Savings puzzle: Does the fall in financial savings show household distress?

The finance ministry thinks otherwise

A fall in net financial savings of households to a 47-year low as a proportion of the country’s gross domestic product (GDP) in 2022-23 has raised fears of there being a distress among people — fears the finance ministry has sought to dispel.

GDP, the widely accepted measure of a country’s economic health, is the combined value of all goods and services produced within its borders in a specified period. Net financial savings are gross financial savings minus financial liabilities.

So, if net financial liabilities declined to 5.1 per cent of GDP in 2022-23 — as seen in the Reserve Bank of India’s data released last week — it is important to see what is happening to gross financial savings and financial liabilities of households. Net financial savings not only came down as a proportion of GDP but also fell in absolute terms, declining to a five-year low of Rs 13.8 trillion during 2022-23. It was even lower than the Rs 16.3 trillion in 2019-20, when the economy started to show the ravages of the nation-wide lockdown, induced by the Covid-19 pandemic, announced at the fag end of the financial year.

The current savings situation is due to financial liabilities ballooning to Rs 15.8 trillion during 2022-23 — the highest so far. In terms of its proportion to GDP, too, the liabilities are quite high, at 5.8 per cent, against less than 4 per cent in recent years.

Gross savings, on the other hand, though they increased to Rs 29.6 trillion in 2022-23 from Rs 26 trillion in the previous year, were less than the Rs 30.6 trillion in 2020-21. This might be due to less expenditure on consumption in the Covid-hit year. As a proportion to GDP, too, the gross savings, at 10.9 per cent in 2022-23, are at their lowest in recent years.

Why did liabilities rise during 2022-23?

Was it because assets were being created, or on account of consumption needs due to high inflation?

Why did gross financial savings fall during the year?

Gross savings could have fallen due to the pent-up demand after Covid-induced lockdowns were lifted, and also due to the high inflation, which meant more consumption, value-wise, even though physical quantities might have remained the same.

Either way, the decline in gross savings could lead to less resources for investment, for which more foreign funds would have to be tapped.

“If gross savings are down, we have to get foreign capital to bridge the gap,” says Bank of Baroda’s Chief Economist, Madan Sabnavis.

Anil K Sood, professor and co-founder of the Institute for Advanced Studies in Complex Choices, calls the decline in the rate of financial savings worrisome.

“We are a capital-starved economy. Any decrease in household financial savings reduces the availability of capital for business and the government,” he says.

If one looks at the composition of gross savings, households are putting much more money in financial investments, which mainly consist of mutual funds and equities. Still, their share in total gross savings declined to 7.2 per cent in 2022-23 from 8.8 per cent in the previous year, although it was much higher than the 4 per cent in 2019-20 and 2021-22.

Financial investments declined in absolute numbers as well, to Rs 2.1 trillion in 2022-23 from Rs 2.3 trillion in the previous year. This was due to investments in equity halving to Rs 23,038 crore in 2022-23 from Rs 48,613 crore in the previous year. However, investments in mutual funds rose to Rs 1.8 trillion in 2022-23 from Rs 1.6 trillion in the previous year. So, while people became less risk-averse, they were hedging their bets cautiously.

Now come financial liabilities. Though too many details on this are not available, one can look at personal loans provided by scheduled commercial banks. A finance ministry statement posted on X, Twitter’s new avatar, says the key components of these loans are those for real estate and vehicles, both of which have collaterals.

“These two constitute 62 per cent of the overall personal loans by the banking sector. The other big categories are other personal loans and credit card loans,” the statement reads.

The finance ministry points out that there has been a steady double-digit growth in loans for housing since May 2021 and vehicle loans have been growing in double digits year-on-year since September 2022. So, the household sector is buying vehicles and homes on mortgages. They are not in distress, says the ministry.

Sabnavis says as long as people borrow to create assets, it is a positive trend. “While financial savings are going down, physical savings of assets are increasing,” he adds.

In Sood’s calculation, though, the share of housing loans, at 36.1 per cent, to total incremental personal loans during 2022-23 was at its lowest level. "Housing loans as a per cent of aggregate credit have fallen below 50 per cent for the first time in five years," he says.

On the other hand, vehicle loan’s contribution has increased from 8.6 per cent in 2021-22 to 14.2 per cent in 2022-23, Sood says, adding: “Here, too, we know the car industry has been doing well, particularly the higher segments. But mass-market cars and two-wheelers are not doing as well.”

So far, as far as the substantial increase in the share of credit card outstanding and advances against deposits and loans against jewellery are concerned, one must dig deeper to know the reasons behind this trend.

“If these loans are financing daily consumption, we have a cause for worry,” says Sood.

Similarly, there is a significant increase in the contribution of education loans. Is the increase in education loans for taking advantage of subsidised rates or are the households not having savings to support their children?  

Sood points out that the RBI has not released sector-wise gross savings and gross capital formation data for 2022-23 as yet.

That will help figure out whether there is distress. For now, it cannot be ruled out.