Our problem is a drop in gross savings rather than net

Presently, the leverage of households is mainly on account of housing loans, followed by automobile loans, where there is a clear case of corresponding assets being created.
Presently, the leverage of households is mainly on account of housing loans, followed by automobile loans, where there is a clear case of corresponding assets being created.


  • High household debt need not necessarily be a worry as it could reflect the rise of an emerging market where such spending plays a major role in keeping the economy humming along.

The Reserve Bank of India’s (RBI) latest data on household financial savings has generated a lot of interest. India’s gross financial savings rate declined from 15.4% of GDP in 2020-21 to 10.9% in 2022-23 and net financial savings rate has declined from 11.5% to 5.1%. Is there a problem here?

The answer is ‘yes’ and ‘no.’ Yes, because it can impact our growth prospects, leaving us more dependent on foreign capital to finance investment. Ironically, the answer is also ‘no’ because there exist models (like the US) of consumerism fostering growth even with high levels of household debt.

Lower gross savings means that people are saving less and consuming more. Higher consumption can be attributed to pent-up demand after the pandemic’s repression. ‘Revenge spending’ was in evidence as people went shopping and on holidays to make up for covid deprivation. There is nothing amiss in such behaviour, but the broader question is of sustainability. If moderation follows peak satiation and acts as a corrective, there would be little to worry about. But then, there is also the inflation factor. We have had relentlessly high inflation in the last three years, so enlarged spending by consumers need not have translated into a real sales boom for companies, which is what the commentaries of businesses on their recent results suggests. Their topline growth has been lacklustre, with actual declines in turnover in several cases. Now, if households have maintained or increased consumption even as prices rose, saving less, then we face an economic challenge, as lower savings enable less domestic investment.

Another point to note is that there has been a change in the pattern of savings in this time period. The share of interest bearing savings like bank deposits and small savings has shrunk, while that of investments including equities and mutual funds has increased, like that of provident and pension funds. The share of currency was also down. While there is nothing awkward about these shifts, the conclusion we can draw is that people have become less risk averse and are looking for higher returns. At the same time, more formalization brought about by government efforts has increased the appeal of pension and provident funds.

The net savings rate is the second part of the story. It goes with very low interest rates on loans until May 2022. The fall in net financial savings of households means that liabilities have increased faster than gross savings. This again can be a problem for an economy like ours. Presently, the leverage of households is mainly on account of housing loans, followed by automobile loans, where there is a clear case of corresponding assets being created. Loans to buy houses lead directly to capital formation in the economy. They are like loans taken by companies to buy factories, machinery and other assets. Automobiles can be treated like mid-term assets because unlike houses which can have lives of above 30 years, vehicles would normally be held for just 5-10 years (though their regulatory life is 15 years at most).

A problem can arise if household leverage is in the form of personal loans taken for consumption, such as credit taken by means of credit cards. Here, the class of borrowers matters a lot. As long as there is adequate income to back loan repayments, which happens when loans are taken by salaried persons, lending institution do not have much risk to bear. However, if loans for consumption are taken by people with weak earnings, lenders could run into recovery problems, which is an issue that has been highlighted by RBI.

On the whole, high household liabilities need not be an unfavourable development, and could be looked upon as being part of the emergence story of an emerging market with household sector spending providing a significant impetus for investment and growth by keeping demand buoyant.

Construction is among the beneficiaries of such dynamics. The government’s capital expenditure thrust has pushed this sector’s growth at one level, while home purchases have also played a role. As banks and non-banking financial companies push retail loans in an era where people are not shy to borrow money, we can expect more of it.

Contrary to the conventional thinking in the 1990s, when individuals loathed taking loans even to buy assets, the Veblen effect has since come into play, with people keen to buy pricey products the pricier they get. This effect, along with today’s ease of getting loans, as exemplified by the plethora of borrower-chasing fintech firms, has resulted in a debt-taking boom in recent years. The typical age for acquiring an automobile has come down to less than 30 years, while that for a home is in the bracket of 30-35 years now, thanks in no small part to a sharp rise in salaries and the availability of cheap loans. The Veblen effect is even stronger when it comes to electronics goods like mobile phones and laptops; consumers of these usually prefer to buy the latest.

Our concern should not be debt, but the decline in gross savings. If it is coming down due to consumption that is inflated by price inflation, then its linkages with growth would tend to be feeble. But, by and large, these developments are manifestations of an economy in the midst of what Rostov would call the “take-off phase"—from where there’d be no looking back. Admittedly, though, regulatory oversight would have to get sharper for sure.

Catch all the Elections News, Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.


Switch to the Mint app for fast and personalized news - Get App