The Criticism
The finance ministry on Thursday faced criticism over the impact of declining household savings on the economy, as the latest data released by the Reserve Bank of India (RBI) showed that net household savings fell to a 47-year low of 5.1 percent of gross domestic product (GDP) in FY23, compared to 7.2 percent in the previous year12. The data also showed that the annual financial liabilities of households rose sharply by 5.8 percent of GDP, compared to 3.8 percent in 2021-2212.
Some experts and analysts expressed concern over the falling savings rate, as it could affect the availability of funds for investment, consumption, and social security12. They also pointed out that the decline in savings was driven by a drop in income and an increase in expenditure due to the COVID-19 pandemic and its aftermath12.
The Response
The finance ministry, however, dismissed the criticism and defended its position, saying that people are investing in different financial products and “there is no distress” as is being circulated in some circles12. The ministry posted a statement on X, a social media platform, where it explained its rationale and presented some data to support its claim.
The ministry said that the stock of household gross financial assets went up by 37.6 percent, and the stock of household gross financial liabilities went up by 42.6 percent between June 2020 and March 2023, showing no big difference between the two12. It also said that households added net financial assets of Rs 22.8 lakh crore in FY21, Rs 17 lakh crore in FY22, and Rs 13.8 lakh crore in FY23, indicating that their overall net financial assets are still growing12.
The ministry argued that households added financial assets by a lesser magnitude than in the previous years because they have now started taking loans to buy real assets such as homes and vehicles12. It cited RBI data on personal loans, which showed that real estate loans and vehicle loans constituted 62 percent of the overall personal loans by the banking sector12. It also noted that there has been a steady double-digit growth in loans for housing since May 2021, and more than 20 percent growth in vehicle loans since September 202212.
The ministry concluded that changing consumer preference for different financial products is the real reason for the fall in household savings and there is no distress as is being circulated in some circles12.
The Analysis
The finance ministry’s response has raised some questions and debates among experts and observers, who have different views on the issue of household savings and its implications for the economy. Some agree with the ministry’s explanation, saying that households are shifting from traditional savings instruments such as bank deposits and small savings schemes to more diversified and riskier products such as mutual funds, equities, and insurance. They also say that households are taking advantage of low-interest rates and easy credit availability to invest in real assets, which could boost demand and growth in the long run.
Others disagree with the ministry’s response, saying that households are not saving enough for their future needs and are relying too much on debt to finance their consumption and investment. They also say that households are facing income uncertainty and rising inflation due to the pandemic and its impact on various sectors of the economy. They warn that low savings could hamper the domestic sources of funding for investment, increase the dependence on foreign capital inflows, create financial instability and vulnerability, and reduce the social security net for the elderly and poor.
The debate on household savings is likely to continue as more data and evidence emerge on the behavior and preferences of households in the post-pandemic scenario. The finance ministry’s response has provided one perspective on the issue, but it may not be the final word on it.
This post Why Household Savings Are Falling And Why It’s Not A Bad Thing, According To FinMin was originally published at Finance Crave
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