NEW DELHI: The financial distress caused by pay cuts and job losses during the pandemic may have forced Indian households to dip into their savings and borrow more to meet expenses. According to RBI data released on Friday, households’ financial savings rate dropped to 10.4% of the GDP in the July-September 2020 quarter compared with 21% in the preceding quarter, the central bank’s preliminary estimates on household savings.
While the drop appears drastic on a sequential basis, a savings rate at 10.4% is still higher than 9.8% recorded in the year-ago period.
The report said Indian households appeared to be slowly going back to their pre-Covid spending habits as consumption switched from an ‘essentials only’ pattern to discretionary spending with the gradual reopening of the economy.
While the report notes the change is driven by an increase in household borrowings from banks and non-banking financial companies (NBFCs), experts say the drastic drop in income may have accentuated the process.
It gives more credence to economists’ prediction that households are still maintaining consumption despite job losses and low income levels. Rising food prices in the midst of widespread economic pain could also force households to dip into their savings.
According to RBI, household financial savings have moderated despite an increase in savings in the form of deposits as borrowings from banks and NBFCs have picked up.
On the assets side, there was a notable fall in household savings in the form of currency to 0.4% of GDP in Q2 from 5.3% in Q1. Similarly, household investment in mutual fund products declined to 0.3% from 1.7%, while savings in the form of insurance products moderated to 3% from 3.2% in Q1.
Meanwhile, a Pew Research report has said the Indian middle class has shrunk as the financial woes of the pandemic pushed 3.2 crore Indians into poverty. A year into the pandemic, the middle class population has shrunk to 6.6 crore from a pre-pandemic estimate of 9.9 crore, it said.