India's Net Household Savings Fall To Their Lowest In Nearly Five Decades

Indian households' net financial savings have hit at least a 47-year low as household borrowings exceed investments and savings.

According to data released by the Reserve Bank of India in its latest monthly bulletin, net household savings stood at 5.1% of gross domestic product in the year ended March 31, 2023. This is lower than the 7.2% recorded in FY22.

In FY21, India's households recorded 11.5% in net financial savings, reaching a high owing to the Covid-19 pandemic.

Household liabilities were also up 76% in FY23 from the previous financial year. As a share of GDP, total financial liabilities rose to 5.8% in the last fiscal, as compared with 3.8% a year before and 3.9% as of March 2021.

The rising debt and lower savings have a direct impact on India's consumption demand, which has been considered a key metric driving the country's GDP growth.

India Ratings and Research's Principal Economist, Sunil Sinha, said that households are leveraging themselves by borrowing funds. This directly impacts the investment cycle, given that private consumption demand accounts for 60% of the country's GDP.

As of March 31, outstanding bank credit towards retail borrowers rose 20.8% year-on-year to Rs 40.85 lakh crore. It constituted 30% of non-food credit for the banking system. Unsecured personal loans accounted for over Rs 11 lakh crore worth of bank loans, while outstanding credit card debt stood at Rs 1.94 lakh crore at the end of the previous fiscal.

"Household savings going down also has larger implications for the economy because a large part of the investment comes from households, who are the largest savers. If their savings start going down, then much less capital will be available for investment," Sinha said.

As borrowing goes up, future income gets tied up for the repayment of debt, leading to fewer investments. India's consumption demand is not likely to "hold for very long" unless the real wages among the lower-income groups increase, Sinha said.

While the real wage growth of the upper income group has been in double digits, that of the lower income segment has seen negative real wage growth, he said.

"If household savings continue to dip, it will have an impact on overall funding and growth of the economy and would lead to more dependence on foreign capital to fund the growth," said Madhavi Arora, lead economist at Emkay Global.

Gaura Sengupta, India economist for IDFC First Bank, agreed that a lot of India's consumption demand is supported by higher urban demand.

"Rural growth is picking up, but the recovery is a little patchy due to uneven monsoon. However, urban growth has been consistent, supported by strong recovery in formal sector. The pick-up in formal sector growth has supported credit offtake," Sengupta said.

Arora of Emkay Global said that Indian households continue to remain underleveraged, so while borrowing is rising, there is no undue fear of higher bad loans for the banking sector currently.