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.