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Declining Household Savings Sparks Debate in India


The recent decline in household savings, driven by a significant reduction in net financial savings, has become a central topic of debate in India.


GS III: Indian Economy

Dimensions of the Article:

  1. Interpreting Lower Financial Savings
  2. Implication of Higher Debt Burden
  3. Macroeconomic Implications of Fall in Household Savings

Interpreting Lower Financial Savings

Net Financial Savings of Household:

  • Defined as the difference between gross financial savings and borrowing.

Gross Financial Savings:

  • Reflects the change in a household’s financial assets over a period.
  • Includes bank deposits, currency, and investments in mutual funds, pension funds, etc.

Household Borrowing:

  • Comprises credit from non-bank financial corporations, housing corporations, and mainly from commercial banks.
Factors Reducing Household Net Financial Savings:
  • Increased Consumption Expenditure:
    • Households finance additional consumption by increasing borrowing or depleting gross financial savings.
    • The consumption to GDP ratio remained largely unchanged at 60.95% in 2021-22 and 60.93% in 2022-23, indicating this factor didn’t significantly reduce gross financial savings.
  • Higher Physical Investment:
    • Households finance tangible investment by increasing borrowing or depleting gross financial savings.
    • The gross financial savings to GDP ratio decreased from 7.3% to 5.3% in 2022-23, while the household physical investment to GDP ratio rose from 12.6% to 12.9%.
  • Increased Interest Payments:
    • Higher interest rates lead to an increase in interest payments by households.
    • Higher borrowing is partly offset by interest income from financial assets, but largely attributed to increased household interest payments.
Implication of Higher Debt Burden

Concerns for Macroeconomy:

  1. Debt Repayment and Financial Fragility:
    • Household repayment capacity depends on income flow.
    • A key criterion for evaluating debt sustainability is the difference between the interest rate and income growth rate.
      • Interest payments to households are income for the financial sector.
      • Failure to meet debt repayment commitments reduces financial sector income and weakens their balance sheets.
      • This can negatively impact the macroeconomy if the financial sector reduces credit disbursement to the non-financial sector.
  2. Effect on Consumption Demand:
    • Household consumption expenditure is influenced by disposable income, wealth, debt, and interest rate.
      • A reduction in household wealth can lead to decreased consumption as households try to maintain their wealth by increasing savings.

Macroeconomic Implications of Fall in Household Savings

Increasing Household Susceptibility:

  • Both the stock indicator of debt to net worth and the flow indication of liabilities to disposable income are on the rise.

Impact of Higher Interest Rates:

  • Higher interest rates, employed as a policy tool to control inflation by reducing macroeconomic output and employment, can escalate household debt levels.
  • This can potentially lead households into a debt trap.

Effects on Consumption and Aggregate Demand:

  • Elevated interest rates can negatively affect household consumption due to increased debt burden.
  • This, in turn, can have adverse consequences for aggregate demand.

Changes in Household Balance Sheet Trends:

  • Indicates a broader shift in the economy’s structure.
    • Financialisation of the Economy:
      • The asset side of the household balance sheet is transitioning from production-based assets to monetary or financial exchange-based assets.
      • This shift may render the goal of achieving a five trillion-dollar economy fragile and jobless.

-Source: The Hindu

May 2024