Household financial savings rate fell to 8.1% of GDP in the quarter ended December, 2020 from a peak of 21% and 10.4% during the previous two quarters respectively, according to preliminary estimates by the Reserve Bank of India.
The estimated savings rate in Q3 remains flat over the pre-pandemic period, when it had stood at 8.1% in Q3 of FY20.
The decline was due to the unwinding of precautionary and forced savings seen during last year’s peak pandemic months of April-June, 2020.
However, subsequent months saw a steady rise in spending on consumer durables and other goods ahead of the festive season, as Indians switched from an ‘essentials only’ spending mode to making more discretionary spends.
This reversed the unprecedented savings rate of 21% seen in the first quarter of FY21.
Preliminary estimates indicate, however, that household financial savings have plateaued to 8.1% in Q3 FY21 from the high of 21% in Q1, while a surge in retained earnings boosted savings by the non-financial corporate sector, which saw a sharp increase in Q3,
RBI noted in its annual report.It also warned that although aggregate savings increased during the pandemic, it, however, might conceal the unequal impact of savings and consumption expenditure on non-essential items as several households in the unorganised sector suffered from “loss of employment, income and borrowing opportunities.”
The upshot is, FY21 may see an increase in annual household savings rate afterall, led by the June quarter’s 21% growth rate. Presuming a trendline 8-9% growth in Q4, the annual savings rate will likely settle at 12% in FY21, higher than 7.2% and 8% registered in FY19 and FY20 respectively.
Domestic savings rate, particularly that of households, is critical as it determines the quantum of funds available for governments and corporates to borrow from.
Indian households account for about 60% of the country’s savings, but this is falling gradually. Lower domestic savings exposes borrowers to overseas markets, weakening India’s external position and raising external debt.
India’s savings rate had touched a 15-year-low as gross domestic savings stood at 30.9% of GDP in FY20, down from a peak of 34.6% in FY12.
A Household savings fell from 23% of GDP in 2012 to 18% in 2019.
Typically, financial savings data comes with a lag and, currently, the RBI has released estimates for only for two quarters of FY21.
The central bank is expected to release Household Financial Savings and Household Debt-GDP Ratio for Q3 FY21 in July, while the National Statistics Office publishes annual figures in January.
In Q2, increased household consumption, particularly its discretionary component, could be attributed to a resumption in economic activity following the easing of the lockdowns.
The reversal in household financial savings is corroborated by the lower surplus in the current account balance. Household debt to GDP ratio rose sharply to 37.1% in Q2, from 35.4% in Q1.