05-September-2024-Special-Article

HOUSEHOLD SAVINGS IN INDIA POST-PANDEMIC

The Deputy Governor of the Reserve Bank of India (RBI), during the Financing 3.0 Summit by the Confederation of Indian Industry (CII), emphasized the importance of household savings in the post-pandemic recovery phase.

With significant changes in saving patterns, especially after the Covid-19 pandemic, household savings are becoming a crucial factor influencing the economy and financial system.

Current Trends in Household Savings:

Restoration of Financial Savings:

• Household financial savings witnessed a significant decline after peaking during the pandemic.
• With the return to normalcy, households are gradually rebuilding their financial savings, mainly due to rising incomes.
• Financial savings, previously around 10.6% of Gross Domestic Product (GDP) (2011-17), increased to 11.5% (2017-23), excluding the pandemic year.

Shift Towards Physical Assets:

• During the post-pandemic phase, households have shifted a considerable portion of their savings toward physical assets like real estate.
• Physical savings have now surpassed 12% of GDP, though still below the 16% recorded in 2010-11.

Future Expectations:

• As incomes continue to grow, financial savings are expected to rise to levels seen in the early 2000s, potentially reaching 15% of GDP.
• Household savings patterns will play a critical role in shaping India’s economic growth.

Impact of Household Savings on the Economy:

Effect on Interest Rates:

• Changes in household savings can influence monetary policies, especially interest rates.
• Lower financial savings may lead to demands for higher interest rates to encourage savings and vice versa.

Lending Capacity Enhancement:

• Households, as net lenders, will provide much-needed financial support to the economy, particularly as corporate borrowing needs grow.
• The revival of household financial health is crucial for maintaining a stable flow of credit to businesses.

Corporate Borrowing and Economic Growth:

• Although corporate borrowing decreased recently, an increase in capital expenditure (capex) is expected to drive higher borrowing needs.
• Households will fill this financing gap, contributing to investments and overall economic expansion.

Economic Stability:

• The rise in physical savings, such as real estate investments, brings long-term stability by diversifying investment portfolios.
• However, this shift also reduces liquidity, which may affect short-term financial stability.

External Financing Implications:

• An increase in domestic savings may reduce India’s reliance on external financing, though maintaining sustainable external debt remains essential.
• Changes in external financing will evolve as India’s capacity to absorb foreign investment increases.

About Household Savings:

Components of Household Savings:

• Net Financial Savings (NFS): Calculated by deducting financial liabilities from gross financial savings (GFS), which include bank deposits, insurance, pensions, shares, government schemes, and others.
• Physical Savings: Primarily invested in real estate and machinery, accounting for a significant portion of household savings.

Household Savings to GDP Ratio:

• It includes both net financial and physical savings, contributing to the overall economic health.

Trends and Shifts in Savings:

• There is an increasing trend towards investing in riskier assets like stocks and real estate.
• Many households are shifting their savings from financial instruments to physical assets like property and gold.

Impact of the Pandemic on Household Savings:

High Savings During Pandemic:

• With limited spending opportunities during the lockdowns, households accumulated significant financial savings, peaking at Rs 23.3 lakh crore in 2020-21.

Post-Pandemic Decline:

• As restrictions eased, household spending surged, leading to a decline in financial savings.
• By 2022-23, net financial savings had dropped to Rs 14.2 lakh crore from Rs 17.1 lakh crore in 2021-22, indicating a shift toward physical assets.

Surge in Real Estate and Gold Investments:

• Savings in real estate reached Rs 34.8 lakh crore, while gold savings hit Rs 63,397 crore in 2022-23.
• Many households overextended their finances through high EMIs, reducing liquidity and affecting long-term savings potential.

Rising Household Debt:

• Increasing debt due to housing purchases and lifestyle expenses, combined with higher healthcare and education costs, has reduced overall household savings.

Household Debt:

• Household debt refers to liabilities that require future interest or principal payments. This includes loans for housing, education, and other expenses that have become a growing concern in recent years.

Government Initiatives to Promote Household Savings:

• Sukanya Samriddhi Account Scheme: A government-backed savings scheme designed to encourage the education and marriage of girl children.
• Senior Citizens’ Savings Scheme: Provides senior citizens with a secure savings avenue offering higher returns.
• Kisan Vikas Patra Scheme: A savings certificate scheme aimed at encouraging long-term financial planning.
• Mahila Samman Savings Certificate: A savings instrument specifically for women, offering attractive interest rates.
• Public Provident Fund (PPF) and National Savings Certificate (NSC): Popular long-term savings schemes offering tax benefits and secure returns.
• Employees Provident Fund (EPF) and National Pension System (NPS): Retirement-oriented schemes that provide financial security post-retirement.
• Post Office Monthly Income Scheme (POMIS): A small savings scheme backed by the government, offering a steady monthly income with a five-year lock-in period.

Conclusion:

The recovery of household savings in India post-pandemic is a critical factor shaping the economy. The shift towards physical assets and the revival of financial savings highlights changing trends that influence everything from interest rates to corporate borrowing. With government schemes supporting savings, households are gradually rebuilding their financial stability, contributing to overall economic growth.

Mains Question:
Q. “Discuss the impact of post-pandemic household savings trends in India on monetary policy, corporate borrowing, and economic growth, highlighting the shift from financial to physical savings.” (150 WORDS)