Statsguru: Six charts explain the cost of lower financial savings

The last time Indian households recorded such low net financial savings was nearly a decade before Kapil Dev led India to its first Cricket World Cup victory. The net financial savings of Indian households came in at 5.1 per cent of gross domestic product (GDP) in 2022-23, the lowest since 1975-76 when it was at 4.7 per cent. There has been a marked decline since 2018-19, when it was 7.9 per cent (chart 1).

 

Money saved through bank deposits has come down, as has been the allocation to life insurance schemes. Small savings schemes, too, have been affected (chart 2).


 

The decline in net financial savings is also be­cause of an increase in financial liabilities. Finan­cial liabilities of Indian households were at 5.8 per cent of GDP. This is the highest since 2006-07 (chart 3).

Households are said to have borrowed more to increase consumption. Some of this is seen in the increasing growth of personal loans, which accounted for a 29.9 per cent share in total outstanding non-food credit in March 2023, compared to 23.7 per cent in March 2019. The share of housing and vehicle loans are among the major contributors to the increase.

The rise in borrowing is a phenomenon that has played out across key emerging market peers. Household credit is higher relative to GDP in Brazil, China, and Russia, as well as emerging markets overall, according to data from the Bank for Inter­national Settlements. The stock of India’s outstand­ing household debt, as well as government liabili­ties, is higher than it was before Covid-19 (chart 4).

 

Even if higher investment in real estate is a key reason for increased borrowing, the shift away from financial savings is remarkable. This may have some other effects down the line. Domestic savings have been a significant contributor to the government and corporate India’s capital requirements. Bank credit to the commercial sector is showing signs of picking up after a post-pandemic lull. Government borrowings have also been on the higher side (charts 5, 6).

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The effects on the long-awaited pick-up in private sector capital expenditure, as well as future government borrowing requirements, will be worth watching if the current savings trend continues.