Household sector savings are crucial for financing corporate investment

Source: The post household sector savings are crucial for financing corporate investment has been created, based on the article “The worrying trend in household savings” published in “Business Standard” on 25th July 2024

UPSC Syllabus Topic: GS Paper 3- Economy-mobilisation of resources

Context: The article discusses how household sector savings are crucial for financing corporate investment. It highlights that net financial savings of households have declined, which may constrain corporate investments. It also mentions the need for government support through fiscal consolidation.

For detailed information on Issue with Indian household savings read this article here

What is the Status of Saving in India?

1. Household Savings: Household savings are essential for funding corporate investments. These savings have declined from 7.3% of GDP in 2021-22 to 5.2% in 2022-23, which is the lowest rate in the last five decades.
2. Corporate Sector: The private corporate sector’s savings rate has improved to 10.1% of GDP in the last eight years. However, this is still not enough for their investment needs.
3. Government Efforts: The government has reduced its fiscal deficit from 13.1% of GDP in 2020-21 to 8.6% in 2023-24, aiming for further reductions to 4.5% by 2025-26. This fiscal consolidation helps free up resources for corporate investment.

Is Rising Household Indebtedness a Concern?

1. Concerns about rising household indebtedness are largely misplaced.
2. At least 25% of financial liabilities in 2022-23 were for investment purposes like housing and education loans.
3. In March 2023, households’ financial assets were 2.7 times their liabilities, indicating a healthy balance sheet.
4. The debt servicing burden of Indian households declined from 6.9% in March 2021 to 6.7% in March 2023, one of the lowest in the world.

What are the Concerns Related to the Finances of Households?

1. Increased Financial Liabilities: Liabilities rose from 3.8% to 5.7% of GDP, reducing net savings.
2. Rising Personal Loans: Personal loans from banks grew by 28% in 2023-24, after a 21% rise in 2022-23.
3. Debt Servicing Burden: Though lower than before, debt servicing still impacts future savings.
4. Volatile Physical Savings: Savings in physical assets have been unpredictable, peaking at 70% of gross savings in 2022-23.

Question for practice:

Discuss how the decline in household savings and the rise in household indebtedness impact corporate investments in India.