them to dip into their savings or borrow. The average age that people in India get married is 19-23 years and hence a typical parent would be in their mid-40s when marrying off their first child. All in all, one would expect pressure on household savings in India when the proportion of the ‘young’ begins to decline. The declining share of India’s ‘young’, thus, poses a structural impediment.

Simulating the value of this demographic variable and with reasonable assumptions on income growth, we estimate that household savings will be around 20-24% of GDP by 2030. While this level of household savings is reasonably high by global standards and comparable to China’s in the late-2000s, this may not be good enough to meet our growth ambition.

The government needs to realise and address this challenge by incentivising household financial savings. Resolving the lower household saving conundrum in the wake of this silent and irreversible demographic shift is, thus, imperative for faster growth.

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