Household savings fall to two-decade low

In value terms, gross household savings at current prices are 23 per cent higher cumulatively in the last three years, growing at a compounded annual rate of 7.1 per cent since 2013-14. In the same period, the GDP at current prices was up 35.2 per cent, growing at a compounded annual rate of 10.6 per cent. In 2016-17, households’ financial savings were up 8 per cent against 11 per cent growth, year on year, in the GDP at current prices. The recent decline in financial savings is attributed to deceleration in salary growth and a steady rise in households’ financial liabilities. “Salaries and wages are the biggest source of financial savings for households and there has been a sharp deceleration in employee compensation in recent years due to poor corporate earnings. Salaries are now growing at 6-7 per cent per annum, slower than the corresponding rise in personal loans, exerting pressure on financial savings,” says Sinha.

Personal loans issued by banks and listed retail nonbanking finance companies were up 16.6 per cent in 2016-17.

Economists also attribute the slowdown in the household savings rate to stress in the informal sector of the economy. “In national income accounts, households include all entities outside the private corporate sector and the public sector, including general government. Basically, this includes unregistered businesses, small-scale manufacturing and mom-and-pop stores, apart from individuals. This sector bore the brunt of the recent economic slowdown, leading to degrowth in income, savings and investments,” says Devendra Pant, chief economist and head of public finance at India Ratings.

Households are the biggest source of savings in the economy, accounting for nearly 60 per cent of all savings, on average, in the last five years. Lower household savings have depressed the overall savings rate.

This has negative implications for the investment cycle, as nearly 90 per cent of the country’s investments are funded by domestic savings.

“A decline in household savings will translate into lower capital expenditure for the private sector. This, in turn, will exert downward pressure on economic growth,” says Pant. According to him, a sustainable recovery in economic growth is not possible without an uptick in household savings.

In value terms, gross household savings at current prices are 23 per cent higher cumulatively in the last three years, growing at a compounded annual rate of 7.1 per cent since 2013-14