Household investments on physical assets on the rise

  • October 25, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Household investments on physical assets on the rise

Subject :Economy

Section: National income

In News: Households optimistic about future earnings prospects according to the Ministry of Finance’s Monthly Economic Review (MER).

Key Points:

  • With Net household financial savings dropping to a multi-decade low of 5.1% of the gross domestic product (GDP) in 2022-23, the MER finds possible explanations for this change.
  • According to the Finance Ministry, household investment in physical assets grew much faster in FY22, compared to the pre-pandemic decade (FY12 to FY20) in response to release of pent-up demand.
  • This is seen in the steady double-digit growth in housing loans since May 2021 till the present. A low-interest rate regime in the last two years might be behind the sharp fall in household savings in India and an increase in liabilities.
  • Households are making a smart investment choice by acquiring physical assets, taking advantage of larger credit availability from banks and after a long period of elevated returns in financial assets.
  • Given that the real estate sector has a vast network of forward and backward linkages (such as cement and steel, among others, besides various services), the increase in housing demand is inducing broad-based growth and job creation.
  • Acquisition of physical assets has been financed by a rise in financial liabilities of households by 5.8% of GDP compared with 3.8% in FY22.
  • The housing sector recorded consistent double-digit expansion (13.8 per cent in August), while vehicle loan growth strengthened to 20.6 per cent. Credit card loans maintained high growth (30 per cent in August).
  • Of the total gross fixed capital formation (GFCF or fixed investment), households held the highest share of 40.4 per cent in FY22, acquired majorly through ownership of residential properties, followed by the private corporate sector at 34.9 per cent, and the public sector at 24.7 per cent.
  • Thus the report finds that the data indicates confidence of households in their future employment and income prospects for increased demand for housing and vehicle loans.
  • This view is further supported by the Future Expectations Index of the Consumer Confidence Survey of RBI, which has hit a four-year high in the latest survey round.
India’s Household Financial Saving Debate

  • The recent data on household financial savings has given rise to two viewpoints on economic outlook. The reduction in the net financial assets rate is primarily due to a rise in financial liabilities.
  • There can be many interpretations of this rise. An optimistic interpretation of this rise in the borrowings of household sector which also includes non-corporate businesses is that this sector is buoyant and has borrowed more.
  • The other view holds that such a transition is typically seen in times of high inflation, as monetary assets can’t always keep up with the value appreciation delivered by physical assets during such times. And with low financial savings it may be difficult to manage both private sector growth and manage fiscal deficit.
  • The transferable savings ratio of the economy has come down and this will affect the borrowing programme of the government and corporate sector.

Household Financial Savings

  • These household financial assets include bank deposits, cash and equity investments, after deducting debt servicing and consumption.
  • India’s government relies on these savings to fund its capital investments in physical assets like infrastructure, machinery, and equipment.
economy Household investments on physical assets on the rise