Households’ falling savings, rising debts

The good old saying, “a penny saved is a penny earned” seems no longer relevant to Indian households. Not only are they saving less and less, increasingly Indian households are funding their consumption with borrowed money. The fall in net domestic savings year after year means India is no longer the country with the highest savings rate globally. Easy credit availability, aggressive marketing campaigns coupled with deep discounts offered by e-commerce companies and the spreading credit card culture have changed the way Indians handle their earnings and fund their consumption needs. Household savings as a percentage of GDP fell to 17.2% in 2017-18 from 23.6% in 2011-12. On the other hand, unsecured borrowings in the form of personal loans have gone up manifold. For instance, Indian households availed unsecured loans amounting to Rs 5.08 lakh crore in 2017-18 as against Rs 3.76 lakh crore the previous year. The urge to own a house seems to have added another Rs 10 lakh crore in debt, albeit secured debt. Changing lifestyles and imitation of Western levels of consumption seem to have contributed to Indians living increasingly on borrowed money.

Traditionally, Indian households used to set aside at least 30% of their earnings for a rainy day, but that has changed over the last two decades. Now, stuck in the cycle of monthly instalments of debt repayments, Indian households may be leaving little for their children, too. While there are ever more investment options to choose from, households continue to struggle with non-availability of liquid funds. One big contributing factor could be that average household incomes have not kept pace with increasing consumption needs, especially over the last decade. Also, lower household savings means their contribution to economic activity is much lower, in turn translating into higher borrowings by the government to cover investment costs or expanded expenses portfolio. This, in turn, would mean macroeconomic instability. The rapidly expanding indebtedness of Indian households may be unsustainable, as it is in the US. American household debt had crossed a whopping $13.67 trillion by March 31, 2019. A 1% growth in US household indebtedness every quarter for several years has trapped many US citizens in a vicious debt cycle.

This does not, in any way, mean consumption is wrong. But Indian households must seriously consider balancing incomes vis-a-vis savings and consumption, as they used to in the past. Doing so would insulate them from the worst effects of economic slowdowns, such as the one the country is going through right now.