Household Savings in India Drop to a 5-Decade Low in FY23

New Delhi: In a concerning development, the net financial savings of households in India fell to a nearly five-decade low of 5.1% of GDP in the fiscal year 2022-2023 (FY23), according to a report by the Financial Express (FE). This significant decline is down from 7.2% in the previous fiscal year, FY22, and is based on data from the Reserve Bank of India (RBI).

The data also revealed a concerning trend in the annual financial liabilities of households, which increased sharply by 5.8% of GDP in FY23, compared to 3.8% in FY22. This indicates that households have increasingly resorted to borrowing to meet their consumption needs and purchase real estate, the report said.

The rate of increase in financial liabilities during FY23 was the second-highest since Independence, with only FY07 recording a sharper increase at 6.7%.

In absolute terms, net household assets saw a significant decline from Rs 22.8 trillion in FY21 to Rs 16.96 trillion in FY22, and further dropped to Rs 13.76 trillion in FY23, as per RBI data. 

Household debt, measured in terms of the stock of financial liabilities, remained notably high at 37.6% of GDP in FY23, compared to 36.9% in FY22.

The FE report highlights that falling or stagnant household incomes, combined with high inflation, are likely the primary reasons for the subdued savings and increased borrowing among households. As per the report, key factors contributing to this challenging financial landscape include:

1. Lack of Real Wage Growth: Over the past eight years, there has been no significant growth in real wages at the all-India level. This stagnation in wages is a concerning factor given the current high inflation rates.

2. Rising Healthcare and Education Costs: The cost of healthcare and education in India has been steadily increasing, with medical inflation reaching 12% in 2021, the highest among Asian countries. Additionally, the cost of medical treatment has doubled in just five years. Education inflation rates have also been notably high, ranging from 11% to 12%.

3. Impact on Consumption and Investments: The data raises concerns about the immediate growth potential of the Indian economy. While private consumption has shown some improvement in recent quarters, it may not provide the anticipated support to economic growth, given the subdued savings and rising liabilities among households. Moreover, the delay in the private capital expenditure (capex) cycle further complicates the growth outlook.

Economists, including Nikhil Gupta from Motilal Oswal, told FE about concerns over the sustainability of the current consumption growth, given weak income growth and the substantial decline in financial savings primarily driven by increased borrowings. Whether this decline in consumption will be offset by increased investments remains uncertain.

While the trend in household savings could potentially reverse if the economy picks up pace and real incomes begin to grow, it is essential to monitor both consumption and investment trends, as a failure to see meaningful growth in savings may impact overall economic performance.

Recent data for the first quarter of FY24 showed some improvement in private consumption final expenditure (PFCE), likely aided by lower inflation, the FE report said. However, consumption and investment trends remain mixed, with various sectors showing varying performance levels.