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With inflation continuing to hurt daily budgets, Indian households are finding it difficult to save money. Indian households saved a smaller portion of their income in 2022-23 compared to previous year and net financial savings have dropped to a five-year low. The Reserve Bank of India has noted that household net financial savings fell sharply to 5.1% of GDP in 2022-23 from 11.5% in 2020-21, well below its long-run annual average of 7-7.5%.

This is disturbing news for our policy makers. Savings and investments are two key variables which play a pivotal role in economic growth and expansion. A fall in savings thus, is feared to affect the country’s ambitious investment plan, the key to achieve higher GDP growth.

India's economy will expand by 8% in 2023-24 and is projected to grow by 7% in the current year, V Anantha Nageswaran, chief economic adviser to the government, has claimed recently. Several agencies have recently revised their estimates on India’s FY24 GDP growth. Ratings agency Moody's increased its estimate from 6.6% to 8%, citing strong government expenditure and domestic consumption.  Fitch Ratings also raised India’s growth forecast for FY25 from 6.5% to 7%, highlighting investment as a significant growth driver.

The International Monetary Fund (IMF) has raised India's growth forecast for 2024-25 to 6.8% from 6.5% on the back of strong domestic demand and a rising working-age population. RBI estimates the economy to grow at 7% in the current financial year.

Almost all of these agencies have cited higher investment as the driver of higher growth prospects. Indeed, the government has relied on higher capital spending to maintain the growth momentum. The strategy is simple: spend more on asset creation in the core sector and the growth will follow. A massive outlay of funds for the infrastructure projects will automatically create higher activities in a large number of core sector industries such as steel, cement and power which in turn, will generate more jobs and increase consumer demand – the two shots the economy needs right now. 

Considering this imperative, the outlay for capital expenditure in the interim Budget 2024-25 has been increased sharply to Rs.11.11 lakh crore from Rs.10 crore in the previous budget. This will be 3.4% of GDP and was about double the expenditure of 2021-22.

The faltering savings rate

But the question is: Where will the money to fund the government’s ambitious investment plan come? The answer is: As has been the case in the past, this time also a large amount of this investment would be financed through borrowings. But now that the domestic savings are falling, the investment is feared to be affected. Traditionally household savings have been a major source of government borrowings.

Savings and investments are two key variables which play a significant role in economic growth and expansion. The mobilisation of domestic savings is crucial for raising the economic growth and promoting development, as it is the private savings that affect the domestic investments significantly. Most of the savings are made when they are fully channelled into productive investments. As a result, this will lead to the solution of problems of employment and economic growth.

With the falling purchasing power of rupee Indian households are finding it difficult to save money. Households’ net financial savings have dropped to a five-year low of Rs.14.16 lakh crore in 2022-23. In fact, in last two years alone the net financial savings of households declined by over Rs. 9 trillion from Rs.23.30 trillion in 2020-21 to Rs.14.16 trillion in 2022-23. Overall, India’s household savings rate has fallen from 22.4% of GDP in 2020-21 to 18.4% in 2022-23.

This decline in savings happened despite, or perhaps because of, an increase in borrowing from banks and non-banks. People are taking out more loans. The borrowed money is being used to invest in physical assets, which could include things like real estate, gold, or a car. There has also been a rise in investments in various financial instruments like mutual funds, stocks, bank deposits and life insurance.

The household sector plays a major role in the Indian economy by serving as the primary source of financial resources through savings, contributing more than three-fifths to the total gross domestic savings.

The gross financial savings of households were at Rs. 29.7 lakh crore, while financial liabilities were estimated at Rs.15.6 lakh crore in 2022-23, according to the latest data. Households’ financial liabilities were at their highest level in 2022-23 since 2011-12, when they were at Rs.2.9 lakh crore.

Household savings, which account for over 60% of total savings, are split between financial and physical savings and net financial savings are estimated as the difference between gross financial savings and household borrowings/liabilities.

The Reserve Bank of India has observed that gross household financial savings, which had surged to 15.4% of GDP in 2020-21 (pandemic peak year), supported by large precautionary savings, fell to 11% in 2021-22 and further to 10.9% in 2022-23. Reverting to the pre-pandemic trend of an average 11%,

Economists attribute this decline primarily to a rise in household financial liabilities like surge in loans. Bank advances to households witnessed a significant jump of 54% to Rs.11.88 lakh crore in 2022-2, compared to Rs. 7.69 lakh crore in the previous year. Loans from non-banking companies also saw a rise, reaching Rs.3.33 lakh crore. 

