Media has been reporting on the decline in net financial assets of Indian households! It does not end there – this decline has also been interpreted as an indication of households’ financial distress. Both are far from reality.

According to media reports (May 7), net financial household savings declined sharply by ₹9-lakh crore to ₹14.16-lakh crore in three years to 2022-23 (and 17 per cent below FY22), on the basis of National Accounts Statistics data, a five-year low. This is bound to raise a few eyebrows, if the data is not understood and interpreted correctly. In sum, there has been a shift from financial to physical savings, with an overall increase in gross savings. While it was the net financial savings which went down by ₹9 lakh crore in three years, the aggregate household saving (net of debt) has gone up by ₹4 lakh crore during the same period owing to a significant rise in physical assets (Fig 3).

Sticking to the numbers

According to the RBI data, the flow of net financial assets in 2022-23 was 5.1 per cent of GDP (5.25 per cent of the revised GDP estimates), down from 11.5 per cent in 2020-21 and 7.2 per cent in 2021-22.

The decline was driven by both a 0.2 percentage point reduction in net financial assets and a 2.0 percentage point rise in net financial liabilities of households. Despite the steep rise in liabilities, they stood at only 5.8 per cent of GDP during the year.

However, a conceptual error occurred while juxtaposing the cumulated stock of household debt of 37.6 per cent as of March 2023 with the additional net flow of financial assets in the financial year. A stock figure cumulated over years cannot be compared to one-year flow data! Rather, the debt numbers are dwarfed in front of the cumulated financial asset numbers that stand at a staggering 103.1 per cent of the GDP.

In absolute terms, a year-on-year comparison shows an increase in both financial assets and liabilities, but a steeper rise in liabilities. This would have been concerning if it implied that aggregate household savings had slowed down, posing a threat to economic growth.

However, is not the case for two major reasons.

First, households continue to be the powerhouse behind fixed capital formation, commanding over 60 per cent of gross national savings, according to recent NSO figures. The apparent disconnect between financial savings and overall savings is clarified once we examine the various savings avenues — ranging from financial instruments to physical assets, and even gold and silver ornaments. This variety suggests that a decrease in financial savings doesn’t necessarily signal a drop in total savings; it could instead indicate a shift in household preferences, risk tolerance, and confidence in the country’s economic future.

Secondly, while the Private Final Consumption Expenditure (PFCE) growth rate has slowed to 6.7 per cent (FY23, real terms), below the GDP growth rate, this moderation in consumption likely translates into increased savings amid rising national income.

The principles of national income accounting assure us that gross savings remain robust, potentially setting the stage for a higher domestic savings rate and a move toward investment-driven growth.

Despite households maintaining their status as key contributors to domestic savings and showing growth in absolute terms, their proportion of total savings has seen a gradual decrease. This shift is partly due to stronger financial positions of non-financial corporations and healthier public finances post-pandemic. Yet, the lingering question is the direction of household financial flows.

Where is the household spending?

When investment-friendly conditions foster wealth accumulation, consumption typically slows, a trend that redistributes wealth — such a phenomenon is partly evident in the Indian economy. The propensity to consume declines with increasing incomes and wealth.

Concurrently, the aspirational Indian household is increasingly investing in real estate, as evidenced by the growing share of physical assets in household savings for 2022-23 (Fig. 2). In fact, gross household savings saw a notable increase of 4.65 per cent from FY21 to FY22. This doesn’t mean the money has left the household sphere; rather, it’s simply shifting from one pocket to another!

This dynamic is echoed in the substantial role households play in gross capital formation, financing over 40 per cent of domestic investments, predominantly in real estate such as homes, buildings, and other structures. This desire to secure a personal roof is driving a significant surge of savings into the market, but it’s also ballooning household debt as families stretch financially to embrace the real estate boom.

This is where the latest MOSPI estimates are also being grossly misinterpreted, causing widespread confusion in the media. The claim that ‘net financial savings’ have gone down is not just inaccurate but a testament to how blatantly statistics are misused to sway public opinion.

To further simplify the conundrum, net household savings can be expressed as the sum of net financial savings, physical savings and bullion savings (Fig. 3). The MOSPI data shows a clear growing trend in net household savings even after adjusting for their debt.

While orthodox neo-Keynesian and neoclassical macroeconomic theories might relate a slowdown in savings growth as a precursor to GDP growth slowdown, this needs to be looked at as a structural inflexion point towards higher domestic savings in the context of a more diversified savings portfolio.

The entire problem lies with the nomenclature and definition of savings, investment and consumption. Household savings directed towards real estate of any form (residences and dwellings) are accounted as investment, and not private consumption.

That is why one might note a departure in the consumption-driven growth phenomenon in the last quarter, where consumption growth has comparatively slowed down, despite a high GDP growth and better growth performances of gross capital formation.

Apart from real estate, the sustained surge in bullion markets, coupled with an increase in savings through ornaments, suggests that Indian households favour tangible assets over financial ones, which carry a higher risk premium. This trend reflects the changing consumer preference over time and in the economic future.

Ghosh is Director and Bardhan is Research Assistant at the Observer Research Foundation