Net financial savings of households plunging to a five-year low of Rs 14.2 trillion in FY23 largely signifies that households have diversified their savings portfolio and shifted towards physical assets savings, top economists tell Priyansh Verma & Prasanta Sahu. In FY23, gross financial savings saw a rise of 14% year-on-year, while financial liabilities jumped 73%. This also signifies a major uptick in leveraged demand, possibly due to easier access to credit. Economists say the channel of financing will only change in the case of low savings but investments per se will not suffer. FE spoke to Abheek Barua, chief economist, HDFC Bank; Mridul Saggar, former member, RBI’s Monetary Policy Committee; Madan Sabnavis, chief economist, Bank of Baroda and N R Bhanumurthy, vice-chancellor of Bengaluru’s BASE University for their perspective on the subject. Excerpts:
What does a drop in net financial savings of households signify?
Abheek Barua: Net financial savings almost halved from 10% in FY11 to 5.4% of GDP in FY23. This was underpinned by a muted trend in gross financial savings while at the same time household financial liabilities rose sharply. The data suggests an emerging trend, wherein households seem to have diversified towards physical asset savings.
This aligns with the increased demand for housing with a rise in the pace of urbanisation. Moreover, lower financial savings can also be explained by higher inflation in the year which negatively impacts household savings. The significant rise in financial liabilities for households signifies an increase in leveraged demand.
Mridul K Saggar: What the drop in net financial savings signifies is that (i) households are willingly leveraging their balance sheets to maintain higher consumption, (ii) Non-bank financial intermediaries after deleveraging in 2021-22 have resumed their normal lending operations to households.
Is it a worry?
Firstly, the household balance sheet in India is not excessively leveraged. On a stock basis, BIS has estimated that credit to households from all sources stood at 37.2% at the end of H1-FY24. This is an increase of about 5.5 percentage points in the last 7-years but is lower than the jump of 8.5 percentage points for all emerging markets over the same period, for which the stock of household credit stands markedly higher at 47.6% of GDP. The trend of sharper rise in financial liabilities than assets is a global trend where financial deepening is accompanied by households’ ability to borrow more as financial intermediaries seek to diversify their lending portfolios away from stressed firms. Second, at a time when private final consumption expenditure growth has been low, it makes macroeconomic sense for banks to lend households more.
N R Bhanumurthy: If you look at most of the macro parameters, one thing which has ceased to be a focus in recent years is ‘savings’. Although it should have been the most important macro parameter, nowhere are discussions happening, neither in the Reserve Bank of India nor in the ministry of finance.
I have been arguing that India’s growth is more of savings-led investment growth that India focussed on for a long time. This helped us contain external shocks. But, the policies are now against savings. For example, the government has discontinued tax-free infrastructure bonds, which channelised savings for long-term investments.
I also feel that we have reached the peak in indirect tax rates, the rates have to be reduced before they start hurting consumption and growth. Historically if household savings decline, overall gross domestic savings also decline.
Are low financial savings likely to hit investments?
Madan Sabnavis: Drop in savings means that either income is not growing proportionately or consumption is increasing. Again consumption increasing due to inflation would mean that people are spending more on necessities like food thus leaving less for savings. This, I think, is a concern.
As long as investment is not increasing rapidly we are meeting our requirements of funding and there is no major issue. Now once investment picks up, we will have to fund the same through foreign funds in case savings are low. That will be the change. But investment per se will not suffer if savings come down. The channel of finance will only change.
Abheek Barua: Lower household financial savings do present a challenge for spurring investments in the economy. India’s investment needs to reach a $5 trillion economy would require a steady increase in financial savings by households. Greater digitalisation, ease in access to financial products and expansion of the formal economy bodes well for an increase in financial savings going forward. Besides, moderation in inflation prints is also likely to be positive for household financial savings going forward.
Mridul Saggar: Saving-investment gap that is a mirror image of current account deficit (CAD) at the current juncture appears low. CAD/GDP was only 1.2% in Q3FY24, well below the threshold of 2.5% which can be of concern. So, if planned investment picks up and domestic savings lagged, there is room for additional foreign savings to bridge the gap.
The enabling environment for foreign investments has improved and despite the lower looking net FDI on account of repatriations/disinvestments, gross FDI remains encouraging. However, capacity utilisation rates are at a point where the investment cycle can pick up once current uncertainties recede and difficult policy choices can arise in that milieu. In addition, what the government can look at is some incentivization policies for household savings even if it means a relook at ushering in a new tax regime.