Decline in Household Savings – Causes & Consequences

According to RBI, the net household savings declined by 19% in FY 23 while household liabilities, excluding mortgage loans (housing/real estate), grew 99 per cent. As could be expected, the Finance Ministry has shrugged off this disturbing development on the basis of cherry picked data put out by SBI’s economic wing. It is agreed that the main reason for the decline in net household savings is the sharp rise in household liabilities, which the ministry says is on account of households borrowing mainly to buy vehicles and property. This, it is claimed, demonstrates their confidence about income prospects. But Bank of Baroda in a recent report, has bluntly said that real incomes are actually falling because inflation is higher than what people can bear. Official statistics don’t always reflect the ground realities of economic distress. So the data supporting government’s stand are at best spotty. Just luxury homes and high-end cars purchases are quite possibly no more than a skew caused by inequality which is hardly comforting. Well every thesis has an anti-thesis and the ministry seems to have revisited Hegelian Dialectics! As always, when the intention is to tweak the facts to fit the narrative, truth is the first casualty.

If more granular data on savings, consumption and GDP, sourced from RBI, CSO and CMIE are analysed in some detail, we could infer the following.

First, net financial savings of households (assets minus liabilities) contracted by 19% in FY 23.

Second, incremental non-mortgage borrowing growth, derived by netting out housing loans from banks and housing finance companies from total financial liabilities, jumped up 99% in FY 23.

Third, assuming a 6.2% rise in investments in physical assets in FY 23 based on recent trend, nominal Compounded Annual Growth Rate (CAGR) of household income over four years is estimated at 8.6%. Net of inflation of 5.7%, the estimated real income stands at 2.9% which is the slowest pace of growth in the last 40 years. But the nominal private final consumption expenditure (PFCE), plus net financial savings over the last four years has grown at 3.2%, clearly suggesting that household savings decline is mainly caused by an increase in borrowings by households to finance consumption in the context of sluggish income and rising inflation.

If fall in income coupled with rising inflation is one cause of falling household savings, the other more insidious cause appears to be India’s failure to wring more growth out of its huge working age population. At the moment we are busy patting ourselves on the back as the fastest growing large economy. But the country has to try harder to increase female participation in the labour force. As per the Economist, in India it is a dismal 24%, half of global average. Getting more women into jobs would bolster household savings and the demographic dividend which would help deal with the fact that women live longer than men, but tend to have more meager savings and pensions and so are vulnerable in old age. Moreover, the young demographic profile will not last forever. If India needs a cautionary tale to justify action, it need look no further than its own rapidly ageing southern states. In Kerala 17% of the population is already 60 or older. So to sustain savings over the long term, we need to start planning for old age earlier which would warrant creation of an ecosystem to promote and sustain long term savings, comprising more extensive reform of our pension systems, possibly by raising retirement ages. We should nurture financial markets by deepening and widening them, particularly the debt market to provide options for long-term saving and health insurance. Simultaneously, we should create conditions for well-regulated private social care.

The impending consequences of fall in net household savings are many:

1. Households have been on a borrowing binge as it were, from FY 20 with new loans more than doubling from Rs 7.74 lac crores to Rs 15.80 lac crores. This does increase systemic risks for banks and NBFCs posed by the ongoing retail loan boom, particularly the unsecured portion of it.
2. Decline in the net financial savings ratio of the household sector will adversely affect the borrowing programme of both the Government and Corporate Sector. For example, the prudential norm that the acceptable level of fiscal deficit of 6% of the GDP for the centre and States taken together, is based on the assumption that household savings will be around 7% of GDP and the inflow of resources from abroad will be around 2.5% of GDP. The borrowing space so provided is expected to be shared by Government to the extent of 6 %, public sector 1 – 1.5%, leaving about 2 – 2.5% for the private corporate sector. Hence if savings of household sector fell to, say, 5% of GDP on a long term, the fiscal deficit will be higher and this will first and foremost adversely affect capital expenditure of the governments, which at present provides the prime engine of growth for the economy.
3. On the other hand, increasing fiscal deficit that is inconsistent with the potential for growth of the economy will result in structural inflation, further reducing savings and investments. It will also increase cost of borrowing all round, particularly for government which eventually will lead to a debt trap where progressively higher share of revenue will be preempted to service burgeoning public debt. In other words, it means that the present generation is increasingly borrowing from future generations unmindful of the of the burden we are casting on them just because it is politically expedient at present.

We can not let the household sector’s savings to fall further. It is not equitable to our children and even to our immediate future, since household sector is the only surplus savings sector in the economy. The other two sectors; the government and the corporate business sector are net borrowers. Alas! In the prevailing political milieu of competitive populism there may not be many who are willing to read the writing on the wall.