Status of household savings in India: On the fall in household savings

Source: The post status of household savings in India has been created, based on the article “On the fall in household savings” published in “The Hindu” on 22nd April 2024.

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

News: The article discusses how household savings in India have decreased, mainly because people are borrowing more and saving less money in banks and other financial assets. This rise in borrowing is increasing households’ debt levels, affecting their spending and overall economic stability.

For details information on Concerns related to savings in India read here

What is the current status of household savings in India?

Household savings in India have declined, with the net financial savings to GDP ratio hitting a four-decade low.

Net financial savings have significantly decreased, with the gross financial savings to GDP ratio falling from 7.3% to 5.3% in 2022-23.

Physical savings have slightly increased, with the household physical investment to GDP ratio moving from 12.6% to 12.9% during the same period.

Household debt has risen sharply, especially noticeable in the spike in the household borrowing to income ratio in 2022-23.

Interest payments have increased, contributing to higher household debt and affecting overall net financial savings despite stable consumption rates.

Why are financial savings decreasing?

Increased Consumption: Households are either borrowing more or using their savings to fund higher consumption, though this has not been a major factor recently since the consumption to GDP ratio has stayed almost the same (from 60.95% in 2021-22 to 60.93% in 2022-23).

More Physical Investment: Some households are investing more in physical assets, slightly reducing their financial savings.

Higher Interest Payments: Increasing interest rates have led to higher interest payments, prompting households to either borrow more or dip into their savings, which lowers their net financial savings.

What is the impact of Increasing Household Debt?

Increased Debt Burden: As per the data, the sharp rise in the household debt to income ratio in 2022-23 signals a growing debt burden, potentially reducing households’ financial stability and increasing their vulnerability to economic shifts.

Impact on Consumption: Higher household debt leads to increased interest payments, reducing disposable income and consequently lowering consumption expenditure. The reduction in consumption was evident in 2023-24 when private final consumption expenditure significantly declined compared to the previous year.

Economic Fragility: The rise in household leverage, coupled with a decrease in the financial wealth to GDP ratio, reflects a move towards a more financially unstable and fragile economic structure, threatening overall economic stability and growth.

Question for practice:

Evaluate the trend of household savings in India and its implications on economic stability, considering the decline in net financial savings and the rise in household debt.