There has been increasing focus on gross domestic savings (GDS) in the Indian economy since the change in regime in 2014. It has gained even more weight since the release of Reserve Bank of India’s Bulletin for September 2023. A discussion about this should begin with what materialised two decades ago. The Economic Survey 2006-07 reveals irrefutable and guiding facts about consumption, savings and investment in the Indian economy.

First, the increasing trend in GDS as a proportion of GDP observed since 2001-02 has continued with the savings ratio rising from 26.4 per cent in 2002-03 to 29.7 per cent in 2003-04, 31.1 per cent in 2004-05 and 32.4 per cent in 2005-06. Second, as the savings rate has gone up, private final consumption expenditure (PFCE), at current prices as a proportion of GDP, has shown a declining trend particularly from 2001-02. PFCE as a proportion of GDP declined from 63.1 per cent in 2002-03 to 62.1 per cent in 2003-04, 60 per cent in 2004-05, and further to 58.7 per cent in 2005-06.

An inverse trend can be observed post 2013-14. The share of PFCE in GDP, at current prices, has projected an increasing trend since 2013-14. It increased from 57.65 per cent in 2013-14 to 61.12 per cent in 2021-22 with a high of 61.27 per cent in 2020-21. Consequently, its effect was felt in the share of GDS in GDP which fell from 32.12 per cent in 2013-14 to 30.15 per cent in 2021-22.

What can be inferred is that households preferred to spend more on consumption than save. This can be explained by marginal propensity to consume and shifting structure of economic activity towards formalisation, poverty elimination and empowerment schemes and measures adopted by the Modi dispensation like housing for all, access to credit without collateral, etc.

Three components

Household savings has three components — financial, physical assets, gold and silver ornaments. Within the financial component, households can save in the form of currency, bank deposits, pension, insurance, equity and related products. Financial savings witnessed different distribution profile depending on household expectations and convenience. In 2007-08, households saved ₹74,000 crore in shares and debentures but in 2008-09 households withdrew ₹2,300 crore as they expected that the stock market may not generate desired returns.

On the contrary, households increased their investments in shares and debentures by more than six times between 2015-16 and 2016-17 as they expected the stock market would deliver huge returns. Likewise, total household savings too witnessed different distribution profile. Although there is no definite trend in the share of physical assets in household savings between 2013-14 and 2022-23, its trajectory between 2019-20 and 2022-23 has displayed a roller coaster characteristic — 58.57 per cent in FY20, 47.8 per cent in FY21, 60 per cent in FY22 and as per projections 68-70 per cent in FY23.

Net financial savings, calculated as difference between gross financial savings and financial liabilities, of household has an inverse relationship with financial liabilities and savings in physical assets. As an outcome of this relationship, the net financial savings of the household sector as a per cent of GDP has been 7.6 in FY20, 11.5 in FY21, 7.2 in FY22 and 5.1 in FY23. The 5.1 per cent has gathered so much media space in the last couple of days.

It is ironical for the following reasons. First, household sector is the major contributor to GDS and GDS as a proportion of GDP is likely to have crossed 31 per cent in FY23, as per SBI, from 28.8 per cent in FY21. Second, more than ₹10.5-lakh crore has been disbursed under personal loans by the banking sector between FY21 and FY23. Approximately, ₹4.5-lakh crore has been disbursed under housing category implying a significant share of the increase in household financial liabilities between FY21 and FY23 has flowed to productive sector like real estate which impact about 300 sectors of the economy.

Capital formation

Third, physical assets include investment in fixed assets of construction and the household sector’s saving in the form of physical assets can be taken to be the same as the capital formation of the household sector. Any addition to gross fixed capital formation, also known as investment rate in the economy, must be welcomed. Economic rationale has been outlined for understanding the shift in distribution profile of total household savings between FY21 and FY23. Understanding the reasons for choices made by the household sector will provide a comprehensive view of the shift. First, during Covid, as part of its mandate to maintain price stability and growth, the RBI began reducing interest rates. In the course, the repo rate decreased to 4 per cent in May 2020 which was the lowest since October 2004 when the RBI adopted the internationally accepted definition of the repo and reverse repo terms.

Second, in Union Budget 2021-22, additional deduction of ₹1.5 lakh for loan taken to purchase an affordable house was extended until March 2022. Third, affordable housing projects were given additional one year tax holiday until March 2022. Fourth, housing prices have corrected during Covid and the households expected good returns from their investment in the housing market.

The government of the day cannot and should not adopt a carrot and stick policy to effect a change in household preferences in their savings which are in excess of consumption needs. What may be the focus for the government is whether increased financial liabilities from the household sector have flown towards consumption and whether there is any concentration risk in the profile of total household savings.

The writer is an economist and columnist with Bharatiya Janata Party

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