Household savings in India dip to record levels, loans rise sharply

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A worrying revelation in the RBIs September 2023 bulletin noted that the net financial savings of Indian households has taken a drastic hit, reaching a 50-year low of 5.1% of the GDP in FY23. This figure stood at 7.2% in FY22. Jarringly, during the same period, the annual financial liabilities of Indian households have shot up exponentially, rising by 5.8% of the GDP. In FY22, this figure was considerably low at 3.8%. 

The disparity indicates that most households have been resorting to taking loans to meet their day-to-day demands. The rise seconded only the ones since Independence and the one in FY07, when the financial liabilities of Indian households rose by 6.7%. 

It is important to remember that these are flow figures. This means they are not representative of the total amount of assets and liabilities held by a household at any given point of time, which is known as a stock figure. In contrast, flow figures measure the changes witnessed by the asset and liabilities of a household during a financial year. The economic impact of Covid is evident on these figures. 

The only silver lining, perhaps, was the savings rate during this period, which shot up 11.5% of the GDP during 2020-21. Just as the world went back to normalcy, the savings rate fell, too. On an average, Indians saved 19% less post pandemic, in 2022-23, as compared to peak Covid times. 

As per RBI data, household debt stood at 37.6% of India’s GDP, as opposed to  36.9% in FY 22. In absolute terms, India’s net household assets also took a hit, falling from Rs 22.8 lakh crore in FY21 to Rs 16.96 lakh crore in FY 22 and dipping further to Rs 13.76 lakh crore in FY 23. 

All this comes amidst rising inflationary pressures, of which medical and educational take the lion’s share. Due to the rising cost of treatment in India, our usual health covers are rendered inadequate every 5 years. Similarly, education inflation has been consistently high at 11-12%. 

The dire situation culminates into high inflation for individuals, who have low real household income to counter it. Hence the gravitation towards credit to fulfill daily demands.

However, the growth of consumption based majorly off loans is an unsustainable one, the bubble of which is bound to burst sooner or later. In FY23, the total assets held by Indian households made up 5.1% of GDP, lagging far behind their liabilities, which stood at 5.8% of the GDP. Even loans to households from banks rose to 4.4% in FY23, in contrast to just 3.30% in FY22.