Issue with Indian household savings

Source: The post issue with Indian household savings has been created, based on the article “Rising debt strains household savings” published in “The Hindu” on 24th May 2024.

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

Context: The article discusses a decline in the amount of money Indian households save after paying their debts. It argues that this isn’t just a change in where people put their money but a sign of deeper economic issues, like increasing debt and slower income growth.

For detailed information on Status of household savings in India read this article here

What is the main issue with Indian household savings?

Decline in Net Financial Savings: The main issue is the significant decline in household net financial savings to GDP, which fell by 2.5 percentage points during 2022-23. This shows households are saving less in financial forms like bank deposits or stocks.

Increase in Household Debt: Alongside the decrease in savings, there was a rise in the household borrowing to GDP ratio by 2 percentage points, indicating that households are taking on more debt.

Mismatched Compensation: Although there was a slight increase in physical savings (up by 0.3 percentage points), it did not offset the reduction in financial savings, leading to an overall drop in the household savings to GDP ratio by 1.7 percentage points.

How does the government interpret this trend?

Shift in Savings Composition: The government, represented by the Chief Economic Advisor (CEA), interprets the trend as a shift in savings from financial assets to physical investments, suggesting households are not actually saving less but changing where they save.

Increase in Total Savings: Despite the decline in net financial savings, the CEA points out that the nominal value of total household savings has increased, indicating growth in the overall savings pool during 2022-23.

What are the signs of structural economic shifts?

Increased Debt and Interest Payments: Post-COVID, there has been a noticeable increase in the household debt-income ratio and interest payments, indicating higher financial stress among households.

Fisher Dynamics at Play: The scenario described aligns with Fisher dynamics, where rising interest rates combined with slower income growth lead to growing household debt relative to income. This dynamic is confirmed by the average growth rate of household disposable income being consistently lower than the average lending rate from 2019-20 to 2022-23.

Historical Comparison: The current period contrasts with earlier periods, like 2003-04 to 2007-08, when household income growth generally outpaced the lending rate. This shift suggests a structural change in the economy’s functioning.

What challenges does the Indian economy face?

Growing Debt Burden: The gap between lending rates and income growth is increasing. This raises the debt-income ratio, leading to higher interest payments for households.

Reduced Consumption: Higher debt prompts households to cut back on spending. The consumption to GDP ratio dropped in 2023-24, showing this trend.

Policy Adjustments Needed: These issues highlight the need for policies that boost household income. This would help close the gap between interest rates and income growth and stabilize demand.

Question for practice:

Evaluate the interpretation of the Indian government regarding the trend in household savings, considering the decline in net financial savings and the increase in total savings.