A low-interest rate regime in the last two years might be behind the sharp fall in household savings in India, said SBI Research in a commentary about the latest numbers revealed by India’s central bank.
According to RBI data, Indian households' net financial savings hit an all-time low of 5.1% of gross domestic product in FY2023 as household borrowings exceeded investments and savings.
This is considerably lower than the 11.5% recorded in FY 2021 and 7.6% recorded in FY 2020 before the Covid-19 pandemic.
Household liabilities rose 76% in FY23 from the previous financial year.
SBI Research suggested that the sharp decline in savings may be related to a ‘paradigm shift’ in saving — away from monetary assets to physical assets such as real estate. Such a transition is typically seen in times of high inflation, as monetary assets can’t always keep up with the value appreciation delivered by physical assets during such times.
“To start with, the sharp rise in financial liabilities in hindsight may reflect a drawdown in precautionary saving during the pandemic,” noted the analysts from SBI.
This suggests that the sharp increase in the financial liabilities and borrowings may have posed a reason for the decline in the net financial savings. However, a deeper look at the data reveals otherwise.
Since the Covid-19 pandemic, the financial liabilities of Indian households jumped to Rs 8.2 trillion, outpacing the increase in gross financial savings at Rs 6.7 trillion.
Out of the Rs 8.2 trillion increase, Rs 7.1 billion was accounted for by an increase in household borrowing from commercial banks.
This, it suggested, indicates that Indians may be focusing more on credit-led expenditure on certain high-value items, instead of keeping their savings in the form of bank deposits.
“Juxtaposing this increase in borrowing from commercial banks with the increase in bank credit, we find that 55% of the retail credit to households in the last 2 years has gone to housing,
education and vehicle purchase,” said the analysts.
“Thus, it is entirely possible that a low-interest rate regime resulted in a paradigm shift of
household financial savings to household physical savings in the last 2 years,” it added.
Even though the report suggests that the decline in savings was due to the increase in financial liabilities, it is important to note that there was an incremental increase of Rs 4.1 trillion on the assets side, in terms of insurance and provident and pension funds.
The report also noted a significant long-run relationship between housing loans and household savings in physical assets.
“Every Rs 1 increase in housing loans has resulted in a Rs 2.12 increase in household savings in physical assets for the 14-year period ended FY22,” said the analysts.
Hence, said SBI Research, household savings have not declined but are witnessing a shift in the mode of savings. The Indian households have reduced their net financial savings resulting in a substantial increase in household savings in gross physical assets.
In FY2021 which had registered an 11.5% net financial savings also happened to register a 48% decline of savings in physical assets, it noted.
“Savings in physical assets which accounted for more than two-thirds of household savings in FY 2012, had declined to 48% in FY2021,” noted the analysts.
However, the trend is again shifting and the share of physical assets is expected to reach a nearly 70% level in FY23, due to a decline in the share of financial assets suggesting that the household savings are still up but in the form of assets.
“We believe that the total household savings (both financial+physical) for FY 2023 would still surpass the FY 2022 levels despite the decline in financial savings as household savings in
physical assets have jumped Rs 6.5 trillion in FY 2022 over FY 2021 and as per current trends,” noted the analysts.
It is expected to jump further by upto Rs 5 trillion in FY23 and hence will outstrip the increase in household indebtedness, it added.
“We also believe that the shift to physical assets is also triggered by a recovery in the real estate sector and the increase in property prices,” said the analysts from SBI research.
The RBI House Price Index shows a modest acceleration since FY21, which may be acting as a motivator for buying homes. The household sector investment posted a gradual recovery at 11.8% in FY 2022.
This increased “pull” factor thereby pushed up capital spending in a multitude of sectors.
“If this is indeed the proximate story of the revival in household investment, this has strong policy implications for growth and investment revival,” noted the analysts.