The Reserve Bank of India (RBI) data on household financial savings falling to 5.1 percent of GDP during FY23 created a flutter with concerns expressed about how declining incomes caused savings to fall as well as about the unsustainability of the increased indebtedness of households. There were also worries about investment and growth being impacted.
For sure, the net financial savings ratio fell but the narratives around it seem somewhat unfounded when we take a deeper look into the data. First, it was net financial savings that fell; gross financial savings actually increased in absolute terms with the decline in gross savings ratio being more modest (from 11.1 percent to 10.9 percent). Of course, the spike in household debt by 75 percent (rising from 3.8 percent of GDP to 5.8 percent) distorted the picture as bank borrowings and borrowings from non-banking and housing finance companies (NBFCs/HFCs) shot up by 60 percent and 200 percent, respectively. Second, the increase in debt was unusually high compared to earlier years but cannot be entirely attributed to family households. The household sector includes not only family households but also farm households engaged in agriculture and all unincorporated enterprises in industry, trade and services. The informal sector is known to be sizeable though no reliable data on savings or liabilities is available. However, the RBI’s credit data reveal that banks’ credit under personal loans grew by Rs 6.5 trillion, while the increase in liabilities as per the savings data was Rs 12.2 trillion. It is likely that the remaining debt came from the unincorporated sector.
Share of Unincorporated Sector
Likewise, it is unlikely that the 200 percent increase in borrowings from NBFCs/HFCs was entirely by family households. Without data on the liabilities of the unincorporated sector, it is simplistic to assume that family households had piled up debt to finance consumption. Further, the link between bank credit and personal consumption is not very robust to suggest that consumption is being debt-financed. For one, incremental personal credit from banks was only about 20 percent of personal consumption spending during FY23. Also, personal credit consists largely of home loans (44 percent), consumer durables and vehicle loans (12 percent), credit cards (5 percent) and other general-purpose loans having much smaller shares. But personal consumption expenditure majorly consists of food, beverages and other non-durables (42 percent) with housing, vehicles, consumer durables and education together amounting to less than 20 percent of spending. These are not quite in sync with bank credit to be called debt-fuelled consumption.
Finally, a point to be noted is that the RBI data refer only to financial savings. Investment in physical assets (mainly houses) and gold have long been a significant component of total savings (nearly 40 percent) and are about 11 percent of GDP. Data for non-financial savings for FY23 are not available but even assuming the same level as the previous year, the decline in total savings is more moderate. In fact, the government also sought to explain the decline in financial savings by pointing to non-financial savings replacing financial savings, as households apparently took advantage of low-interest rates after the pandemic to invest in vehicles, education and homes. While housing investment is evident from capital formation data, investment in other assets is not so obvious, at least as revealed by bank credit.
Slow Growth of Household Financial Savings
While slowing growth in financial savings of households is a concern given the crucial link with capital formation, the larger issues are with the pattern of savings and investments. Bank deposits continue to be the dominant instrument (over 40 percent) followed by insurance (18 percent) and provident funds/public provident fund (18 percent). From a saver’s perspective, this may reflect risk aversion, but from a capital formation perspective, the implication is that these savings have been pre-empted by the government, given the statutory investment mandates of banks, insurance companies and provident funds. The ownership pattern of GoI securities confirms the same with banks, insurance companies and provident funds holding close to 70 percent. Gross capital formation data, however, reveals a different picture with the household sector (which includes the unincorporated sector) emerging as the largest investor at 40 percent, closely followed by the private sector at 37 percent. The government and the public sector together account for only 23 percent of gross capital formation. Households have been primarily investing in housing (72 percent) which now resembles a form of flight from currency, quite like what took place in the US where houses became monetized.
Households’ appetite for housing and the government’s focus on infrastructure spending have meant that construction and ownership of dwellings now contribute about 15 percent to total gross value added but the implication for job creation has been less favourable, as these sectors mostly create semi-skilled jobs that absorb surplus rural labour. For all the criticism, the private sector invests almost as much as the household sector. But what is interesting is the shift in the patterns of investment. The share of plant and machinery which was 57 percent in FY2012 has been steadily going down, dropping to 41 percent in FY2022, while the share of intangible assets increased from 18 percent to 28 percent. This not only reflects the decline of manufacturing but perhaps also the asset-light nature of modern private enterprises. Unshackling household financial savings could free up resources, but investment opportunities and intentions need to pick up for them to be profitably utilised.
SA Raghu is a columnist who writes on economics, banking and finance. Views are personal and do not represent the stand of this publication.
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