Indians are saving less and borrowing more

India’s net household financial savings have come down to 5.1 per cent of GDP, the lowest since 1976-1977. It will not be surprising if this further declines to 4 per cent.

The Reserve Bank of India (RBI) data released in its September bulletin shrieked: India’s net household financial savings have come down to just 5.1 per cent of GDP, the lowest since 1976-1977. Net household financial savings is the difference between financial assets like currency, bank deposits, shares, etc. and financial liabilities like loans from banks.

In 2022-2023, there was a blow from both ends. Inflow into financial assets declined to 10.9 per cent of GDP, whereas households’ financial liabilities shot up sharply to 5.8 per cent of GDP.

Clearly, Indian households are saving less and borrowing more. What is going on?

Have Indian households turned their back on their acclaimed virtue of saving? Why have they turned into binge borrowers? Is this trend a one-off? Are they on the way to becoming net dis-savers?

Alarming collapse

The inflow in financial assets dipped marginally from 11.1 per cent of GDP in 2021-2022 to 10.9 per cent of GDP in 2022-2023. However, financial savings had dipped from 15.4 per cent of GDP in 2020-2021 to 11.1 per cent of GDP in 2021-2022. Taken together, there was an alarmingly massive reduction of 4.5 per cent of GDP in two years. For the GDP of Rs 274 lakh-crore, this reduction amounted to lesser savings of a whopping Rs 12.33 lakh-crore!

FY2022-23 witnessed binge borrowing as well. From 3.8 per cent of GDP in 2021-2022, households’ financial liabilities went up to 5.8 per cent of GDP in 2022-2023 — a clear 2 per cent increase. This was most starkly evident in the new loans from commercial banks (Rs 11.88 lakh-crore in 2022-2023 against Rs 7.76 lakh-crore in 2021-2022).

India’s approximately 400 million households can broadly be classified into three types: poor, middle-class, and rich. The poor consume and do not save typically using more than 90 per cent of their income in consumption.

The middle class is the saving workhorse. Besides maintaining healthy consumption standards, they can typically save 30-50 per cent of their incomes. The rich, of course, save the bulk of their incomes but the sheer size of the middle class and their aggregate savings is what we see predominantly in bank deposits and other financial assets.

Dipping savings

India’s total household savings hovered around 20 per cent of GDP in the last 10 years. Households also invest in physical assets such as houses, consumer durables, computers and laptops, and so on. The NSO provides data on total, financial and physical savings, which are available up to FY2021-2022.

India’s total household savings were Rs 38.45 lakh-crore in 2018-2019; 20.34 per cent of GDP. In 2021-2022, the total household savings were Rs 46.20 lakh-crore; 19.68 per cent of GDP. This reduction of 0.68 per cent in household savings meant Indians saved Rs 1.60 lakh-crore less in 2021-2022.

A good part of the big dip in net financial savings in 2022-2023 would have surely gone into the financing of physical assets. However, it is quite likely that total household savings will decline by up to 1 per cent of GDP in 2022-2023.

An unhealthy trend

Bank deposits are the largest financial savings instrument in India. Bank loans also make up about 80 per cent of households’ financial liabilities.

Two clear trends are emerging from the banking sector. One, the banks are lending less to large industries and corporates. Two, their loans to the household sector are increasing at a fast pace.

Bank loans to large industries from Rs 23.65 lakh-crore in 2018-2019 and almost unchanged at Rs 24.85 lakh-crore in 2022-2023, as a proportion of India’s GDP, went down from 12.5 per cent in 2018-2019 to 9.07 per cent in 2022-2023.

Personal loans, on the other hand, went up much faster. In 2018-2019, outstanding personal loans were Rs 23.03 lakh-crore, a little less than total loans to large industries. In 2022-2023, the personal loans rose to Rs 40.85 lakh-crore — 15 per cent of GDP and 65 per cent more than the loans to large industries.

Banks are meant primarily to provide credit to industry and infrastructure by intermediating households’ savings and creating credit. Now, banks are intermediating deposits from households back to them.

A changing middle-class

In 2022-2023 alone, the banks’ personal loans grew by about Rs 7 lakh-crore (from Rs 33.87 lakh-crore to Rs 40.85 lakh-crore). In the first four months of FY2024, the banks’ personal loans have already grown to Rs 47.32 lakh-crore, recording an increase of Rs 6.45 lakh-crore. There is a run-away increase in households’ financial liabilities.

The writing on the wall is clear. India’s household sector is saving less and borrowing more.

India’s household sector is using its savings and borrowing happily to invest in physical assets — in better homes and home offices, in high-end consumer assets like cars, televisions, air-purifiers, and in high-tech commercially productive assets like computers, laptops, smartphones, etc.

It will not be surprising if the net financial savings for 2023-2024 further decline to about 4 per cent of GDP, and this trend persists and gets more accentuated in times to come.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘We Also Make Policy’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.