Net financial savings (NFS) of households – or the difference between household financial asset and liability flows as a share of gross domestic product (GDP) – fell to almost a five-decade low in the previous financial year. This is cause for serious concern. According to the Reserve Bank of India’s (RBI) estimates on ‘Flow of Financial Assets and Liabilities of Households’ in its September Monthly Bulletin, released on Monday, NFS was down from 11.5% of GDP in FY21 to 5.1% in FY23.
An analysis of the data for the past five years shows the sharp fall in household NFS is almost entirely explained by the increase in their financial liabilities. Thus, while the share of household financial assets in GDP has been fairly steady – in the range of 10.9% to 12.0% (apart from the covid year of FY21 when it rose to 15.4% thanks to the fall in consumption following the lockdown) – there has been a sharp increase in their financial liabilities. Households’ financial liabilities increased by almost 53%, from 3.8% of GDP in FY22 to 5.8% in 2022-23, even as their financial assets fell by only 1.8%, from 11.1% of GDP to 10.9% during the same period.
The increase in household financial liabilities, the flip side of our consumption-driven GDP growth during the past few years and, ironically, greater financial inclusion, is the consequence of a number of factors: continued stress on household incomes following the covid pandemic, high inflation, and a negative real rate of interest (thanks to the Reserve Bank of India’s loose monetary policy in response to covid). These factors made it both necessary and easier for households to borrow.
Stressed budgets meant households found it necessary to borrow to maintain their standard of living at a time when many had lost their jobs due to the pandemic. Meanwhile, negative rates of interest and greater willingness on the part of banks to lend to retail borrowers (thanks in part to growing dis-enchantment with corporate borrowers and lower credit demand from the latter) meant easier access to bank loans for households.
Lower levels of delinquency in retail loans also helped to make these more attractive to banks, as is reflected in the sharp increase in retail bank lending. Retail loans grew at a compound annual growth rate of 24.8% from March 2021 to March 2023, nearly double the growth in gross advances during the same period, according to RBI’s latest Financial Stability Report.
While an increase in households’ financial liabilities is the inevitable consequence of greater financial inclusion and higher financialisation as the economy moves from the low-income to middle-income category, what is distressing is that the share of gross financial assets in GDP has not shown a corresponding increase. This despite one of the great successes in recent years, the dramatic increase in stock market investment by households through systematic investment plans. Clearly, increased flow of savings to stock markets has come at the cost of other forms of financial assets, primarily bank deposits. Capital-market investments rose from ₹1.24 trillion in FY21 to ₹2.14 trillion in FY23, even as bank deposits fell from ₹12.4 trillion to ₹11 trillion.
A closer look at the break-up of financial and physical savings (land, gold and silver) of households, for which data is available until FY22, shows the hold of physical assets continues to be strong. Indian households are not unique in preferring savings in physical form in times of economic stress. But what is unique to Indians is our continued societal preference for gold jewellery. Thus, the share of physical assets (including gold) in total household savings has remained constant at roughly 61% of total savings, despite efforts by the government to provide alternatives such as the sovereign gold bond scheme to meet households’ desire for gold and help diversify their assets.
This is unfortunate. Given that household savings, especially financial savings, are the bedrock for investment and hence economic growth, the stickiness in the share of gross household financial assets in GDP is worrisome, especially since financial liabilities are bound to increase over time. At the micro level, too, in a scenario where social safety nets are virtually non-existent and pension remains the privilege of a miniscule section of society, financial savings provide security in old age and at times of ill health thanks to their relatively greater liquidity. In a nutshell, financial savings play a crucial role, both at the micro and macro level, and need to be incentivised.
The government should look to incentivise financial savings, which is what ultimately what finances growth – whether through government borrowings for its capital expenditure, or debt raised for investment projects by the private sector.
