The latest data on household financial savings, released by the Reserve Bank of India (RBI), has raised concerns among economists and can have significant implications for medium-term growth.
Household Savings Decline:
Net household financial savings dropped to a multi-decade low of 5.1% of GDP in 2022-23, down from 7.2% the previous year.
Possible Reasons for Decline:
Households impacted by pandemic-related income setbacks may not have fully recovered. Economic recovery has been primarily driven by corporate profits.
High inflation may have eroded the ability to save.
Households may have borrowed for consumption and real assets like houses.
Rise in Household Debt:
Financial liabilities for households increased from 3.8% of GDP in 2021-22 to 5.8% in 2022-23.
Individuals have been borrowing at a higher pace, with household debt reaching 37.6% of GDP in 2022-23.
Implications for Economic Growth:
Weak consumer demand could lead to lower economic growth in the near to medium term.
Private investment may not fully compensate for muted private consumption.
The government has been supporting growth through higher capital expenditure, but fiscal constraints could limit this.
Impact on Interest Rates and Investments:
Lower household savings can put pressure on interest rates and affect investments.
General government borrowing is higher than the supply of financial savings from households.
Increased corporate borrowing for investments could further raise interest rates.
Global demand is also expected to remain weak, which may discourage corporations from making large investments.
The policy challenge is to boost economic growth amid slower global economic growth and fiscal constraints.
In summary, the decline in household financial savings in India has raised concerns about its impact on economic growth, interest rates, and investment.
Policymakers face challenges in stimulating economic growth in the current context.