Evolving Household Savings in India | 05 Sep 2024

Source: IE

Why in News?

Recently, the Reserve Bank of India (RBI) Deputy Governor at the Financing 3.0 Summit of the Confederation of Indian Industry (CII) highlighted that Indian households are rebuilding financial savings post-pandemic, with significant implications for the broader economy and financial system.

What is the Current Trend in Household Savings?

• Recovery of Household Savings: The net financial savings of households nearly halved from 2020-21 levels due to the unwinding of pandemic-era careful savings and a shift to physical assets like housing instead of savings.
  • Households have now begun to restore their financial savings driven by rising incomes after a decline during the Covid pandemic.
  • Financial assets have increased from 10.6% of Gross Domestic Product (GDP) (2011-17) to 11.5% (2017-23, excluding the pandemic year).
  • Physical savings have increased to over 12% of GDP in the post-pandemic years and could continue to rise. However, this is still lower than the 16% of GDP recorded in 2010-11.
• Future Prospects: As incomes continue to rise, households are expected to rebuild financial assets to levels similar to the early 2000s, potentially reaching around 15% of GDP.
• Impact of Household Savings on the Economy:
  • Interest Rates: Changes in household savings behaviour can influence monetary policy, including interest rates. Lower financial savings might prompt demands for higher interest rates to encourage savings, and vice versa.
  • Enhanced Lending Capacity: As households regain financial strength, they are likely to become the primary net lenders in the economy, providing crucial funding for other sectors, especially as corporate borrowing needs rise.
  • Corporate Sector Borrowing: The corporate sector has decreased net borrowings. However, anticipated increases in capital expenditure (capex) may lead to higher borrowing needs.
    • With a projected rise in corporate borrowing, households are expected to fill the financing gap, supporting economic growth and investment.
  • Economic Stability: Higher physical savings contribute to economic stability by diversifying investment portfolios and potentially increasing long-term wealth, though it might also limit liquidity.
  • Implications for External Financing: As domestic savings rise, the need for external financing may decrease, though external debt sustainability will remain a priority.
    • Changes in external financing composition could occur as the economy’s capacity to absorb foreign resources evolves.
    • The public sector’s net dissaving has moderated but remains a net borrower, reflecting the need for continued fiscal policy support.

What are Household Savings?

• About: Household (HH) savings in India consist of two parts, net financial savings (NFS) and physical savings.
  • HH NFS is arrived at after deducting financial liabilities (known as annual borrowing) from gross financial savings (GFS).
    • GFS includes seven key areas: Currencies; deposits (bank and non-bank); insurance; provident and pension funds (P&PF), including the public provident fund (PPF); shares and debentures (S&D); claims on government (small savings); and others.
  • HH physical savings primarily constitute residential real estate (accounting for about two-thirds) and machinery and equipment (owned by producers within the HH sector).
• Household Savings to GDP Ratio: It is the sum of its net financial savings to GDP ratio, physical savings to GDP ratio and gold and ornaments.
• Trends in Household Savings: There is a growing trend towards investing in riskier financial assets like stocks and debentures.
  • A growing proportion of savings is being allocated to physical assets (real estate) rather than financial instruments.
• Pandemic and Impact on Household Savings: During the Covid-19 pandemic, households saved more due to limited spending opportunities. This resulted in a high financial savings rate (Rs 23.3 lakh crore in 2020-21).
  • However, as restrictions eased, spending surged, reducing savings. Post-pandemic, many households have shifted their savings from financial assets to physical assets such as real estate and gold. This shift has reduced net financial savings.
  • Net financial savings of households fell to Rs 14.2 lakh crore in 2022-23 from Rs 17.1 lakh crore in 2021-22. This is a notable drop from Rs 23.3 lakh crore in 2020-21.
  • Savings in real estate and gold have surged, with physical asset savings reaching Rs 34.8 lakh crore and gold savings hitting Rs 63,397 crore in 2022-23.
  • Many households overextended financially to purchase homes, often with high Equated Monthly Instalment (EMI) payments and reduced liquidity.
  • Increasing expenses for healthcare and education have further squeezed household savings.
  • The younger generation prioritises lifestyle and experiences over savings, encouraged by easy online shopping and borrowing options led to further decline in Household Savings and contributed to increase in household debt.
• Household Debt: It is defined as all liabilities of households (including non-profit institutions serving households) that require payments of interest or principal by households to the creditors at a fixed date in the future.

What are the Initiatives Related to Household Savings?

• Sukanya Samriddhi Account Scheme
• Senior Citizens’ Savings Scheme
• Kisan Vikas Patra Scheme
• Mahila Samman Savings Certificate
• Employees Provident Fund (EPF)
• National Pension System (NPS)
• Public Provident Fund (PPF) and National Savings Certificate (NSC)
• Post Office Monthly Income Scheme (POMIS): It is a Government of India-backed small savings scheme that allows residents of India above 10 years of age to invest a specific amount monthly.
  • There is a 5-year lock-in period, and premature withdrawal is allowed after one year with a penalty. Income from the scheme is not subject to Tax Deduction at Source (TDS).

Read more: Rising Debt Strained Household Savings