Net financial savings of households as a percentage of the gross domestic product (GDP) slumped to the lowest in 47 years in FY23. According to the Reserve Bank of India’s September bulletin, net financial savings were down to 5.1% of GDP in FY23 from 7.2% in the previous fiscal year. This is a cause for serious concern as the figure was 11.5% in FY21, indicating a severe income crunch and a likely transience of the post-pandemic rise in consumption.
Disturbingly, the financial liabilities of households also sharply increased by 5.8% last fiscal compared with 3.8% in FY22, suggesting a larger-than-usual recourse to debt-driven consumption. In fact, the rate of increase in financial liabilities last fiscal was the second highest since Independence. It’s true that owing to the development objectives, access to affordable credit for the household sector can alleviate the liquidity constraint, enabling them to smoothen their consumption. So, household borrowing plays a critical role. But it’s equally true that excessive leverage beyond sustainable levels may start impacting the health of the financial system adversely causing economic disruptions.
The prospects of a boost in demand from higher consumption do not appear very bright as the reality is of falling or stagnant household incomes when inflation is raging. At 6.83% in August, inflation as measured by the consumer price index (CPI) has stayed above RBI’s flexible inflation target of 2-6% for two consecutive months. In its August monetary policy, RBI has projected CPI inflation at 5.4% in 2023-24. The stress on incomes is relatively more in the countryside as real rural wages contracted for 12 straight months to March. Though there is a likelihood of a reversal of these trends if overall economic growth picks up and real household incomes grow, the FY23 figures have a potential bearing on private investments over the near-term at least. Nikhil Gupta, economist at Motilal Oswal, believes the combination of weak income growth and falling financial savings, led by borrowings, is unsustainable.
As consumption weakens, its impact on a private sector–led investment push is obvious. The Union finance ministry’s latest monthly economic report highlights the “emergence of the green shoots of a private capex upcycle” based on high frequency indicators such as rising capital goods imports, steel and cement consumption and auto sales. Proposals to set up new investment projects in Q1 FY24 were 11.6% higher than in the corresponding period of the previous fiscal according to CMIE’s capex database. The official narrative also factors in the incentivisation of higher private investments through production-linked incentives in 14 key sectors, PM Gatishakti and the National Infrastructure Pipeline.
Yet the fact remains that the corporate sector is not driving the current growth story as it did earlier — a point underscored by Pronab Sen, chairman of the standing committee on statistics, in an interview to this paper. That was possible because there was a lot of excess capacity in the system. This has not yet been fully used up. In manufacturing, capacity utilisation rates rose to 76.3% in Q4 FY 23 from Covid-related lows of 47.3% during Q1 FY21. They need to go up much further to a point where private industry requires additional capacity. This can happen only if demand improves as the year-on-year growth curve for new orders is sloping downwards. Thus, a private capex upswing is only likely further down the road.