“Savings rate at 19-year low in H1FY23” | The Financial Express

“Savings rate at 19-year low in H1FY23”

Inflation, spurt in consumption drain savings

“Savings rate at 19-year low in H1FY23”
Gross domestic savings (savings rate) is defined as GDP less total final consumption expenditure.

India’s gross domestic savings rate may have fallen to a 19-year low of 26.2% of the gross domestic product (GDP) in the first half of the fiscal 2022-23, according to a report by Motilal Oswal Financial Services. The agency has ascribed the fall, which could have adverse implications for the drive to kick-start to a new investment cycle, to private consumption remaining rather strong and household incomes being squeezed due to persistent inflation.

Analysts believe that gross domestic savings rate may fall to 27-29% this fiscal, delaying the recovery to the pre-pandemic level (see chart).

Gross domestic savings (savings rate) is defined as GDP less total final consumption expenditure.

“The implied gross domestic savings is derived from the GDP data. India’s savings rate has been falling since FY14,” said Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services. Since inflation is unlikely to fall to 4% even in calendar year 2023, the agency expects the gross domestic savings rate to remain subdued at about 28% for the next six to 12 months, he said.

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Lower savings will make it difficult to increase investments rate without pushing the current account deficit higher. Motilal Oswal has pegged national savings at 27% this fiscal and at 28.6% in 2023-24. A robust savings rate is helpful in pushing up investments and capital formation in the country.

However, India’s gross domestic savings has fallen over the years from a high of 36.9% of GDP in 2020-11. While it registered a minor recovery at 32.2% of the GDP in 2014-15, the gross domestic savings dipped further to 31.4% by 2019-20.

DK Srivastava, Chief Policy Advisor, EY expects the nominal savings to GDP ratio at 28.5% this fiscal from an estimated 30% in 2020-21. “The fall in the savings rate is part of a longer-term trend,” he noted, adding that households have been increasing consumption expenditure even though increase in per capita income has not kept pace. Households, particularly those at the lower end of the income spectrum, who are employed in the informal sector are still impacted by the pandemic and their incomes have not recovered. A larger portion of their income is going into spending, which has impacted savings, he said.

“For the time being, we need not compromise over our growth rate as fall in nominal savings is compensated by fall in relative price of capital goods,” Srivastava said.

Private consumption was the silver lining in the GDP data for the second quarter of the fiscal. While the economic growth slowed to 6.3% year on year for the July to September 2022 quarter while private final consumption expenditure grew by 9.7% in real terms and at over 20% in nominal terms on the back of pent-up demand and inflationary pressures.

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First published on: 10-12-2022 at 01:30:00 am
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