A Matter of Concern if Household Savings Are Down and Liabilities Up: Former PMEAC Chief

In order to achieve India's projected GDP growth of 6.1% in the current fiscal year ending in March, the government must maintain its investment spending rather than depending solely on growth driven by private consumption fueled by debt.

New Delhi: Net household financial savings dropped to a multi-decade low of 5.1% of the gross domestic product (GDP) in 2022-23. In addition, annual financial liabilities of households rose sharply by 5.8% of GDP compared with 3.8% in FY22.

According to the Hindu BusinessLine, from 2011-12 to 2019-20, the financial savings of the household sector have moved in a narrow range of 7-8% of Gross National Disposable Income (GNDI). In 2020-21, it touched 11.3% during the COVID-19 period; however, that was a lone exception. In 2021-22 the financial savings of household sector was 8.3% of GDP.

The finance ministry has dismissed the ‘critical voices’ on household savings, arguing that households have started taking loans for real estate and vehicles which is a sign of ‘confidence’, not ‘distress’.

So, how serious is the fall in household savings?

To understand this argument, note that the economy’s financial dynamics can be categorised into three main sectors: the household sector, the government sector, and the corporate business sector. Each of these sectors play a distinct role in the economy’s overall financial health.

The household sector, by nature of saving more than it borrows, accumulates surplus savings, which can then be channeled into investments, lending, and capital formation. In contrast, the government and corporate business sectors often need to borrow to finance their activities, leading to deficits in their respective financial positions.

In this context, C. Rangarajan, former chairman, Prime Minister’s Economic Advisory Council, and former RBI governor and D.K. Srivastava, former director and honorary professor, Madras School of Economics, said:

“The reduction in the net financial assets rate is primarily due to a rise in financial liabilities. There can be many interpretations of this rise. An optimistic interpretation of this rise in the borrowings of household sector which also includes non-corporate businesses is that this sector is buoyant and has borrowed more. Nevertheless, the fact is that net financial savings ratio of the sector has come down.”

“That is, the transferable savings ratio of the economy has come down and this will affect the borrowing programme of government and corporate sector.”

These household financial assets include bank deposits, cash and equity investments, after deducting debt servicing and consumption.

India’s government relies on these savings to fund its capital investments in physical assets like infrastructure, machinery, and equipment.

The authors explain the problems the economy will face due to low household savings, saying that “the rule that the acceptable level of fiscal deficit of the Centre and the States taken together can be 6% of the GDP is based on the assumption that household savings will be around 7% of GDP and the net inflow of resources from abroad will be around 2.5% of GDP.”

This gives a borrowing space of 9.5% of GDP. This borrowing space could be shared by the government to the extent of 6% of GDP, and by the public sector enterprises to the extent of 1 to 1.5% of GDP. The remaining borrowing space of 2 to 2.5% is left for the private corporate sector.

However, “if the savings rate of the household sector fell to 5% of GDP permanently, we cannot have the 6% rule.”

The authors say the fiscal deficit will have to be lower. And this situation will put the budgets under a stress.

They further note that if financial liabilities are to rise, gross financial assets of household sector should go up.

Although there’s no direct way to calculate savings, but if at the end of computations, the estimate is that savings are down, it is a matter of concern, they concluded.

This concern was also echoed by Saugata Bhattacharya economist at Axis Bank Ltd. He told Bloomberg: “Household financial savings not keeping pace with growth is a matter of concern. Without adequate domestic savings, funding the needed investment will require large foreign capital, which is often volatile.”

To achieve India’s projected GDP growth of 6.1% in the current fiscal year ending March, the government needs to sustain investment spending, and not just rely on private consumption fueled by debt as an engine of growth, Bloomberg noted.

It further observed that the rise in financial liabilities with falling assets levels could be a sign of rising inequality.

“The household sector is consuming by borrowing more,” Rupa Rege Nitsure economist with L&T Finance Holdings Ltd told Bloomberg.

“This happens when income level stays stagnant but inflation creeps up. The recovery is not broad-based — while a section splurges on luxury goods, others are borrowing to stay afloat.”