Strong impact of GST, demonetisation on household sector .
During FY12-FY17, the household sector accounted for 60.93% of the economy’s total savings, followed by private corporations (35%) and public sector (4.07%). However, the growth of household savings at 3.7% was the lowest during this period among the three broad categories. Savings of the private corporations grew 17.4%, while that of the public sector at 12.9% during FY12-FY17.
As a result, household savings rate (gross household savings/gross domestic product) plunged to 16.3% during FY12-FY17 (FY12: 23.6%). However, household savings rate for the public sector increased marginally to 1.6% in FY17 (FY12: 1.5%) and for corporations to 12.1% (9.5%). Since the household sector is the largest contributor to savings in the economy, the overall savings rate declined to 30.0% in FY17 (FY12: 34.6%).
Impact on GDP
India Ratings and Research believes that if the declining trend of household savings continues, it may pose a serious challenge to GDP growth and macroeconomic stability. Household savings intermediated by banks and other non-banking financial entities are a major source of investment funding for the Indian economy.
During FY12-FY17, the share of public sector and private corporations in investment as measured by gross capital formation (GCF) increased; although, the same for the household sector declined. Until FY13, the household sector was the largest contributor to the GCF, but since FY14, private corporations have emerged as the largest contributor. The declining share of household sector is visible even in case of nominal Gross Value Added (GVA), where its share declined to 43.2% in FY17 (FY12: 45.5%) because of lower nominal GVA growth of the household sector than that of the private corporations and overall economy. In FY17, the household sector contributed 94.8% to agriculture, 27.5% to industrial and 34.4% to services sector’s nominal GVA.
Besides other reasons, tighter financial conditions (increasing median working capital days) have been one of the key reasons for the slowdown in the household sector’s growth. Although there is no regulatory bias against MSMEs for accessing credit, the size of their balance sheet and credit worthiness has become an even bigger issue post 2008 global financial crisis.
The proportion of MSME in total non-food credit declined to 6.1% by Q1FY19 from 11.2% in FY09. In fact, the credit to MSMEs contracted in FY16 and FY17 and was nearly static in FY18. It grew at a paltry 1.1% in 1QFY19.
Twin policy shock
Although the twin policy shock of demonetisation and GST had economy-wide ramifications, it was more pronounced in case of the household sector. The savings rate of the household sector plummeted 153 basis points (bps) year-on-year (yoy) in FY17, while for private corporations it fell 12 bps y-o-y. Savings rate for the public sector increased 37 bps. However, the overall impact was a decline of 128 bps in savings rate.
A recent study by TransUnion CIBIL and SIDBI1, however, suggests that MSMEs have now recovered from the credit shock inflicted by demonetisation and GST. The study finds that MSMEs with credit exposure of `1-100 million have recovered to pre-demonetisation levels by September 2017. The segment with credit exposure of less than `1 million took a little longer and recovered to pre-demonetisation levels by March 2018.
Edited extracts from India Ratings & Research’s report ‘Arth Samvaad’