Declining Savings Rates in India

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In the past decade the Indian economy has performed exceptionally well, with annual GDP growth rates staying constantly above 6% (except for 2021 due to COVID) and even crossing 7% in the past few years. Among other factors, increasing investment has been one of the major factors that have aided this economic growth. During the last decade the investment rate has consistently remained above 30% of nominal annual GDP (as per data from CEIC) during which period, India's nominal GDP increased from ₹99 trillion in 2013 to over ₹295 trillion in 2024. This shows how important investment is for the growth of our economy. In order to continue this growth in the future, it is essential for us to be able to grow our levels of national investment. However this is coming under risk.

Importance of Savings

It is a basic principle of economics that savings funds investments. Theoretically, assuming the case of a closed economy, all of the national investment is funded by national savings and even in open economies like India, although foreign investments backed by foreign savings do play a role, national savings still hold significant importance. We can see this in the following diagram showing the Circular Flow of Income in an economy. The basics of national income studies in economics tells us that in any economy, household savings is the foundation for all investment in the economy. The household savings are mobilised by financial institutions and financial markets and then put into productive uses. This is what forms investment in an economy. 

Situation of Indian Household Savings

Household savings in India have been on a decline in the past decade. From 23.6% of GDP in FY12, household savings have fallen to 18.4% in FY23. This is a concerning trend in the economy. In India, household savings constitute approximately 60% of the total savings in the economy and supports a large part of the investment needs of the country. To understand the reasons behind the fall in the savings rate we need to first look into a few key figures about the economy.

The NSO bifurcates the household savings data into three broad categories:

• Saivngs in financial assets.
• Savings in physical assets (mainly real estate).
• Savings in gold and silver.

The figure for financial savings is calculated as the net difference between gross financial savings and financial liabilities. Gross financial savings consists of household cash balances and deposits and other financial market instruments, while financial liabilities include household borrowings from financial institutions.

According to the data from the NSO for FY23, savings in physical assets was the highest at 12.9% of the GDP followed by  net financial assets at 5.3% and gold and silver at 0.2%.

Comparing this to long term trends showed that the share of overall household savings in GDP, at 18.4% was below the pre-covid decadal average of 20.1%. The share of gross financial savings in GDP was on par with the decadal average of 11%. However, the share of financial liabilities, at 5.8% of GDP, was much higher than the average of 3.4%. This resulted in the net financial savings, at 5.3% of GDP, to fall below the average of 7.6%. Meanwhile, savings in physical assets, at 12.9% of GDP was nominally higher than the average of 12.2%.

What led to the fall in savings?

The overall household savings started falling after the economy reopened after the pandemic lockdown. During FY21, savings saw a rise owing to reduction in household expenditure brought about by the lockdown as it limited the avenues of expenditure for households. Expenditure on hotels, holidays, and other non essential consumables was essentially put on hold as a combined result of shutting down of the economy and a sense of panic caused by the Covid pandemic. However, the opening of the economy released the floodgates on spending which was strengthened as a result of the built up stress from the lockdown.

Stress spending

Post pandemic, as the economy reopened, people resorted to stress spending which led to a fall in savings. The years following the pandemic saw unprecedented spending on holidaying, dining and other entertainment activities as avenues for people to release their stress from being locked up for nearly 2 years.

Switch to physical assets

After the pandemic, households moved towards adding physical assets to their savings portfolios, leading to a rise in savings in physical assets above the pre-pandemic average of 12.2% of GDP.

Rising debt

The post pandemic period also brought about a sharp rise in borrowings. While gross financial savings grew at 10.3% year-on-year average between fiscals 21 and 23, financial liabilities grew at a rate of 30.1%. Financial liabilities have shown an increasing trend since 2018 coinciding with growth in retail credit. This was driven by banks, NBFCs and essentially fintechs easing credit availability and access. Although, the pandemic slowed down this progress during the lockdown years, with the reopening of the economy, debt levels rebounded. Total retail credit saw a rise from 12.1% of GDP in FY17 to 19.4% of GDP in FY23. The following factors were the major contributors to the rising household debt levels in the country:

1. Retail credit push by  lenders.
2. Increased appetite for long and short term borrowings.
3. Increased risk appetite among the youth.
4. Improvement in ease of credit access driven by technology.

What's next?

Even though household savings plummeted during FY23, early indicators are showing a recovery in savings and moderation of household liabilities for FY24. 

At the macro level, savings have likely improved in FY24. This can be inferred from the reduction in current account deficit in FY24. We know that: CAD = S - I (S - Savings, I - Investment, CAD - Current Account Deficit). According to the Economic Survey, India's CAD had narrowed to 0.7% of the GDP in FY24 from 2% of GDP during the previous year. At the same time investment rose to 33.7% of GDP from 32.2% of GDP in the previous year. Given these figures, we can expect rising savings to have financed the increased investment given the fall in CAD. 

At the same time bank retail credit growth, although high at 17.7% in FY24, has moderated relatively compared to 21% in FY23. Estimates also show a slowdown in consumption expenditure for FY24, indicating a potential rise in savings.

Although household savings are showing a recovery for the near future, over the long term it will be essential for saving levels to be sustained with the help of sustained increase in income and proper lending and credit control measures by the RBI.