Concerns related to savings in India: Borrowing to consume

Source: The post concerns related to savings in India has been created, based on the article “Borrowing to consume” published in “Business standard” on 12th April 2024.

UPSC Syllabus Topic: GS Paper 3 – Indian economy – Mobilisation of resource

Context: The article discusses how India saves a lot of money, but most is not in banks and is instead in things like gold and property. This makes borrowing expensive for businesses and the government. Also, households are borrowing more, often for spending rather than investing, which could harm the economy in the long term.

What is the current state of savings in India?

High rate of domestic savings: India’s savings rate has historically been strong, peaking at 35% of GDP in 2012 and currently around 30%.

Recent trends show a significant increase in household borrowing, from 3.1% of GDP in 2019 to an expected 4.8% in 2024, primarily for consumption, which diverts funds from investment.

Preference for Physical Assets: A significant portion of these savings, over 60% of household gross domestic savings, is invested in physical assets such as housing, land, agriculture, and gold.

What are the major concerns related to savings in India?

Reduced Funds for Borrowing: The preference for physical savings means less money is available in the financial system for borrowing by the government and organized sectors.

Increased Cost of Capital: With fewer financial savings, the cost of borrowing increases for businesses and the government, impacting economic growth and investment.

Interest Rate Management: To manage this, the Reserve Bank of India (RBI) keeps interest rates low, which affects the value of financial savings and encourages more physical savings.

Middle-Income Trap Concern: The low ratio of mortgage lending and high ratio of consumption-based borrowing indicate a narrow base of market-based real estate activity, especially in rural areas. This consumption-oriented debt pattern makes investment capital more expensive and could potentially lead to a middle-income trap, where economic growth stagnates, and the country struggles to move to a higher income bracket.

What should be done?

Increase Financial Savings: Encourage the growth of financial savings over physical ones to ensure more capital is available for economic development, reducing the reliance on administratively managed interest rates.

Managing Household Debt: Government policies should focus on curbing non-essential borrowing and promoting savings.

Strengthen Financial Policy: Adapt the financial repression and credit-rationing systems to handle the increased household debt effectively and prevent further rise in capital costs.

Focus on Mortgage Debt: Support mortgage lending to channel debt towards housing, which is lower at 10% of GDP compared to non-mortgage debt at 25% of GDP, promoting long-term financial stability.

Question for practice:

Examine the current state of savings in India and its implications for economic growth and investment opportunities.