The fast-changing behaviour of Indian households when it comes to savings, investments and asset creation, partly driven by the young generation’s propensity to save less and consume more, has attracted the attention of policymakers. Priyansh Verma and Saikat Negoi spoke to four economists on whether and how much the dynamics of capital allocations have changed as a result, and what this holds for the economy.
Net financial savings of Indian households (HH) almost halved from 10% in FY11 to 5.4% of GDP in FY23 , a five-decade low. Is the declining trend still on? If so, does it mean more reliance on foreign savings (high current account deficit) for India’s investment needs?
Gaura Sen Gupta, chief economist, IDFC FIRST Bank
FY24 current account deficit narrowed to 0.7% of GDP, indicating the gap between overall investments and savings has actually narrowed. We estimate overall gross savings (households, corporates and government) increased to 31.8% of GDP in FY24 from 30.2% in FY23. Hence the dependence on foreign capital to finance investments has reduced. In FY2, the CAD is estimated to remain moderate at 1.3% of GDP.
NR Bhanumurthy, director, Madras School of Economics
Historically, India’s reliance on foreign savings is deliberately limited to the extent of 1.5 to 2% of GDP as a threshold level in order to be immune from unexpected external shocks. Currently investment rate in India is close to 31% of GDP while HH savings are on the decline. This suggest that there is a slightly different causal relationship now, between savings and investments. Large part of savings entering financial markets by bypassing banking industry suggest we need to relook at the definition of savings.
Suman Chowdhury, chief economist and executive director, Acuité Ratings and Research
The plunge HH savings surely is a matter of concern. Nevertheless, the investment needs in our economy are also significantly funded through corporate savings as well as the government budget. HH savings will continue to be on a gradual decline and along with that, HH debt will be on the rise in line with the trend in developed economies. Thers isn’t much dependence on foreign savings now. Nevertheless, low domestic savings can leave us vulnerable during shocks.
Madan Sabnavis, chief economist at Bank of Baroda
The fall in net savings of households in FY23 did not lead to sharp rise in CAD, which was at 2% (mainly due to the Ukraine crisis). Households are one source of savings, and those of the non-household non-government sector also needs to be looked at closely. When we look at net savings, the point missed is that when households borrow, which is largely for creating capital assets like homes or automobiles, there is capital formation taking place.
What, according to you, has been the trend on net HH savings since FY23?
Sen Gupta: In FY24 household savings would have increased (as % of GDP). This assumption is based on overall savings (households, corporates and government) having risen in FY24 to 31.8% of GDP in FY24 from 30.2% in FY23. Household savings account for more than 60% of overall savings. The rise in household savings in FY24 is likely led by physical savings (or real estate).
Bhanumurthy: Going by reports, there (continues to be) a decline in net financial savings. Given the present CAD and investment rate, India should be having a savings rate not less than 28%. It is possible that post-Covid, corporate savings have increased while HH savings declined.
Chowdhury: During the pandemic, overall HH savings saw a peak, but since then, HHs have been on a “revenge spending” spree, and savings declined. This year the trend has so far been similar. While HH financial savings are on a decline, physical asset purchases like gold and real estate will increase the aggregate HH savings. The current rally of gold, as well as the tariff reduction in gold, will push this further. More inflows to SIPs, mutual funds as well as other equity market assets boosted by the continuous rally and high returns.
Sabnavis: Financial savings would tend to be declining in FY24 as well as FY25 as higher spending on consumption has impacted overall savings. Add to this the fact that retail lending has been robust. Net financial assets would have slowed down in terms of growth, though borrowing for consumption would have reduced post-November 2023.
Motilal Oswal calculates that “HH net financial wealth” rose to an all-time high of 116% of GDP in Q1FY25. Does this involve a definitional issue as HH net financial savings are still seen to be at a low ebb?
Bhanumurthy. This is exactly the point. We need different definitions for savings and investment. With expanding cost-effective fintech leading to reduced role of banks’ financial intermediation, such divergent trends in HH financial savings and financial wealth are obvious. In a way, there is a strong structural change in the way we need to look at savings and investments as well as financial intermediation, going forward.
Chowdhury: The drop in HH net financial savings has raised some red flags. It looks worrying prima facie, as lower savings usually mean less capital for the economy to grow. But there’s more to the story; some of HH savings have been converted to physical assets, such as real estate that become a part of overall investment in the economy. So, households are saving less, but they’re also choosing to park their money in different assets, as seen by overall household savings. Apart from this, retail credit has risen sharply in the past few years. This brings a short-term boost to the economy but raises questions about sustainability in the long run. Most of this retail lending is for consumption purposes. The young generation today tends to prioritize less on savings.
Does this trend– less financial savings and more financial wealth– augur well for the economy? How will this impact the investment rate, increase in which is vital for higher economic growth?
Sen Gupta: Something similar is also happening in the US where household net worth has held-up but savings has reduced. Rise in net wealth will tend to support consumption. Note that in FY24, household savings would have risen in our assessment.
Bhanumurthy: India is a saving-led-investment growth economy. As we also deliberately depend less on foreign savings, what is required is focusing on domestic savings, and its channelling towards investment more efficiently and cost-effective manner. We need to see investment rate going above 35% to achieve a growth of 8% plus. For this, we need more domestic savings.
Chowdhury: Households moving towards more financial wealth as well as moving from savings towards investments are clear signs of the evolution of the Indian economy. In the long term, this could lead to faster economic growth. The recent shift in household behaviour—moving from traditional financial savings toward accumulating financial wealth—presents a mixed bag for the economy. As households invest more in equities, MFs, and real estate, there’s a clear boost to asset prices, creating a “wealth effect,” encouraging higher growth. But this also hinges on how household debt in the country is managed. Rising retail loan delinquencies can impact the banking system and financial stability.
Sabnavis: Financial wealth also has equivalent increase in assets, and hence is not contradictory to decline in net financial savings.