24-May-2024-Special-Article

WHY INDIAN HOUSEHOLD SAVINGS FELL TO A SIX-YEAR LOW IN FY23 

The decline in India’s household net financial savings to GDP ratio has raised concerns about the financial well-being of households and the overall stability of the economy.  

This decline is attributed to increased borrowing and structural shifts in the economy rather than a mere change in savings patterns.  

Household Savings in India: Current Scenario 

Declining Household Savings 

• Net Financial Savings Decline: The net financial savings to GDP ratio fell by 2.5 percentage points in 2022-23. 
• Increased Borrowing: The household borrowing to GDP ratio rose by 2 percentage points, indicating higher financial stress. 
• Physical Savings Increase: Physical savings to GDP ratio only increased by 0.3 percentage points. 
• Overall Savings Decline: The overall household savings to GDP ratio declined by 1.7 percentage points, as gold savings remained unchanged. 

Arguments and Counterarguments 

Chief Economic Advisor’s (CEA) Interpretation 

• Nominal Savings Growth: The CEA argues that the nominal value of total household savings has increased due to a rise in physical savings. 
• Shift in Composition: According to the CEA, households are borrowing more to finance physical investments, not indicating a decline in overall savings. 

Problems with the CEA’s Argument 

• Ratio vs. Absolute Numbers: The CEA’s analysis is based on absolute nominal numbers, which do not account for the relative decline in net financial savings to GDP ratio. 
• Unaddressed Concerns: The historic fall in the net financial savings to GDP ratio and the significant rise in household borrowing to GDP ratio remain unaddressed by the CEA’s argument. 

Signs of Structural Shifts 

Higher Household Debt-to-Income Ratio 

• Interest Payments: Increased interest rates and higher debt levels have raised the share of interest payments in household income. 
• Net Borrowing: The net borrowing-to-income ratio is rising, meaning households are borrowing more than they are repaying. 

• Fisher Dynamics: This phenomenon, where nominal income growth is slower than the weighted average lending rate, indicates a structural economic shift. 

Impact on Income Growth 

• Nominal Income Growth: Post-COVID, nominal income growth has often been lower than lending rates, affecting household financial stability. 
• Debt Servicing Ratio: Although India’s debt servicing ratio is lower than many countries, the rising interest rates and lower income growth pose significant risks. 

Macroeconomic Challenges 

Interest Rate vs. Income Growth 

• Gap Reduction: The primary challenge is to reduce the gap between interest rates and income growth to alleviate household financial burdens. 
• Income Growth Stimulation: Policies must focus on stimulating household income growth to manage rising interest payments and debt levels. 

Aggregate Demand and Debt Obligations 

• Preventing Demand Decline: Rising household debt and interest rates can lead to a decline in aggregate demand, impacting economic growth. 
• Policy Measures: Macroeconomic policies should aim to support household income and prevent a decrease in consumer spending. 

Policy Recommendations 

Supporting Household Income Growth 

• Income Support Programs: Implement programs to boost household income, such as direct cash transfers, employment schemes, and tax relief. 
• Wage Growth: Encourage wage growth through policies that support labor market improvements and skills development. 

Managing Interest Rates 

• Monetary Policy: Adjust monetary policies to balance interest rates and support economic growth without burdening households with high-interest payments. 
• Credit Access: Improve access to affordable credit for households to manage debt more effectively. 

Enhancing Financial Literacy 

• Education Programs: Implement financial literacy programs to help households make informed borrowing and savings decisions. 

• Debt Management: Provide resources and support for effective debt management and financial planning. 

Encouraging Savings 

• Incentives: Offer incentives for saving, such as tax benefits on savings accounts and investment schemes. 
• Savings Schemes: Promote government-backed savings schemes that offer higher returns and security. 

Mains question: 

1. “Discuss the reasons behind the decline in India’s household net financial savings to GDP ratio and suggest macroeconomic policies to address the associated challenges.” (150 WORDS)