It has been reported that household savings dropped to 50-year low in FY23. However, SBI Research says such a claim is misleading as it does not take into account the sum total of physical and financial savings.

According to the latest Ecowrap report by SBI Research, household financial savings may have dropped because the ownership of physical assets has jumped. Also, it believes that the low interest rates since the pandemic and corrections in the real estate market may have led to a paradigm shift from household financial savings to household physical savings.

“The net financial saving of the household sector – the most important source of funds for the two deficit sectors, namely, the general government sector and the non-financial corporations – moderated to 5.1% of GDP in FY23 from 11.5% in FY21 and 7.6% from FY20 (pre-pandemic). It has been said that it fell to 50 50-year low, however, this is completely misleading as household savings must be looked into as a sum total of physical and financial savings,” writes Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, in the report.

While household savings moderated in FY23, household ownership of physical assets has jumped. The report says that ownership of physical assets by households or household gross capital formation has been turbocharged by low interest rates in the pandemic regime coupled with a recovery in housing prices.

Also Read: Household savings fall to 5-decade low

According to the report, the sharp rise in financial liabilities in hindsight may reflect a drawdown in precautionary savings during the pandemic. However, a deeper look at the data reveals otherwise.

The following are some interesting observations from the report:

Financial liabilities jumped Rs 8.2 trillion since the pandemic, outpacing the increase in gross financial savings at Rs 6.7 trillion, thus explaining the fall in household net financial savings by Rs 1.5 trillion / 2.5% of GDP.

On the asset side of households, there was an increase of Rs 4.1 trillion in insurance and provident and pension funds.

On the liability side of households, out of the Rs 8.2 billion increase, Rs 7.1 billion was accounted for by an increase in household borrowing from commercial banks. Juxtaposing this increase in borrowing from commercial banks with the increase in bank credit, we find that 55% of the retail credit to households in the last 2 years have gone to housing, education and vehicle purchase.

“Thus, it is entirely possible that a low-interest rate regime resulted in a paradigm shift of household financial savings to household physical savings in the last 2 years,” says Ghosh.

He further says there is a significant long-run relationship between Housing Loans and household savings in physical assets. “Every Re 1 increase in Housing loans has resulted in to Rs 2.12 increase in household’s savings in physical assets for the 14-year period ended FY22.”

The decline in net financial savings of households has resulted in a concomitant increase in household savings in gross physical assets.

“In fact, savings in physical assets which accounted for more than two-thirds of household savings in FY12, had declined to 48% in FY21. However, the trend is again shifting and the share of physical assets is expected to reach ~70% level in FY23, due to a decline in the share of financial assets.

“We believe that the total household savings (both financial+physical) for FY23 would still surpass the FY22 levels despite the decline in financial savings as household savings in physical assets has jumped Rs 6.5 trillion in FY22 over FY21 and as per current trends it is expected to jump further by upto Rs. 5 trillion in FY23 and hence will outstrip the increase in household indebtedness. This clearly indicates that the shift from financial savings to physical savings was also triggered by a low-interest rate regime in the pandemic,” writes Ghosh.

“We also believe that the shift to physical assets is also triggered by a recovery in the real estate sector and the increase in property prices. The RBI House Price Index shows a modest acceleration since FY21, which may be acting as a motivator for buying homes. This increased “pull” factor thereby pushing up capital spends in a multitude of sectors. If this is indeed the proximate story of the revival in household investment, this has strong policy implications for growth and investment revival,” he adds.

Interesting policy connotation

The report says that the shift to physical assets has interesting policy connotations.

“Household sector investment gradually recovered to reach 11.8% in FY22. It is pertinent to note that there has been an increase in capital formation as % of household gross savings to 60% in FY22 from a low of 53.2% in FY16 (exception: 47.8% in FY21). Thus, households have now started utilizing more of their savings for capital formation. This number is expected to increase further to a decade-high of ~68% in FY23,” says Ghosh.

Disclaimer: The facts and views expressed above are those of SBI Research. They do not reflect the views of financialexpress.com