The Reserve Bank of India’s recently released data on household (HH) financial assets and liabilities paints a disquieting picture – of a contraction in savings, in the context of a slowdown in incomes. The latter is borne out by slow growth in consumption expenditure. Since household incomes is the sum of expenditure and savings, it would appear that incomes have taken a hit recently.

Let’s put down the broad headline numbers for our analysis, taking the last financial year as well as the trend in the last three or four years:

-- first, net financial savings of HH (assets minus liabilities) contracted by 19 per cent in FY23 (minus 2 per cent in four-year CAGR);

-- second, incremental non-mortgage borrowing growth, derived from netting out housing loans taken from banks and housing finance companies from total financial liabilities, jumped up 99 per cent in FY23 (indicative of borrowing to plug income-expenditure gap, against a four-year CAGR at 24 per cent);

-- third, nominal private final consumption expenditure (PFCE) plus net financial savings up 8.9 per cent in four-year CAGR terms, translating into 3.2 per cent in real terms; assuming a 6.2 per cent rise in investments in physical assets in FY23 based on the recent trend, nominal HH income growth on four-year CAGR is estimated at 8.6 per cent. And net of inflation (four-year deflator at 5.7 per cent) the estimated real income growth stands at 2.9 per cent or 1.8 per cent per capita basis, i.e. perhaps the slowest pace in 40 years.

-- finally, the rise in physical savings in the last few years as well as in FY23 does not categorically point to a diversification of savings away from financial avenues, as some have suggested.

Overall, the rise in gross financial savings of households has been completely overshadowed by the rise in liabilities.

The assets and liabilities

Financial assets (gross) of households, however, rose by 13.9 per cent YoY in FY23 as against a modest four and three-year CAGR of 6.9 per cent and 7.1 per cent respectively (see table). The FY23 rise came largely from the recovery in deposits in response to rising deposit rates. Significantly, household investments in mutual funds and equities, together contributing 4.9 per cent of HH savings (FY23E), grew by just 5.4 per cent on 4-year CAGR and declined by 6 per cent YoY in FY23.

The flow of household liabilities grew faster than that of assets, at 75.5 per cent YoY, and 19.7 per cent and 26.9 per cent on a four and three-year CAGR basis, respectively. Loans under mortgage by housing finance companies (HFCs) and banks (banking sector data) grew by 10 per cent on a four-year CAGR (27 per cent YoY). As a corollary, the flow of non-mortgage borrowings (financial liabilities less incremental housing loans by NBFCs and banks) rose by 23.5 per cent on a four-year CAGR and 99 per cent YoY.

Thus, the proportion of flows into non-mortgage borrowing vis-a-vis change in total household liabilities increased to 77 per cent in FY23 from 67 per cent in FY19. Booming HH financial liabilities are increasingly funding consumption expenditure.

Income aspect

To arrive at a proper assessment of household income trends, one needs to consider both financial and physical savings and then juxtapose that with consumption.

We estimate the physical savings of households in FY23 using capital formation data from the national income accounts available till FY22; the post-Covid trend growth (FY19-FY22) stands at 6.2 per cent.

Thus, using the combination of actual net household financial savings of RBI (minus 18.8 per cent YoY in FY23), an estimated 6.2 per cent growth in physical savings and 12.5 per cent decline in investments in gold and silver (trade data), the estimated overall savings for HH in FY23E is estimated to have contracted by 3.7 per cent YoY in FY23E.

The contribution of real estate/ownership of dwelling in HH physical savings has been consistently declining from the peak of 80.8 per cent in FY12 to 66.7 per cent in FY22 as it grew by 5.1 per cent CAGR since FY12. Also, it is worth noting that while the proportion of outstanding retail loans of banks has risen to a 30-year peak of 30 per cent in FY23, the contribution of home loans has declined from a peak of 56 per cent in FY16 to 47 per cent in FY23, thereby corroborating the rising pace of consumer lending at the broader level.

Overall, the sharp deceleration in real household consumption in FY23 (average growth of 3.6 per cent in PFCE in real terms during the three quarters ending 1QFY24, or 2.5 per cent on a per capita basis) along with the contraction in net financial assets of households suggest that household income growth (savings plus consumption) has taken a hit.

Based on the imputed household physical savings, actual net financial savings, and PFCE, the nominal income growth on four-year CAGR is estimated at 8.5 per cent. And net of inflation (5.7 per cent four year CAGR, based on deflator) the real income growth stands at 2.8 per cent or 1.7 per cent per capita basis, i.e. the slowest pace in 40 years.

The lowest average of 2.1 per cent was seen in FY83 in the backdrop of global oil shocks (1979), contraction in the agriculture sector (FY81), severe supply shortages resulting in high inflation, and pronounced fiscal imbalance.

The structural fragility

The contraction in HH savings and the rising cost of living have translated into an exponential rise in HH debt to fund consumption. But this is not episodic. Since FY12 real PFCE (5.8 per cent 11-year CAGR) has exceeded real HH income growth (4.8 per cent).

This perhaps makes it the longest phase of shortfall in the last 69 years; in the previous 58 years, income exceeded consumption growth in 47 years by an average of 0.5 per cent.

Sinha is Co Head of Equities & Head of Research - Strategy & Economics; Mundhra is Economist, Systematix Group. Views are personal

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