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    How falling household savings affects the economy


    With government expenditure needs exceeding the revenues, the savings were negative. Government dissaving has averaged 2.1% of GDP in the past 10 years. Households contribute to most of the gross savings, contributing over 65% in 2021-22.

    inflation impoactGetty Images
    The financial savings of households crashed to a multi-decade low in 2022-23 due to higher inflation. ET Wealth analyses the impact.

    Fall in overall savings rate is cause for concern

    • Consumption and investment are major components of national income.
    • Savings generate funds for investment and support national income.
    • Savings are contributed by households, private corporate, and public sector.
    • With government expenditure needs exceeding the revenues, the savings were negative. Government dissaving has averaged 2.1% of GDP in the past 10 years.
    • Households contribute to most of the gross savings, contributing over 65% in 2021-22.

    Higher inflation dragged financial savings in 2022-23


    • In the past 10 years, financial savings, as percentage of GDP, have averaged 7.7%. The impact of the pandemic was visible in 2020-21 when savings jumped to 11.5% of GDP. Lockdowns led to reduced spending and higher savings. Job uncertainty also supported the increase in savings. 2021-22 saw pent-up demand, and consumption during the year was funded using excess savings of previous year.

    Consumer inflation cooled after RBI stepped in, but it remains high

    WHAT HAPPENED IN 2022-23?

    • Net financial savings of households plunged to a multi-decade low of 5.2% of GDP in 2022-23, according to the RBI.
    • Compared to 2021-22, the net financial savings of households fell over 18.8% y-o-y.
    • After Covid-19, the surge in demand, coupled with limited supply, led to a global increase in inflation rate.
    • The surge in commodity and energy prices amid the Russia-Ukraine war and dislocation of global supply chains also led to the increase in inflation rate.
    • India CPI-Combined averaged* 6.7% in 2022-23 compared to the 10-year average* of 5.4%.
    • Higher inflation and loss of purchasing power negatively impacted household savings.
    Assets grew by 14%, liabilities by 75.5%
    Change in household assets and liabilities (y-o-y %) in 2022-23

    • Among assets, bank deposits witnessed a healthy growth in 2022-23 supported by an increase in deposit rates.
    • While life insurance, PF and pension funds, and mutual funds saw an increase in household investments, small savings schemes and cash or currency holdings saw a decline.
    • Surprisingly, investment in direct equities declined by over 52% after growing by 26% y-o-y in 2021-22.
    • In liabilities, loans from the banking sector grew despite multiple repo rate hikes by the RBI.
    • The proportion of nonmortgage loans in household liabilities is rising*, indicating increasing reliance on loans to fund consumption expenditure.
    *Systematix report analysis

    How the household liabilities surged


    • Decline in savings will create challenges for the government to finance its fiscal deficit.
    • Household liabilities have risen significantly in 2022-23 compared to assets on a y-o-y basis.
    • Real income of households (net of inflation) has decelerated in the past four years.*
    • Household debt as percentage of GDP rose to 37.6% in 2022-23 compared to 36.9 in 2021-22.
    • Falling income levels and rising borrowings affects households' loan repayment ability and increase lenders' default risk.
    • Lower household savings will keep interest rates elevated. Higher interest rates negatively impact corporate investments.
    *Systematix report

    Households major contributors to domestic savings


    • There are two components of household savings: financial and physical.
    • Financial savings (or net financial savings) is the difference between financial assets and liabilities.
    • Financial assets include bank deposits and investments in financial institutions, life insurance, PF, equity, mutual funds and small savings schemes.
    • Financial liabilities include loans from banks and NBFCs.
    • Physical savings include investments in land, buildings and gold.

    Share of physical savings rose


    • Recent RBI savings data captures only financial, not physical, savings.
    • While financial savings have declined, experts believe savings in physical assets have gone up.
    • Share of physical assets is expected to reach 70% level* in 2022-23 from 61% in 2021-22.
    • Low interest rates in Covid led to a shift from financial to physical assets.
    • Revival in real estate sector and increased property prices also contributed to the shift*. (*SBI Research.)
    • Physical savings are not available to the corporate sector for investment and, therefore, not productive.
    • SBI Research estimates that the total household savings for 2022-23 will surpass 2021-22 levels despite the decline in financial savings, and will outstrip the rise in household debt.
    • Systematix report says that the overall gross savings for households in 2022-23 are estimated to have contracted by 4.6% y-o-y.
    • Motilal Oswal report raised concerns about sustainability of economic growth. A further fall in financial savings looks difficult, which could mean weak consumption growth or a decline in household investments in 2023-24.
    Data is sourced from RBI, Reuters-Refinitv and reports from Systematix, SBI Research and Motilal Oswal.
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