Dramatic fall in Household Savings – RBI Data

Context

According to recent data from the Reserve Bank of India, India’s net household savings have reached their lowest point in 47 years.

On the fall in Household Savings

• Reduction in Savings: Savings reduced to 5.3% of the gross domestic product (GDP) in the financial year 2023, down from 7.3% in 2022. 
• Increase in Household Debt: There has also been a sharp increase in household debt in the same period. 
  • Annual borrowings stood at 5.8% of GDP – the second-highest level after the 1970s.
  • A significant portion of India’s increasing household debt is made up of non-mortgage loans. Farm and business loans comprise over half of these loans. 
• Debt Service Ratio: Indian households have a debt service ratio of approximately 12%, similar to Nordic countries. 
• This ratio is higher than that of China, France, the UK, and the US, all of which have higher household debt levels. 
  • The difference is due to higher interest rates and shorter loan tenures in India, resulting in a relatively higher DSR despite lower debt-to-income ratios.
  • DSR is the share of income used to service loans.

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What is Household Net Savings?

• About: Household net savings are the total money and investments families have, like deposits, stocks and bonus, minus any money they owe, like loans and debt.
• Components of Household Savings: There are two components of household savings: financial and physical.
  • Financial savings (or net financial savings): It is the difference between financial assets and liabilities.
    • Financial assets include bank deposits and investments in financial institutions, life insurance, PF, equity, mutual funds and small savings schemes.
    • Financial liabilities include loans from banks and NBFCs.
  • Physical savings: It includes investments in land, buildings and gold.
• Reason behind Reduction in Savings: As households rely more on borrowing to sustain consumption, their savings naturally reduce. 
• • With increased borrowing, a larger portion of their income is allocated towards debt repayment, resulting in a reduction of savings.
  • Although borrowing for consumption purposes such as credit cards, consumer durables, weddings, and health emergencies accounts for less than 20% of total household debt, it represents the fastest-growing segment.
• Shift from “Credit Widening” to “Credit Deepening: The primary driver of household debt growth over the past decade has been credit widening rather than Credit Deepening.
  • Credit widening is characterized by an expansion in the number of borrowers in contrast to credit deepening,” which involves each borrower taking out larger loans. 
  • Increasing the number of borrowers is considered more favorable than having individual borrowers take on larger loan amounts.

Macroeconomic Implications of Fall in Household Savings

• Increased Vulnerability of Households due to Rising Debt Indicators: The rising trend in both the flow indicator of liabilities to disposable income and the stock indicator of debt to net worth renders households increasingly vulnerable.
• Impact of Higher Interest Rates on Household Debt: The higher interest rate to counter inflation can increase debt levels and potentially push households into a debt trap. 
• Impact on Consumption: The implications of high interest rates on debt burden can have an adverse impact on the consumption of the households and consequently on aggregate demand.

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