A dip in Indian households' net financial savings due to elevated debt threatens to choke major sources of funds for the government's capital investments, key for the nation to retain its mantle of the fastest-growing major economy, according to a report published by Bloomberg News.
In its latest data, the Reserve Bank of India stated household financial assets, including bank deposits, cash, and equity investments, after deducting debt servicing and consumption, eased to 5.1% of gross domestic product in the fiscal year ended March from 7.2% in the previous year.
This level is the lowest since the fiscal year ended March 2007 and will crimp resources for the rest of the economy, as per calculations done by IndusInd Bank Ltd.'s Chief Economist Gaurav Kapur.
In absolute terms, net household financial savings added stood at ₹22.8 trillion in FY21 and it came down to ₹16.9 trillion in FY22 and to ₹13.75 trillion in FY23.
The report also stated that the Indian government depends on these savings to finance its capital investments in physical assets such as infrastructure, machinery, and equipment, Bloomberg reported.
While savings increased for many households globally during the pandemic, most used up the resultant extra spending power as COVID-19 curbs ended.
Saugata Bhattacharya economist at Axis Bank Ltd said, "Household financial savings not keeping pace with growth is a matter of concern. Without adequate domestic savings, funding the needed investment will require large foreign capital, which is often volatile."
“The household sector is consuming by borrowing more. This happens when the income level stays stagnant but inflation creeps up. The recovery is not broad-based — while a section splurges on luxury goods, others are borrowing to stay afloat," said Rupa Rege Nitsure economist with L&T Finance Holdings Ltd. as quoted by Bloomberg.
More than 300 million Indian households have seen debt levels increase following aggressive lending tactics by banks after the pandemic. The rise in financial liabilities with falling asset levels could be a sign of rising inequality.
The finance ministry, meanwhile, sought to dispel worries expressed by economists about the declining trend of financial savings of households saying it signaled a shift in their investment preference for non-financial assets.
Investments into financial instruments are often guided by factors like risk perception, financial literacy, and easy liquidity while purchases of physical assets like houses and gold are often based on the need for these assets, their potential for appreciation, and cultural factors.