On the fall in household savings
The sharp reduction in household net nancial savings, which has been at the heart of recent debates, and the rise in household debt burden are a cause for concern for growth and economic stability
he fall in household savings has been at the heart of recent debates in India. The decline in household savings is brought about by a drastic reduction in net nancial savings as the household net nancial savings to GDP ratio attained a four-decade low. Figure 1 shows the broad trend in household savings, physical savings and gold, and net nancial savings. The sharp reduction in household net nancial savings in 2022-23 has been associated with an overall fall in household savings despite marginal recovery in physical savings.
TInterpreting lower nancial savings
The net nancial savings of the household is the dierence between its gross nancial savings and borrowing. The gross nancial savings of a household is the extent to which its nancial assets change during a period. The nancial assets of households typically comprise bank deposits, currency and nancial investments in mutual funds, pension funds, etc. Though household borrowing includes credit from non-bank nancial corporations and housing corporations, the bulk of the borrowing comprises credit from commercial banks. In general, there are at least three distinct factors that can potentially bring about a reduction in household net nancial savings.
First, households typically nance their additional consumption expenditure by increasing their borrowing or depleting their gross nancial savings. By nancing higher consumption expenditure at any given level of disposable income, lower net nancial savings provide stimulus for aggregate demand and output in this case.
Secondly, when households nance higher tangible (physical) investment by increasing their borrowing or depleting their gross nancial savings. The reduction in net nancial savings in this case stimulates aggregate demand and output through the investment channel.
Third, when interest payment of a household increases say due to higher interest rates, households can meet the increased burden through borrowing or through depleting gross nancial savings thereby inducing a reduction in net nancial savings.
The rst factor hardly played any role in the sharp reduction in gross nancial savings in 2022-23 as the consumption to GDP ratio remained largely unchanged between 2021-22 (60.95%) and 2022-23 (60.93%). The second factor played only a limited role. While the gross nancial savings to GDP ratio declined by 3 percentage points (7.3% to 5.3%) in 2022-23, household physical investment to GDP ratio increased only by 0.3 percentage point (12.6% to 12.9%) during the same period. Though higher borrowing is partly nanced by interest income from nancial assets, it can be largely attributed to higher interest payments of the household in the recent period.
Figure 2 reects this phenomenon by depicting the trend in household borrowing to income ratio, debt to income ratio and the ratio between household physical savings and gross nancial savings. The share of household borrowing in household (disposable) income registered a sharp spike in 2022-23. Such a rise in household liabilities was associated with a decline in the physical savings to nancial savings ratio, indicating a change in household asset composition in favour of nancial assets.
Implication of higher debt burden
The rise in household debt burden has two concerns for the macroeconomy.
The rst concern is about debt repayment and nancial fragility. Since the repayment capacity depends on the income ow, a key criterion for evaluating a household’s debt sustainability is the dierence between interest rate and the income growth rate. On the ip side, the interest payments from the households are the interest income of the nancial sector. If households fail to meet their debt repayment commitments, then it reduces the income of the nancial sector and deteriorates their balance sheets, which in turn can have a cascading eect on the macroeconomy if the latter responds by reducing their credit disbursement to the non- nancial sector.
Figure 3 shows the dierence between the weighted average lending rate of scheduled commercial banks and the growth rate of gross national income. Though the dierence shows a declining trend since 2021-22, the indicator turned out to be negative in the 2023-24 period. The sharp reduction in interest rate and income growth gap is on account of lower income growth rate and higher lending rate of the commercial banks. The weighted average lending rate registered a sharp rise in the last two years, particularly due to the tight monetary policy stance of the RBI and the sharp rise in the call money rate during this period.
The second concern pertains to the implication on consumption demand. Over and above disposable income, the consumption expenditure of the household can be aected by their wealth, debt, and interest rate. Reduction in household wealth can lead to lower consumption expenditure as households may attempt to preserve their wealth position by increasing their savings.
Higher household debt can also reduce consumption expenditure in at least two ways. First, if higher household leverage is perceived as an indicator of higher default risk, then it may induce banks to indulge in credit rationing and reduce the credit disbursement. The consequent reduction in credit disbursement can adversely aect consumption. Second, higher debt can reduce consumption expenditure by increasing the interest burden, not to mention the eect of higher interest rates on consumption expenditure.
The Indian economy registered all these trends in the recent period. The nancial wealth or the net worth of the household is the dierence between the stock of nancial assets and liabilities. As evident from gure 4, the nancial wealth to GDP ratio of the household has registered a sharp decline in the recent period, along with a rise in leverage of the household as indicated by the rise in debt to net worth ratio. Not surprisingly, the growth rate in private nal consumption expenditure during 2023-24 registered a sharp decline as compared to 2022-23.
Macroeconomic implication
The implications of the procyclical leverage by the households along with the compositional change in the asset side of the balance sheet, albeit with a fall in the level of savings, for the stability of economic growth is concerning.
First, given that both the ow indicator of liabilities to disposable income and the stock indicator of debt to net worth shows an increasing trend makes the households vulnerable.
Second, the policy mantra of higher interest rate to counter ination by reducing macroeconomic output and employment can leave households with an increasing level of debt in their balance sheets and potentially push the households into a debt trap. Third, the implications of high interest rate on debt burden can have an adverse impact on the consumption of the households and consequently for aggregate demand.
The household balance sheet trends indicate a broader change in the structure of the economy. The change in composition of the asset side of the household balance sheet towards
nancial assets indicate some degree of nancialisation of the economy which moves from a production-based economy to a monetary or nancial exchange-based economy making the ve-trillion-dollar economy both jobless and fragile.
Zico Dasgupta and Srinivas
Raghavendra teach economics at Azim Premji University.
THE GIST
The decline in household savings is brought about by a drastic reduction in net financial savings as the household net financial savings to GDP ratio attained a four-decade low.
The rise in household debt burden has two concerns for the macroeconomy. The first concern is about debt repayment and financial fragility. Since the repayment capacity depends on the income flow, a key criterion for evaluating a household’s debt sustainability is the dierence between interest rate and the income growth rate.
The second concern pertains to the implication on consumption demand. Over and above disposable income, the consumption expenditure of the household can be aected by their wealth, debt, and interest rate.