Household savings hit record lows amid surging inflation, forcing finance ministry response

India's household savings have reached a two-decade low as surging inflation prompts people to dip into their savings and avail loans for their spending requirements. This worrying trend has sparked concerns among economists and experts about the financial health of Indian households.

According to data released by the Reserve Bank of India (RBI), net financial assets for households have consistently declined. In the fiscal year 2020-21 (FY21), these assets accounted for 11.5 per cent of the gross domestic product (GDP). This figure dropped to 7.2 per cent in FY22, and as of FY23, it has plummeted to a mere 5.1 per cent.

Net financial assets are calculated by subtracting financial liabilities from overall financial assets. Household liabilities include loans from banks and non-banking financial companies (NBFCs), while assets encompass bank deposits, investments in financial institutions, life insurance, provident funds, currency, and other investments.

In the fiscal year 2022-23, the net financial assets of Indian households stood at 5.1 per cent of GDP, marking the lowest point in at least 23 years. The last time such a low was recorded was in FY15, at 7.1 per cent, according to a September 2022 report by Motilal Oswal. The peak in household savings during FY21, at 11.5 per cent, was attributed to the Covid-19 pandemic, which led to lockdowns and restricted spending worldwide.

Madan Sabnavis, chief economist at Bank of Baroda, said, “There has been a surge in household liabilities as banks and NBFCs pushed retail credit to consumers.” During the same period, financial liabilities surged by 76 per cent, outpacing asset growth. This resulted in a decline in net financial savings as a percentage of GDP.

As measured by the consumer price index (CPI), India's retail inflation reached 6.83 per cent in August, surpassing the RBI's flexible inflation target of 2-6 per cent for two consecutive months. In its August monetary policy, the RBI projected CPI inflation to hover at 5.4 per cent for 2023-24, with FY23 seeing retail inflation at 6.7 per cent.

Robust credit growth to retail borrowers has driven a 57 per cent increase in household bank borrowings year-on-year, while deposits witnessed a 32 per cent rise. In FY23, retail loans surged by 21 per cent, significantly higher than the 13 per cent growth observed in FY22.

Despite the RBI's repo rate increases between May 2022 and February 2023, retail loan growth remains strong for banks, driven by growing demand for mortgages, compensating for sluggish demand for corporate loans.

While experts express concern over the decline in household savings, the ministry of finance has issued a statement countering claims of deteriorating financial health.

According to the ministry, the household savings trend does not indicate distress but instead reflects changing consumer preferences for different financial products. Government data shows that the stock of household gross financial assets increased by 37.6 per cent between June 2020 and March 2023, while the stock of household gross financial liabilities rose by 42.6 per cent during the same period.

The ministry emphasised, “[Households] added fewer financial assets to their portfolio than in the previous year and the year before, but it is important to note that their overall net financial assets are still growing.”

Citing double-digit growth in real estate and vehicle loans since May 2021 and April 2022, the ministry pointed out that households are investing in these assets. They stated, "The household sector is not in distress. They are buying vehicles and homes on mortgages.”

Regarding the overall trend in household savings data, the government noted that they have grown at a compound annual growth rate of 9.2 per cent between FY14 and FY22, while nominal GDP grew by 9.65 per cent during the same period. Thus, the household savings to nominal GDP ratio has remained relatively constant.

The ministry concluded that there is no distress in the household sector, contrary to concerns circulating in some quarters.

As economists and policymakers continue to debate the implications of declining household savings, the overall economic landscape in India remains a subject of keen interest and concern.