In the first part of this series, we discussed the sharp fall in Consumer Expenditure indicating a fall in the standard of living of people of India. A return to earlier Consumer Expenditure levels would require growth to accelerate and employment and household incomes to rise. But this is a significant challenge. The recent fall in per capita Consumer Expenditure is so steep that India needs to catch-up from its levels three years ago. Now, let’s discuss the second part on household savings.
Reserve Bank of India (RBI) has recently released data on household savings for the third quarter of 2020-21, indicating household financial savings at 8.2% of GDP, exhibiting a sequential moderation for the second consecutive quarter. From Q-1 of 2020-21 to Q3, net financial assets dropped from 21% of India’s GDP to just 8.2% after two consecutive quarters of decline. As per RBI, the moderation was driven by a significant weakening in the flow of household financial assets. Further in the report, the ratio of household deposits (bank deposits) to GDP declined to 3.0% in Q3:2020-21 from 7.7% in the previous quarter. The report further states that, Household debt to GDP ratio has been increasing steadily since end-March 2019. It rose sharply to 37.9% at end-December 2020.
RBI has also reported a large number of fixed deposits being broken during Q-4, indicating a high level of financial distress among the Indian middle class. If we look at flow in different household asset classes, all around there has been an impact as depicted below:
Apart from covid impact and stress on households, there is also an increased flow into the stock market driven both by good market performance as well as poor interest rates in traditional saving instruments such as fixed deposits.
Why Household Savings are important for the economy?
Household savings is the main domestic source of funds to finance capital investment, which is a major driver of long-term economic growth. India has traditionally had a high rate of saving significantly above developed countries like the United States and comparable to developing economies such as Brazil and South Africa. As the economy of the country has matured since Independence, household savings have increased accordingly as evident from the below chart:
Moreover, the lion’s share of India’s savings are due to households (with the corporate sector and the public sector being the other minor contributors). In 2018-19, out of a total savings of 30% of the GDP, 18.2% was due to households.
While still high at a global level, household savings have taken a hit of late because of twin shocks of demonetisation and GST as evident from the below chart:
To add to these is now, the Covid shock. Households are running down saving buffers to support consumption and a desire to rebuild saving could hold back spending even as the economy reopens as reported by credit rating agencies.
India’s middle class benefited significantly post the 1991 liberal reforms. However, Covid-19 has hit it hard. Apart from their assets dropping as seen in the RBI data for the third quarter, the class itself seems to have shrunk. Research from CMIE has reported that middle class incomes were the most badly hit of any class due to the first wave.
Companies also resorted to salary cuts to protect their profits in the June quarter, as revenues came under pressure due to the second pandemic wave that affected nearly the entire country, as per report by India Ratings and Research. The weak wage growth will prove to be a drag on the overall economic recovery in the medium term as it will affect household consumption, the report said.
Apart from bringing out the Indian economy from the twin shocks of demonetisation and GST, the Indian government needs to incentivise households that invest their tax-paid money in long-term investment instruments. The growing unemployment rate in the country, which is at a 45-year high, is also eating into the household savings rate. Therefore, creating more job opportunities by infusing liquidity and enhancing ease of business is something that has to be done immediately. Household income, savings and investments are the mainstays of the Indian economy and the government must do everything in its power to empower and revive this sector.
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