Household savings are an important measure that indicate multiple different things about the economy. The recently released RBI data shows that India’s household savings are at a five-decadal low, accounting for only 5.1% of the GDP. But what has been the trend overall? Is there a shift in household savings?
In propelling economic growth, savings and investments emerge as powerful engines. Economic history reveals that nations good at amassing substantial domestic investments, predominantly fuelled by savings from within their own borders, witnessed swifter growth of economic prosperity and advancement. The pivotal factor in driving economic growth lies in the generation of increased savings and their effective allocation into productive investments.
Households, in their multifaceted roles as contributors to production, as consumers, and as reservoirs of financial support for investments through their savings, stand as the cornerstone of an economy’s functionality. Thus, the financial well-being of households takes centre stage, assuming a pivotal role in overall financial stability. With this context, we look at the trends in household savings in India.
India’s Household Savings plummet to a 47-Year low, standing at just 5.1% of FY23 GDP.
The recently released RBI data shows that India’s household savings are at a five-decadal low, accounting for only 5.1% of the GDP. Information regarding yearly household savings is made available by the Central Statistics Office (CSO) in their January report known as the ‘First Revised Estimates (FRE) of National Income, Consumption Expenditure, Saving and Capital Formation.’ These figures are later updated in subsequent annual releases.
From a Flow of Funds (FoF) perspective, households have traditionally been considered a sector with a financial surplus. The RBI also publishes data on changes in financial assets and financial liabilities at current prices in its annual ‘Handbook of Statistics on Indian Economy’. The difference between financial assets and liabilities is taken to be financial savings, and it is measured as a percentage of GDP at current prices.
Data compiled from the RBI show that the current savings share of 5.1% is a 47-year low. It is slightly lower than the 5.23% during 1977-78. Between the 1990s to 2010s, the average savings stood at 10.4%, thereafter from 2011 to 2023, the average savings fell to 7.7%.
The composition of household financial savings is changing.
Traditionally, households’ financial assets comprise bank deposits, investments such as mutual funds, and equity, savings in currency form, provident and pension funds, small savings, and life insurance funds. The data from the RBI annual report suggests that the share of deposits out of the gross financial saving fell to 3.5% in 2021-22 from 6.0% in 2011-12, whereas share of provident and pension funds rose from 1.1% to 2.4% during the same period.
The quarterly data starting from 2018-19 to 2022-23 on flow of financial assets and liabilities released by RBI also complement this. The gross financial savings in currency form registered a decline of almost 15%, whereas it rose by 65% and 23% in PPF and investments respectively.
Is there a structural shift in household savings?
As mentioned earlier, the effective channelisation of household savings into productive investments is the hinge on which the growth of economy rests. In other words, investments act as a proxy for household savings. There have been shifts in household savings- both in the composition and the structure of savings. In the composition, there has been a shift towards other forms of investments from traditional bank deposits.
On the structural shift aspect, there is a marked shift from financial assets towards physical assets. The data on gross fixed capital formation (GFCF) by household sector reveals that the GFCF of the household sector grew from Rs. 13.8 Lakh Crores in 2011-12 to Rs. 27.5 Lakh Crores in 2021-22. Among the household sector, dwellings, other buildings, and structures had a larger share, followed by machinery and equipment. The GFCF for construction activities, i.e., dwellings, buildings, and structures grew from Rs. 11.2 Lakh Crore to Rs. 18.5 Lakh Crore during the same period. Particularly, between 2020-21 and 2021-22, it rose by Rs. 4.5 Lakh Crore.
Sharp uptick in the deployment of bank credit for housing and personal loans
One reason apparently stated by the government amidst the debate on falling household savings is that people are moving from financial to physical assets by taking loans to buy real estate properties and vehicles. The data on the deployment of bank credit for the non-food sector indicate that vehicle loans grew from Rs. 0.6 Lakh Crore in 2007 to Rs. 5.0 Lakh Crore in 2023. Similarly, bank credit for other personal loans grew from Rs. 0.8 Lakh Crore to Rs. 11.3 Lakh Crore during the same period. The lending for the housing sector, including the priority sector lending grew from Rs. 2.3 Lakh Crore to Rs. 19.5 Lakh Crore in this period.
Are the concerns around dip in household savings reasonable?
Traditionally, in terms of their contribution to savings generation, the primary contributors are, in descending order, the household sector, corporate sector, and public sector. Conversely, when it comes to investment, the leading contributors are the corporate sector, household sector, and public sector, in that sequence. Now that seems to be changing with the household sector preferring investments rather than savings.
Household financial savings have experienced a decrease in recent years, while physical savings have shown a rising pattern. The prevailing prevalence of physical savings over financial savings in the household sector can be attributed to ongoing economic developments, including a thriving residential property market, the growing availability of housing loans, favourable demographic characteristics of the economy, substantial incomes in sectors such as IT, finance, and BPOs, where young, skilled professionals are earning and saving more.
There is no definite answer for concerns surrounding the dip in household savings. Interpretational issues have remained endemic to the savings and investment estimates, owing to the lack of direct estimation of household savings and its cross validation. As the authors in this article mention, it is inconsistent to ask households to save more and also to spend more simultaneously.
