The net financial saving of the household sector – the most important source of funds for the two deficit sectors, namely, the general government sector and the non-financial corporations – moderated to 5.1% of GDP in FY23 from 11.5% in FY21 and 7.6% from FY20 (pre-pandemic). It has been said that it fell to 50 year low, however this is completely misleading as household savings must be looked into as a sum total of physical and financial savings.
To start with, the sharp rise in financial liabilities on hindsight may reflect drawdown in precautionary saving during pandemic. However, a deeper look at the data reveals otherwise. Consider the following. Financial liabilities jumped Rs 8.2 trillion since pandemic, outpacing the increase in gross financial savings at Rs 6.7 trillion, thus explaining the fall in household net financial saving by Rs 1.5 trillion / 2.5% of GDP.
On the asset side of households, there was an increase of Rs 4.1 trillion in insurance and provident and pension funds. On the liability side of households, out of Rs 8.2 trillion increase, Rs 7.1 trillion was accounted for by increase in household borrowing from commercial banks. Juxtaposing this increase in borrowing from commercial banks with the increase in bank credit, we find that 55% of the retail credit to households in the last 2 years have gone to housing, education and vehicle purchase. Thus, it is entirely possible that a low interest rate regime resulted in a paradigm shift of household financial savings to household physical savings in the last 2 years.
It may be noted that that there is a significant long run relationship between Housing Loans and household’s savings in physical assets. Every Re 1 increase in Housing loans has resulted into Rs 2.12 increase in household’s savings in physical assets for the 14 year period ended FY22.
The decline in net financial savings of households has resulted in a concomitant increase in household savings in gross physical assets. In fact, savings in physical assets which accounted for more than two-thirds of household savings in FY12, had declined to 48% in FY21. However, the trend is again shifting and the share of physical assets is expected to reach ~70% level in FY23, due to decline in share of financial assets.
The research desk believes that the total household savings (both financial+physical) for FY23 would still surpass the FY22 levels despite the decline in financial savings as household savings in physical assets has jumped Rs 6.5 trillion in FY22 over FY21 and as per current trends it is expected to jump further by upto Rs 5 trillion in FY23 and hence will outstrip the increase in household indebtedness. This clearly indicates that the shift from financial savings to physical savings was also triggered by a low interest rate regime in pandemic.
The desk also believes that the shift to physical assets is also triggered by a recovery in real estate sector and the increase in property prices. The RBI House Price Index shows a modest acceleration since FY21, which may be acting as a motivator for buying homes. This increased “pull” factor thereby pushing up capital spends in a multitude of sectors. If this is indeed the proximate story of the revival in household investment, this has strong policy implications for growth and investment revival.
The shift to physical assets has interesting policy connotation. Household sector investment gradually recovered to reach 11.8% in FY22. It is pertinent to note that there has been an increase in capital formation as % of household gross savings to 60% in FY22 from a low of 53.2% in FY16 (exception: 47.8% in FY21). Thus, households have now started utilizing more of their savings for capital formation. This number is expected to increase further to a decade high of ~68% in FY23.
To end with an anecdote – the household sector in the national accounts includes, apart from individuals, all non-government, non-corporate enterprises like farm and non-farm businesses, unincorporated establishments such as sole proprietorships and partnerships and non-profit institutions. It thus reflects conditions in the informal sector. The recovery in investment in household sector thus bodes well for the informal sector also. Meanwhile, household debt to GDP ratio (household leverage) has increased during Covid but has declined thereafter. India’s HH debt % GDP was at 40.7% in Mar-20, fallen to 36.5% in June-2023 and much lower than China at 62%.
Be First to Comment