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Households’ net savings hit multi-decade low in FY23

Households’ net savings hit multi-decade low in FY23

The data released by the Reserve Bank of India (RBI) on September 18 reveals a significant decline in household savings in India during the fiscal year 2022-23 compared to the previous fiscal year 2021-22. On a net basis, households saved 19 percent less during this period, with the absolute amount dropping to Rs 13.77 lakh crore. This decline in savings brings the net financial savings of households to just 5.1 percent of the country’s GDP.

This 5.1 percent figure is particularly noteworthy as it represents the lowest level of household savings as a percentage of GDP in 34 years, according to Nikhil Gupta, the chief economist at Motilal Oswal Financial Services. This decline in household savings can have various economic implications, including reduced investments, lower capital formation, and potential challenges in achieving long-term financial goals for individuals and families.

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Understanding the factors contributing to this decline in savings and exploring strategies to promote savings and financial security for households will be crucial for policymakers and economists in India. It also underscores the importance of economic stability and policies that encourage savings and financial resilience among the population.

The data from the Reserve Bank of India (RBI) provides a broader context for understanding the decline in household savings in the fiscal year 2022-23. In the previous fiscal year, 2021-22, the net financial savings of households amounted to 7.2 percent of GDP, reflecting a relatively higher level of savings compared to the subsequent year.

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The fiscal year 2020-21, considered the peak pandemic year, saw a significant increase in household savings, with net financial savings amounting to 11.5 percent of GDP. This surge in savings was attributed to limited spending opportunities and uncertainties related to the pandemic, prompting households to save more.

However, in 2022-23, the decline in household savings can be attributed to several factors. One significant factor is the increase in liabilities, which were 76 percent higher compared to the previous fiscal year (2021-22). On the other hand, financial assets increased by only 14 percent during the same period. Among financial assets, bank deposits saw a notable increase of 32 percent, but small savings (excluding PPF) and investments were lower compared to the previous fiscal year.

Households' net savings hit multi-decade low in FY23

These dynamics suggest that households may have taken on more debt or liabilities in the face of various economic challenges or opportunities, such as increased consumption or investments. The lower growth in financial assets, particularly in small savings and investments, may reflect a shift in investment preferences or a response to changing economic conditions.

Understanding the drivers behind these trends in household savings and liabilities is essential for policymakers and economists to formulate strategies that promote financial stability and savings in the country. The variations in savings over the past few years highlight the complex interplay of economic factors and consumer behavior in shaping the financial landscape of India.

The data reveals significant shifts in household financial dynamics during the fiscal year 2022-23. One prominent trend is the substantial increase in borrowings from commercial banks, which surged by 54 percent compared to the previous fiscal year. This uptick in bank borrowings suggests that households may have increasingly turned to loans to meet their financial needs or capitalize on investment opportunities.

Furthermore, the impact on the balance between financial assets and liabilities is noteworthy. Household financial assets saw a slight decline as a percentage of GDP, dropping from 11.1 percent in 2021-22 to 10.9 percent in 2022-23. In contrast, liabilities increased significantly, rising from 3.8 percent of GDP in 2021-22 to 5.8 percent in 2022-23. This marks the second-highest level of liabilities as a percentage of GDP in independent India’s history.

Notably, these shifts in household financial dynamics had implications for the broader economy. According to Nikhil Gupta of Motilal Oswal Financial Services, the decrease in household financial savings played a role in supporting strong consumption and real estate investments in 2022-23, particularly in the context of weak income growth. This suggests that the use of borrowings and the adjustment in financial assets and liabilities helped buoy economic activity in certain sectors despite the challenges posed by lower savings. Understanding these trends is critical for policymakers and economists in shaping strategies that promote financial stability and economic growth.

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