How critical are household savings for government borrowing?

Published: April 9, 2019 2:11:17 AM

The importance of households savings can be gauged from the fact that a household is the only segment that is the net financial surplus sector in the economy; all other segments, namely public sector, private sector and general government, are in deficit

systemic risk survey, SRS, RBI, household savings, government borrowing, financial express. opinion

By Sunil Kumar Sinha
& Devendra Kumar Pant

Household savings are an important variable under the macroeconomic risk category of the systemic risk survey (SRS) conducted by the Reserve Bank of India (RBI) biannually to capture the perceptions of experts, including market participants, on the major risks faced by the Indian financial system. The SRS conducted during October-November 2018 pegs household savings in the medium-risk category. (Households is a heterogeneous group and includes resident households, non-profit institutions, and unorganised and unregistered enterprises.)

However, the importance of households savings can be gauged from the fact that a household is the only segment that is the net financial surplus sector in the economy; all other segments, namely public sector, private sector and general government, are in deficit. In fact, 50.8% of households’ savings in FY18 were in financial assets, followed by physical assets (48.1%) and gold/silver ornaments (1.1%). Deposits with banks are the single largest form of households’ financial assets, followed by insurance funds, mutual funds and currency. Therefore, any adverse movement in the household savings will have a significant bearing on banks, insurance companies and mutual/provident funds, who, in turn, are key investors in government securities.

At end-December 2018, banks held 40.5% of the Union government dated securities, followed by insurance companies who held 24.6% and RBI with 13.8%. Others such as provident funds held 5.5% and foreign portfolio investors 3.6%. However, provident funds are the most aggressive subscribers of state government securities. At end-December 2018, they held 21.3% of state government securities (end-December 2017: 17.05%). In the case of extra budgetary resources (EBR), the National Small Savings Fund is one of the major subscribers. (EBR are the financial liabilities raised by public sector undertakings, for which repayments are made using government budget.)

While gross savings in the economy grew 9.5% over FY12-18, households’ savings grew just 6%. As a result, its proportion in gross savings declined to 56.3% in FY18 from 68.2% in FY12. Gross households financial savings net of financial liabilities increased to Rs 11.29 trillion in FY18 from Rs 6.43 trillion in FY12 (CAGR: 9.8%). However, net central government, state government and EBR borrowings increased to Rs 11.55 trillion in FY18 from Rs 6.28 trillion in FY12 (CAGR: 10.7%). During this period, state governments’ net borrowings grew at a CAGR of 33%, followed by EBR (15.1%) and central government (0.5%).

The aggregate net borrowing is budgeted to increase to Rs 12.08 trillion in FY20 and gross borrowing to Rs 16.7 trillion (FY18: Rs 14.5 trillion). The ratio of gross household financial savings net of financial liabilities compared to net borrowings of central and state governments and EBR declined to 0.97x in FY18 from 1.02x in FY12 (FY16: 1.38x). Therefore, despite RBI’s policy rate cut, slower growth of gross household financial savings net of financial liabilities compared to the net borrowing of central and state governments plus EBR is keeping the 10-year G-Sec yields at relatively elevated levels. The weighted average yield of outstanding government debt stock at end-December 2018 was 7.84%.

For the ratio of gross household financial savings net of financial liabilities to net borrowings of central and state governments and EBR to improve, either the gross household financial savings have to increase or the funding requirements of the central and state governments plus EBR have to decline. The other alternative is to rely on external funding. The foreign portfolio investment (FPI) limit in central government securities (G-Sec) was 5% of the outstanding stock in FY18. Since it was utilised to the tune of 99.3%, the limit has been increased to 5.5% of the outstanding stock for FY19 and 6% for FY20. However, the FPI investment in state development loans (SDLs) continues to be 2% of the outstanding stock of securities and utilisation level was low at 17.9% in end-March 2018. At end-December 2018, Indian government’s public debt accounted for 89.5% of the total outstanding liabilities with internal debt and external debt accounting for 83.3% and 6.2%, respectively. The balance 10.5% is public account liabilities.

While India can rely on foreign savings/funding to meet its government borrowing and/or investment requirement, higher reliance on external funding has its own drawbacks. In fact, the fickle nature of FPI can be quite destabilising for the economy and the same has been witnessed multiple times. The most recent one relates to the period over April-October 2018 when FPI pulled out a little over $16 billion from the Indian market. At the national level, the gap between domestic savings and domestic investment shows up in the current account of balance of payment.

In case gross household financial savings net of financial liabilities continues to grow slower than the net borrowings of central and state governments plus EBR and the gap is funded by external sources, the economy would run the risk of current account deficit (CAD) widening along with its associated consequences.
The good news is that the consumer price inflation has been benign and likely to be so in the near term. This, in combination with improvement in nominal gross value added (GVA) growth of the household sector, resulted in gross household savings growth improving to 12.02% in FY18 (FY16: 1.47%). With benign inflation and nominal GVA growth of 11.4%, households saving is expected to improve further in FY19.

Authors are principal economist and chief economist, respectively, at India Ratings and Research. Views are personal

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