Foreign debt worry in household savings dip
Households’ net financial savings as a share of gross domestic product (GDP) fell to a near five-decade low of 5.1 percent in 2022-23. Analysts blame this troubling trend on stagnant or falling incomes and high inflation. The finance ministry thinks otherwise, reasoning that the decline was due to a 5.8 percent rise in financial liabilities—the second-highest growth rate seen since Independence. Household savings include financial and physical assets and, citing Reserve Bank data, the ministry argued that the steady double-digit growth in housing and vehicle loans indicate that financial liabilities rose due to the purchase of physical assets, which isn’t a sign of distress but of confidence in their future employment and income prospects. Likewise, SBI Research argued that a low-interest rate regime may have led to a paradigm shift of financial savings to physical assets in the last two years.
With the overall household savings including financial, physical and jewellery growing at a compounded annual rate of 9.2 percent between 2013-14 and 2021-22, the ratio of household savings to nominal GDP remained constant at about 20 percent. Given the rise in physical assets, it’s possible that the overall household savings may rise in 2022-23 too, notwithstanding the decline in financial savings. SBI Research expects the share of physical assets to total household savings to increase significantly in 2022-23. Household physical assets, which accounted for two-thirds of household savings in 2011-12, fell to 48 percent by 2020-21. But now the trend will likely reverse with the share of physical assets touching 70 percent in 2022-23.
That said, a decline in financial savings could affect long-term growth prospects as they are the primary source of domestic loanable funds to governments and businesses. Within financial savings, bank deposits are the single largest component of households’ financial assets, followed by insurance funds, mutual funds and currency. A decline will have a significant bearing on banks, insurers, mutual funds and provident funds, who in turn invest heavily in government securities. Falling domestic savings will force any economy to rely on external funding, and India, with its unbeatable record of internal debt should avoid piling on foreign debt, which could spike bond yields and widen the current account deficit.