India's shining GDP data masks a key weakness in what fuels growth: household savings

One of India’s structural determinants of sustained, high and inclusive growth has been the resilience of household savings. This provides the crucial financial capital to fund growth and acts as a stable domestic base to fund fiscal deficits.

Also, net foreign investment inflows act as supplementary savings for investment capital. India has been a unique Asian country to attract healthy net foreign capital flows despite a consistent external trade deficit. If our savings pool begins to dry up, both fiscal sustainability and growth will come under pressure.

India’s macroeconomic savings rate has fallen from a high of 36-38% of GDP to about 30% in the last two decades. Within this, the net financial savings of households has seen the steepest drop, from a pandemic peak of 11% to just about 5% in 2023-24, a multi-decadal low. This is not a statistical curiosity.

High and sustained growth, the kind that generates jobs for the youth, requires a correspondingly high savings rate. East Asian economies that grew at double digits consistently had a savings rate of 35-40% of GDP. Hence, a low household savings rate will pose a structural constraint to achieving 8%-plus GDP growth in the medium-term.

Even more remarkable is that households now park more than 70% of their savings in non-financial assets, mostly real estate and gold. Bank deposits, insurance and mutual fund investments account for a far smaller share. The Securities and Exchange Board of India’s Investor Survey 2025 reveals that only 9.5% of Indian households invest in capital markets, indicating risk aversion or lack of confidence, or both.

The high proportion of non-financial savings portends weak deposit mobilization by banks, making it difficult to meet credit demand and the government’s borrowing needs. Also, the conversion of savings to growth is much weaker and capital formation suffers if financial savings are a smaller fraction of total savings.

As deposit growth lags credit growth, liquidity tightens. The transmission of lower interest rates gets hurt too. Even as the government has embarked on fiscal consolidation, the tax collection buoyancy of direct taxes and GST is not robust enough to offset the country’s decline in household financial savings.

A key supplement to domestic savings has been net foreign direct investment (FDI). During the boom years two decades ago, it was consistently above 2% of GDP. It peaked at 2.6% in 2008-09 even during the global financial crisis. In the past few years, net FDI has fallen precipitously to nearly zero in 2024-25. It might soon become negative.

While gross FDI in 2024-25 jumped 14% to a healthy $81 billion, outflows grew more vigorously, making net FDI a minuscule $0.3 billion. It may be a reflection of economic maturity that outbound FDI and profit repatriation are non-trivial, and hence net and gross FDI do not move together. While private equity exits through IPOs, corporate overseas investments have also contributed to outward FDI.

We must examine whether this flight of capital reflects global ambition or lack of confidence in the domestic economy. After all, where else will global capital want to invest if not in the fastest-growing economy? Foreign portfolio flows into our stock and bond markets have also been waning, spooked by high stock valuations and tariffs.

Another indicator of distress in household finances is the surge in gold-backed loans. Their year-on-year growth in July was a whopping 122%. Bank loans against gold as collateral have risen by more than 70%.

The bulk of these loans are of ticket sizes less than ₹2.5 lakh, for which the Reserve Bank of India (RBI) has slackened regulatory limits. For small loans, the loan-to-value ratio is allowed to be as high as 85%, even as appraisals remain light.

Meanwhile, outstanding loans by microfinance institutions (MFIs) have dropped 16.5%, indicating that some of the increase in gold loans is a substitution. It means that lower- and middle-income households that once depended on MFIs or unsecured credit are turning to gold loans, which have also been fuelled by soaring gold prices.

Gold loans are seen growing rapidly for some time to come. This surge is not a sign of financial deepening, but of households liquidating their last-resort savings to finance consumption or service other debts. And the regulatory compromise of RBI—tightening MFI lending norms but loosening small-ticket gold loans—reflects an uncomfortable reality: the gold loan boom is both a safety valve and a red flag.

Household stress is compounded by a prolonged stagnation in rural real wages. For agricultural labourers and informal rural workers, this hurts purchasing power and savings. Combined with rising food and fuel costs and limited access to formal credit, households dip into savings or pledge gold to meet routine expenses.

Small enterprises face similar troubles. The erosion of financial security also hurts human capital formation, as expenses on health and education are axed. No wonder then that we see direct cash transfers to women as the preferred political response to financial distress.

The author is senior fellow with Pune International Centre