However, the decline in savings in 2022-23 was not an exception. After reaching an all time high of 37.8% of GDP in 2007-08, the savings rate has declined continuously over the years touching the decadal low of 28.8% in 2020-21. And if the household savings rate was somewhat better in 2020-21 it was largely due to lockdown, which on the one hand restricted expenditure avenues and on the other created a fear of economic uncertainty to save more.

Households keeping more money in physical assets

Low bank interest rate in the last two years may be a reason for 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. Household liabilities rose 76% in FY23 from the previous financial year. 

The SBI Research suggested that the fall in household net financial 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 when return from monetary assets cannot keep up with the value appreciation delivered by physical assets.

This is seen in the sharp rise in savings in physical assets as compared to savings in financial instruments. Savings in physical assets surged at 17.1% annually during 2020-23 compared with just 2.2% growth in net financial savings. Savings also rose in gold and silver, and high-yielding assets compared to bank deposits though they accounted for a much smaller proportion of overall household savings – just about 1.3% of households’ total savings in 2022-23. 

That Indian households are parking a significant amount of their savings in physical assets is not a new phenomenon. But what has surprised the financial analysts is the sudden surge over the last two years. In just two years, the share of physical assets in households’ total savings has jumped by 22.8 percentage points from 47.4% in 2020-21 to 70.2% in 2022-23. The share of net financial assets during the same period has declined from 51.7% to 28.5%.

Admittedly, financial savings are computed on a net basis, where gross financial assets are adjusted for financial liabilities, primarily comprising loans obtained by households from banks and non-banking financial institutions.

In the last decade, the growth rate of financial liabilities, at 16.1% year-on-year, has exceeded that of gross financial assets, which averaged 10.8% year-on-year.Bank advances to households witnessed a significant jump of 54% to Rs.11.88 lakh crore in 2022-23, compared to Rs.7.69 lakh crore in the previous year. Loans from non-banking companies also saw a rise, reaching Rs.3.33 lakh crore.

The increase in borrowing could be due to a desire to invest in assets like real estate or stocks, potentially driven by the expectation of higher returns compared to traditional savings options. For example, gross savings into mutual funds experienced a remarkable surge, reaching Rs.1.79 lakh crore in 2022-23 from Rs. 61,688 crore in 2019-20.

Economists believe that this trend signifies a growing preference for financial instruments over traditional savings methods. People are saving less as a proportion of their income but borrowing more to invest in a wider range of financial instruments. This trend suggests a growing financialization of the Indian economy and a potential increase in risk appetite among households.

But on the hind side, lower household savings will keep interest rates elevated. Higher interest rates negatively impact corporate investments. Lower financial savings means that lower funds for investment. Savings in physical assets tie the funds and make it inaccessible for investment.

Maybe, the country can still be able to maintain its investment drive by increasing tax collections and or by attracting more foreign capital, but what happens to an individual? When you don't have savings, life's surprises can hit you harder. Imagine losing the job or getting a surprise medical bill when you are already running low on cash. Savings act like a safety net during these tricky times, and we can imagine what happens when that net is vanishing. 

Household savings projected to rebound

It seems that Indian households understand the importance of financial savings and the fall in savings in 2022-23 was more of an aberration than a regular happening.

Household savings in India could have rebounded the last fiscal year after dropping to a record low post the pandemic. Two recent reports by Goldman Sachs and CRISIL have forecast that domestic household savings may have rebounded in FY24.

“We estimate net financial savings of households at the end of March 2024 to have increased to nearly 6% of GDP (versus 5.1% of GDP in FY 2023),” said Goldman Sachs in a recent report. This is mainly driven by the agency’s estimate of higher gross financial savings of 12.5% of GDP (versus 11% of GDP in FY 2023) owing to its estimate of higher bank deposit growth (11% Y-o-Y in FY 2024 versus 9.4% YoY in FY 2023), it further said.

This is good news, for, in spite of easing norms of foreign investment in the country, the actual FDI inflows have nearly stagnated in recent years. 

Foreign investment in India has nearly stagnated at about $ 71 billion during the last two years. This marked a decline of over 13.6% compared to $ 84.84 billion inflows received in 2021-22. Drugs and pharmaceutical industry, manufacturing, automobile and computer services which are at the forefront of India’s growth drive witnessed the biggest fall in FDI inflow during the last two years.