Households' net savings hit multi-decade low in FY23

Indian households’ liabilities rose to 5.8 percent of GDP in 2022-23 – the second-highest level in independent India’s history.

Indian households saved 19 percent less in 2022-23 compared to 2021-22 on a net basis, with the absolute amount of Rs 13.77 lakh crore falling to just 5.1 percent of the economy's GDP, data released on September 18 by the Reserve Bank of India (RBI) showed.

At 5.1 percent of GDP, the net financial savings of households is the lowest in 47 years, according to Nikhil Gupta, chief economist at Motilal Oswal Financial Services.

Also Read: Households' need to re-build savings to dampen growth, says Motilal Oswal's Nikhil Gupta

In 2021-22, net financial savings of households amounted to 7.2 percent of GDP. The peak pandemic year of 2020-21, when spending avenues were limited, net financial savings of households had jumped to 11.5 percent of GDP from 8.1 percent in 2019-20.

According to the RBI data, the lower financial savings of households last year was down to liabilities being 76 percent higher while financial assets were only 14 percent more compared to 2021-22. Among assets, bank deposits were 32 percent higher, while small savings (excluding PPF), and investments were all lower compared to 2021-22.

On the liabilities side, borrowings from commercial banks jumped 54 percent in 2022-23 from 2021-22.

Even in terms of the GDP, households' financial assets were down to 10.9 percent of GDP in 2022-23 from 11.1 percent in 2021-22, while liabilities rose to 5.8 percent of GDP from 3.8 percent – the second-highest level in independent India's history.

According to Gupta of Motilal Oswal Financial Services, the lower household financial savings helped support strong consumption and real estate investments in 2022-23 due to weak income growth.

As per GDP data, private final consumption expenditure rose by 7.5 percent in 2022-23, down from 11.2 percent growth in 2021-22, which benefitted from a very favourable base effect. Meanwhile, gross value added of the 'financial, real estate, and professional services' industry increased by 7.1 percent in 2022-23, up from 4.7 percent in 2021-22 and 2.1 percent in 2020-21, data from the statistics ministry shows.

"Overall, this combination of weak income growth and falling household net financial savings (led by higher borrowings) is highly unsustainable, which is why we believe that consumption growth is unsustainable," Gupta warned.

"Whether it will be substituted by investments is not our base case, though the jury is still out," he added.

Interestingly, a study by RBI staff – also published on September 18 – found a long-run relationship between real private consumption, income, and wealth.