The big decline in household savings rate after the pandemic – it came in at a near-five-decade low at the end of FY23 — reflects income constraints but also an ongoing structural shift favouring the financial markets, analysts say. There has been a shift away from conventional savings instruments in recent years, partly because the government has chosen to curtail incentives for savings, they reckon.
At the end of FY23, the stock of household financial assets stood at 103.1% of the GDP, down from a peak of 115.4% at FY21-end, but still a considerable 18.6 percentage points higher than 84.5% reported by the end of the FY19.
On the other hand, the stock of household financial liabilities too have gone up — in the year ending-March 2023, stock of financial liabilities was at 37.6%, up from 33.5% in March 2019.
A falling savings rate, coupled with steeper accumulation of financial assets indicates that households have become more risk-prone and been aggressively shifting to financial instruments, which yield higher returns.
The total number active demat accounts in August were 33.1 million, 14.5% higher on year, data from the National Securities Depository Ltd showed. In August 2019, the the number was just 18.9 crore.
This could have short-term adverse implications for growth as the investment rate, which is influenced by savings flows, might fall again. Moreover, given that fresh financial liabilities too are on the rise, the household indebtedness would rise, leading to a drying up of consumption.
Lower household savings could constrict the National Small Savings Fund and make financing of fiscal deficit tougher for the Union government. Household net financial savings rate (HHNFS) fell to a near five-decade low of 5.1% of GDP in FY23, the quarterly RBI bulletin said on Monday. The rate was 7.2% in FY22.
Moreover, the annual financial liabilities of households rose sharply by 5.8% of GDP compared with 3.8% in FY22, signalling higher-than-usual usage of loans for consumption purposes, and purchase of real estate.
“In a scenario of weak wage growth and leveraged consumption, it is unlikely that the consumption will grow at a sustained rate,” said D.K Pant, chief economist, India Ratings and Research. The ratings agency sees growth in private final consumption expenditure growth (PFCE) to ebb to 6.9% in FY24 from 7.5% in FY23. India’s PFCE share in GDP in April-June was at 57.3%, lower than 58.3% in April-June of FY23.
“Also, if household savings continue to decline, this will keep interest rates elevated in the economy, which will have an impact on private investment,” Pant said.
A recent report by Motilal Oswal Financial Services pointed out that corporate investments likely fell 6.2% in Q1FY24, persisting with a trend seen since the previous quarter. The whole of FY23 also saw a contraction of 0.5% in corporate investments.
Anitha Ranga, chief economist, Equirus Securities, however, said that private investment is more a function of demand maturity rather than savings. “While dip in household financial savings is noticeable, at an appropriate savings rate, household savings can come back. The last two years have been a period of low deposit rate which is also a reason for low financial savings,” she said.
In FY19, the pandemic year, net financial savings of households stood at 7.9% of GDP, which rose subsequently to 8.1% in FY20 and then 11.5% in FY21.
“In the current financial year, as nominal GDP growth is likely to be only ~8%, household income growth is also likely to be similar. If so, either consumption growth will be very weak or household investments will weaken substantially, since a further fall in household net financial savings looks very difficult,” MOFSL said in a note. Moreover, since HHNFS play a crucial role in financing the fiscal deficit, a faltering rate will make funding a narrowing fiscal deficit increasingly challenging, MOFSL said.
On the other hand, just as the stock of financial liabilities have gone up, stock of financial assets have increased too. In the year ending-March 2023, stock of financial liabilities was at 37.6%, up from 33.5% in March 2019. And in March 2023, stock of financial assets was at 103.1% up from 84.5% in March 2019.
Also, low tax rates on Employee Provident Fund Organisation (EPFO) and no tax exemptions in the new income tax regime could have also played a role in discouraging savings.
In EPFO, returns from employees’ contribution above Rs 2.5 lakh in a year is taxed at marginal rate, which reduces the real returns. The government has also made the new tax regime as the default option which can be a disincentive for savings because an individual does not get any tax deduction such as Section 80C, 80D, home loan, etc. The only deduction available in the new tax regime is standard deduction of Rs 50,000 a year.