The financial savings of households crashed to a multi-decade low in 2022-23 due to higher inflation. ET Wealth analyses the impact.
Fall in overall savings rate is cause for concern
WHY DO SAVINGS MATTER?
Consumption and investment are major components of national income.
Savings generate funds for investment and support national income.
Savings are contributed by households, private corporate, and public sector.
With government expenditure needs exceeding the revenues, the savings were negative. Government dissaving has averaged 2.1% of GDP in the past 10 years.
Households contribute to most of the gross savings, contributing over 65% in 2021-22.
Higher inflation dragged financial savings in 2022-23
PENT-UP DEMAND DURING COVID DEPLETED SAVINGS
In the past 10 years, financial savings, as percentage of GDP, have averaged 7.7%. The impact of the pandemic was visible in 2020-21 when savings jumped to 11.5% of GDP. Lockdowns led to reduced spending and higher savings. Job uncertainty also supported the increase in savings. 2021-22 saw pent-up demand, and consumption during the year was funded using excess savings of previous year.
Consumer inflation cooled after RBI stepped in, but it remains high
WHAT HAPPENED IN 2022-23?
Net financial savings of households plunged to a multi-decade low of 5.2% of GDP in 2022-23, according to the RBI.
Compared to 2021-22, the net financial savings of households fell over 18.8% y-o-y.
After Covid-19, the surge in demand, coupled with limited supply, led to a global increase in inflation rate.
The surge in commodity and energy prices amid the Russia-Ukraine war and dislocation of global supply chains also led to the increase in inflation rate.
India CPI-Combined averaged* 6.7% in 2022-23 compared to the 10-year average* of 5.4%.
Higher inflation and loss of purchasing power negatively impacted household savings.
Assets grew by 14%, liabilities by 75.5% Change in household assets and liabilities (y-o-y %) in 2022-23
HOUSEHOLD ASSETS AND LIABILITIES
Among assets, bank deposits witnessed a healthy growth in 2022-23 supported by an increase in deposit rates.
While life insurance, PF and pension funds, and mutual funds saw an increase in household investments, small savings schemes and cash or currency holdings saw a decline.
Surprisingly, investment in direct equities declined by over 52% after growing by 26% y-o-y in 2021-22.
In liabilities, loans from the banking sector grew despite multiple repo rate hikes by the RBI.
The proportion of nonmortgage loans in household liabilities is rising*, indicating increasing reliance on loans to fund consumption expenditure.
*Systematix report analysis
How the household liabilities surged
WHY IS IT CAUSE FOR CONCERN?
Decline in savings will create challenges for the government to finance its fiscal deficit.
Household liabilities have risen significantly in 2022-23 compared to assets on a y-o-y basis.
Real income of households (net of inflation) has decelerated in the past four years.*
Household debt as percentage of GDP rose to 37.6% in 2022-23 compared to 36.9 in 2021-22.
Falling income levels and rising borrowings affects households’ loan repayment ability and increase lenders’ default risk.
There are two components of household savings: financial and physical.
Financial savings (or net financial savings) 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 include investments in land, buildings and gold.
Share of physical savings rose
LOW RATES DURING COVID LED TO SHIFT
Recent RBI savings data captures only financial, not physical, savings.
While financial savings have declined, experts believe savings in physical assets have gone up.
Share of physical assets is expected to reach 70% level* in 2022-23 from 61% in 2021-22.
Low interest rates in Covid led to a shift from financial to physical assets.
Revival in real estate sector and increased property prices also contributed to the shift*. (*SBI Research.)
Physical savings are not available to the corporate sector for investment and, therefore, not productive.
EXPERT CONCLUSIONS
SBI Research estimates that the total household savings for 2022-23 will surpass 2021-22 levels despite the decline in financial savings, and will outstrip the rise in household debt.
Systematix report says that the overall gross savings for households in 2022-23 are estimated to have contracted by 4.6% y-o-y.
Motilal Oswal report raised concerns about sustainability of economic growth. A further fall in financial savings looks difficult, which could mean weak consumption growth or a decline in household investments in 2023-24.
Data is sourced from RBI, Reuters-Refinitv and reports from Systematix, SBI Research and Motilal Oswal.
