Less Thrifty Indians!

Aesop is reported to have famously said,” It is thrifty to prepare today for the wants of tomorrow." Clearly, the once thrifty Indians are no longer adhering to this sage advice. Traditionally known as stubborn savers, Indians seem to be diverging from their reputation.

Recent data from the Reserve Bank of India reveals that India’s net household savings fell to a 47-year low. Net household savings dipped to 5.3 per cent of the Gross Domestic Product (GDP) in the financial year (FY) 2023, down from 7.3 per cent in 2022. This occurred alongside a sharp rise in household debt, reaching the second-highest level since the 1970s.

Background

In FY19, the pandemic year, net household savings stood at 7.9 per cent of GDP, rose to 8.1 per cent in FY20, and then 11.5 per cent in FY21. The stark drop in FY23 raises questions about what this declining savings rate means. Is this an aberration or a trend that is likely to be sustained?

A major factor is borrowing. As households increasingly rely on debt, their savings erode as more income goes towards repaying debt and less towards saving. According to an economist at Motilal Oswal Financial Services, cited by BBC (April 30, 2024), a significant amount of India’s growing household debt consists of non-mortgage loans, half of which are farm and business loans. 

While mortgages are secured debts with real estate serving as collateral for repayment, non-mortgage debt is any other type of debt that's not secured by real estate. This could include personal loans, student loans, car loans, and credit card debt. Even in 2022, India's non-mortgage debt was one of the highest in the world, exceeding major powers like the U.S. and China and on par with Japan and Australia. 

Borrowing for spending—whether on consumer durables, credit card spending, weddings, or health emergencies—accounts for one-fifth of total household debt but is the fastest-growing segment.

Analysis

So, the question arises - what does this new trend of low savings and high debt say about the Indian economy? It could point to consumer confidence, where several Indians hope that income will grow strongly in the future, but it could also indicate that people are spending for the present rather than considering the future. 

It could also point to distress borrowing out of necessity or desperation, particularly due to a financial crunch or crisis. Excessive or continuous distress borrowing could result in loan defaults. If this is the case, it raises concerns about why lenders are agreeing to lend to uncreditworthy borrowers in a financial crisis.

Economists have found that most household debt expansion in the last ten years has been due to a growing number of borrowers or "credit widening" and not higher loans per borrower or "credit deepening". This is a better sign than a trend of individuals borrowing more money.

The finance ministry of India has dismissed concerns about lower savings and higher borrowings, attributing it to post-pandemic low-interest rates that encourage more people to buy assets like cars and homes. It is worth pointing out that this was seconded by a State Bank of India (SBI) research report, which posited that while higher spending on physical assets had significantly pushed up financial liabilities, household savings should be considered to include physical and financial savings. Low-interest rates in the last few years have led to a shift from household financial savings to household physical savings.

The major decline in household savings rates can be traced back to the aftermath of the pandemic. It reflects not just tight incomes but also an ongoing structural shift away from traditional savings instruments. This is partly due to the government cutting down on incentives for savings but also shifting mindsets as more Indians open up to the possibility of investing in other financial instruments. 

Falling savings combined with greater accumulation of financial assets point to this trend of households becoming more willing to take on risk and financial instruments yielding potentially higher returns. 

However, this could impact short-term growth since savings contribute to the investment rate, which could be affected. Further, with growing financial liabilities and persistent inflation squeezing incomes, consumption could take a toll.