Is India becoming a spender economy?

“Parox of Thrift”- a ory by renowned economist John Maynard Keynes explains how individuals behave during an economic recession. According to ory,  individuals try to save more during an economic recession. Well, this was case for Indian economy but that could not be sustained in post-pandemic era, and household savings took a hit every passing year.

Take a look, India’s gross household financial savings declined from 15.4 per cent in 2020-2021 to 11.1 per cent in 2021-2022, and furr to 10.9 per cent in 2022-2023 reverting to its pre-pandemic trend an average of 11.0 per cent during 2011- 12 to 2019-20.  On net household financial savings front, net household financial savings in India have fallen steeply to 5.1 per cent of GDP in 2022-23 from 11.5 per cent in 2020-21, well below its long-run annual average of 7.0-7.5 per cent.

Declining savings and rising credit

declining savings and rising credit are what exactly explain reasons for declining household financial savings in India.  But key question to ask is- Is India becoming a spender economy?

“I don’t think India is a spender economy as of now, it is in transition towards a spender economy, but still we are not completely re.  We still have a fair degree of divergence in income levels. K shape recovery is a testament to divergence in our income levels,” Yuvika Singhal, Economist at QuantEco, told Republic Business.

According to RBI, net household financial savings declined owing to a meteoric rise in personal and unsecured loan segment. This means more people are availing loans to buy physical assets like homes, and cars.

Indian household's inclination towards investing in physical assets is reflected in latest credit growth data by RBI. acceleration in gross bank credit during 2022-23 was led by personal loans and credit extended to services sector. Within personal loans, growth in credit card receivables, which are a form of unsecured lending, rose sharply. Services sector credit was driven by lending to NBFCs.

As per RBI trends report, personal loan segment witnessed a growth of 21 per cent in 2022-2023. Similarly, vehicle loans witnessed a growth of 25 per cent, and credit card outstanding amount growth stood at 31 per cent in FY23.

“ consumption growth is not a concern as of now, concern is that a large part of consumption is being fueled by personal loans and unsecured loans. In a nut-shell, higher consumption growth is fuelled by higher debt. This poses a systemic issue for economy,” Suman Chowdhury, Chief Economist and He of Research, at Acuite Ratings, told Republic Business.  However, more spending and less saving by household are also seen by economists as more of behaviour change.

“Millennials and more young people are entering workforce, and re is a mindset of youngsters that don’t want to save money and spend more. This consumption behavior is also driving phenomenon of declining savings,” Singhal opined.  According to Ecowrap report of State Bank of India, financial liabilities of households jumped Rs 8.2 trillion since pandemic, outpacing increase in gross financial savings at Rs 6.7 trillion, thus explaining fall in household net financial saving by Rs 1.5 trillion that is 2.5 per cent of GDP.

transition towards investing more in physical assets is driven by a lower interest rate regime during pandemic that pushed people to avail of more loans, economists opined.  “It is entirely possible that a low-interest rate regime resulted in a parigm shift of household financial savings to household physical savings in last 2 years,” SBI Ecowrap report explained. According to SBI report, re is a significant long-run relationship between housing Loans and household savings in physical assets.

Even apex bank of India believes that every Rs 1 increase in housing loans has resulted in a Rs 2.12 increase in household savings in physical assets for 14 years that ended FY22. It is because lower interest rate regime led to a decline in net financial savings of households and has resulted in a concomitant increase in household savings in gross physical assets.

pattern of saving in physical assets by households was on decline but as per economists and experts, trend is once again bouncing back. In FY12, savings in physical assets accounted for almost 66 per cent of household savings, which grually went down to 48 per cent in FY21 but is expected to go above FY12 levels going forward.

“ trend is again shifting and share of physical assets is expected to reach ~70 per cent level in FY23, due to a decline in share of financial assets,” SBI Ecowrap report said.

same report said that total household savings (both financial and physical) for FY23 would still surpass FY22 levels despite decline in financial savings as household savings in physical assets have jumped Rs 6.5 trillion in FY22 over FY21 and as per current trends it is expected to jump furr by up to Rs 5 trillion in FY23 and hence will outstrip increase in household indebtedness.

Impacting economy

decline in household savings should not be seen as a normal economic affair as it is a key function of investments and for financing deficits. Simply put, an economy with a low saving rate is unable to fund its capital investment needs and hence runs a balance of payments deficit. To be precise, household saving is a cushion for economy.  

Simply put, net financial savings of household sector are most important source of funds for two deficit sectors, namely, general government sector and non-financial corporations. In domestic market, government and non-financial corporations are dependent on domestic savings, if y decline n y have to flock to foreign markets for funds.

declining household savings means Indian economy’s dependence on foreign funds will rise and that is not a good thing as global environment can turn hostile at any moment and is loed with unpredictability. “ re is no harm in depending more on foreign funds but y are hostile. We have seen in FDI inflows those which have declined by 12 per cent globally in 2022, FPI flows have also stayed fickle. As foreign flows are not consistent,” Singhal said.

Concurring with Singhal, Chowdhury said, “Depending on foreign capital is not a good thing, and inflows from abro are influenced by many factors and are not consistent.”

As far as household saving rate, and net financial saving rate of India are concerned, India is much better compared to its peers- thanks to India’s huge domestic consumption.

“Indonesia and Philippines are also doing good as far as household saving is concerned. India's economy stands out amongst its peers because of its huge domestic consumption. India is not dependent on global health of economy for its fortune. We are not that intertwined as ors are,” Singhal told Republic Business.