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Household Financial Savings Fall Steepest in Decades
The decline in savings for the year 2022-23 can be attributed to liabilities increasing by 76% while financial assets only saw a 14% rise compared to the previous year. Bank deposits increased by 32%, but small savings (excluding PPF) and investments saw decreases.
Author: Saurav Kumar
Published: November 5, 2023
Indian households have witnessed the steepest decrease of financial savings in decades. A Financial Express report citing the Reserve Bank of India (RBI) data revealed, household savings nosedived to a five decade low at the end of Financial Year 2023.
The data further indicated a simultaneous decrease in savings and spike in liabilities.
Changing Savings Trends
In the previous fiscal year (2021-22), household net financial savings amounted to 7.2% of GDP. However, during the peak pandemic year of 2020-21, when spending avenues were limited, net financial savings surged to 11.5% of GDP from 8.1% in 2019-20.
In absolute terms, net household assets in FY21 stood at Rs 22.8 trillion. In FY22, it dropped to Rs 16.96 trillion. It further fell to Rs 13.76 trillion in FY23.
The decline in savings for the year 2022-23 can be attributed to liabilities increasing by 76% while financial assets only saw a 14% rise compared to the previous year. Bank deposits increased by 32%, but small savings (excluding PPF) and investments saw decreases.
Liabilities on the Rise
On the liabilities side, borrowings from commercial banks surged by 54% in 2022-23 compared to the previous year. This has led to household financial assets declining to 10.9%t of GDP from 11.1% in 2021-22, while liabilities increased to 5.8% of GDP from 3.8%, marking the second-highest level in independent India's history.
Impact on Consumption and Investments
Nikhil Gupta, chief economist at Motilal Oswal Financial Services, noted that the decline in household financial savings in 2022-23 supported strong consumption and real estate investments. However, this trend was driven by weak income growth.
According to GDP data, private final consumption expenditure increased by 7.5% in 2022-23, down from 11.2% growth in the previous year. Meanwhile, the gross value added of the 'financial, real estate, and professional services' industry saw a significant rise of 7.1% in 2022-23, compared to 4.7% in 2021-22 and 2.1% in 2020-21, as per statistics ministry data.
Gupta cautioned that the combination of weak income growth and falling household net financial savings, driven by higher borrowings, is unsustainable, potentially impacting consumption growth. Whether this decline in consumption will be compensated by increased investments remains uncertain.
An interesting study recently published by the RBI highlighted the long-run relationship between real private consumption, income, and wealth, shedding light on the complex interplay of economic factors affecting Indian households' savings habits.