Rising income driving a revival in household savings: Michael Patra

Household savings are expected to accelerate with rising income, retaining their position of being top net lenders to the rest of the economy in coming decades, Reserve Bank of India deputy governor Michael Patra said on Tuesday.

Addressing the Confederation of Indian Industry’s Finance Summit, he said net financial savings of households have almost halved from 2020-21 levels due to behavioural changes in the form of unwinding of prudential savings accumulated during the pandemic and shifting from financial assets to physical assets such as housing.

“Going forward, boosted by rising incomes, households will likely build back their financial assets. This process has already begun. Households’ financial assets have increased from 10.6 % of the GDP during 2011-17 to 11.5 % during 2017-23 (excluding the pandemic year),” Patra said.

Their physical savings have also risen in the post-pandemic years to over 12% of the GDP and could rise further, he said, adding they had reached 16 % of the GDP in 2010-11.

“Accordingly, households will remain top net lenders to the rest of the economy in the coming decades,” Patra said. Going forward, the gap between the investment and savings ratio would rise on the back of a uptick in domestic savings, household and business and dis-savings from the government in adherence to the principles of fiscal consolidation, he said. “In India, it is household savings which have largely financed investment requirements of the economy and would continue to do so in the future due to rising productivity and thrift of the workforce.”

A productive workforce will pave the way for value creation in the economy, with capital playing an important supportive role. Eventually, a rise in the efficiency of capital will lead to a fall in the capital-output ratio, the deputy governor said.

Patra urged the private sector to step up participation in financing infrastructure projects to reduce the infrastructure gap. He also urged NBFCs and fintechs to come forward to cater the needs of  the MSME sector.

As India is at the cusp of a distinct demographic advantage, Patra said an investment of Rs 2-3 trillion per annum over next six years is needed to finance projects related to skilling, upskilling, and reskilling. He advocated the use of sovereign green bonds.

Patra also highlighted the importance of corporate bond market in deepening of the financial sector, and the role of external finance in accelerating India’s growth momentum.