Home / Opinion / Views /  Our household savings are moving towards normalcy

The Reserve Bank of India (RBI) recently released data on Indian household savings for fiscal year 2021-22. Household savings reflect the health of their balance sheets, signalling the ability of families to cope with emergency requirements in the face of a sudden income shock, the accumulation of funds for significant life events such as marriages and children’s education, a long-term cover for retirement spending and the desire for a bequest. The financial savings of Indian families are held mainly in cash, bank deposits, mutual funds (MFs), insurance and retirement funds, and in physical assets such as real estate and gold. Most of these serve as a source of funds for corporate and government investment, which is the leading determinant of long-term growth. Household financial savings are calculated as the change in the opening and closing balances of stocks of financial assets at the end of each fiscal year, which runs from April to March.

At the end of March 2022, household gross financial savings stood at 10.8% of gross domestic product (GDP) at current prices. This is a decline of over 5 percentage points from a year earlier, when that figure peaked at 16% of GDP. The pandemic spending reduction, partly forced by lockdowns and an increase in precautionary savings, had led to an upsurge in 2020-21. This year, gross household financial savings should rise modestly from 2021-22’s number to move closer to the pre-pandemic trend of around 12% of GDP as household spending normalizes after last year’s phase of pent-up demand being met. While higher inflation may require households to spend more to maintain standards of living, a rise in disposable incomes should cover it. With rising interest rates, household borrowings are unlikely to increase relative to last year, leading to higher net household financial savings, which is the difference between gross financial savings and household borrowings during a year.

There has been a shift in the composition of gross financial savings over the last decade. In 2011-12, bank deposits dominated household financial savings, contributing over half of it. Last year, they contributed less than one-third of those savings. With rising interest rates, deposits may regain share somewhat. Last year also saw a decline in the share of savings in life insurance funds to 1.9% of GDP from a pandemic-year high of 2.8%. The pandemic-led increased awareness of life insurance does not seem to have sustained as the threat of a health emergency has receded.

On a positive note, the contribution of retirement and pension funds has more than doubled over the previous decade, as the economy formalized. In 2021-22, the net addition to the count of employee provident fund (EPF) subscribers was 13.8 million compared to around 9.5 million the previous two years, as formal sector jobs returned from their covid lows. While an individual can hold multiple EPF accounts, a rise in net subscribers suggests higher formal-sector activity.

Households have also been saving more in post office schemes, including national savings certificates, Kisan Vikas Patra and senior citizens’ saving schemes. Like with EPF, the Centre decides the interest rates of these long-term schemes, usually kept higher than the term deposit rates of commercial banks for similar durations. The share of assets in small savings increased to 1.4% of GDP at the end of March 2022, compared to 0.2% a year earlier. Small savings are an increasingly vital source for funding the budget deficit, especially since 2015-16.

Cash holdings by households was at 1.1% of GDP in 2021-22, declining from 1.9% in 2020-21, when it jumped on account of higher demand for money amid pandemic uncertainty. The last decade also saw policy-related factors play a role in cash holdings volatility. In 2016-17, demonetization forced families to deposit much of their household cash in banks, leading to far lower cash holdings than the previous year, while the bank-deposits-to-GDP ratio rose sharply. Once cash was easily available again in 2017-18, a reversal took place. Over the next two years, before the pandemic, the household cash to-GDP ratio fell and settled around 1.5% as digital payments took off in India, thanks largely to internet-enabled mobile phone penetration and a successful Unified Payments Interface (UPI).

Indian household savings in risky instruments such as MFs and equity stocks have risen over the last decade, driven by low returns on bank deposits and rising stock market indices. Despite a surge in demat accounts since the pandemic, enabling people to hold securities in digital form and trade shares in the share market, the risky investments of households remain lower than their peak in 2016-17. In terms of the accumulated stock of financial assets, investments in MFs were less than one-fifth the stock of household bank deposits, as of end-2021-22. This comparison is only indicative, since the value of MF holdings fluctuates with financial market performance.

Over the next decade, it is unlikely that household net financial savings as a share of GDP will rise much more. India’s relatively prosperous states are ageing, resulting in a higher requirement to draw down savings for old-age consumption. While smaller family sizes should aid savings growth, young people are also spending more than the previous generation, shifting financial resources to businesses and assisting higher corporate savings. We should not be surprised if the contribution of household savings to overall Indian savings declines and that of corporate savings goes up in the coming years.

Vidya Mahambare & Praveen Kumar are, respectively, a professor of economics and director (research), and graduate of Great Lakes Institute of Management, Chennai. 

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