Rising Interest, Falling Savings: Substantiating the Article with Data and Figures

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Rising Interest, Falling Savings: Substantiating the Article with Data and Figures

Sub: Economy

Sec: National Income

TAG: Falling savings 

Household net financial savings as a percentage of GDP have seen a decline due to increased borrowing and structural economic shifts, rather than just changes in savings patterns. This has raised concerns about financial stability and the need for macroeconomic policies that support household income growth.

Key Points from the Article:

  • Decline in Household Financial Savings:
  • The household net financial savings to GDP ratio declined by 2.5 percentage in FY22-23.
  • The increase in physical savings to GDP ratio was only 0.3 percentage points.
  • The borrowing to GDP ratio increased by 2.5 percentage, resulting in a net decline in overall household savings.
  • Structural Shifts:
  • This shift indicates a structural change in the economy, reflecting higher borrowing and increased financial stress on households.
  • Higher Borrowing and Interest Burden:
  • The net financial savings to GDP ratio declined while borrowing increased, indicating higher debt levels and interest payment burdens.
  • Fisher Dynamics:
  • The debt-income ratio has risen due to higher interest rates and lower nominal income growth.
  • This phenomenon, explained by Irving Fisher, indicates that when income growth lags behind interest rates, households face increased financial stress.
  • Macroeconomic Challenges:
  • Interest Rate and Income Growth Gap: There is a need to reduce the gap between interest rates and income growth to slow down the debt-income ratio’s growth.
  • Aggregate Demand: High interest payments and debt commitments may lead households to cut consumption, reducing overall demand in the economy.
  • Policy Implications: To address these challenges, macroeconomic policies should aim to stimulate household income growth, alongside managing inflation and government debt targets.

Supporting Data and Figures:

  • Changes in Components of Savings to GDP Ratio (Figure 1):
  • Net Financial Savings to GDP Ratio: Declined by 2.5 percentage points.
  • Physical Savings to GDP Ratio: Increased by 0.3 percentage points.
  • Borrowing to GDP Ratio: Increased by 2.5 percentage points.
  • Overall Savings to GDP Ratio: Declined by 1.7 percentage points.
  • Lending Rate and Household Growth (Table 1a):
  • Average Lending Rate (RBI):
  1. 2019-20 to 2021-22: 9.3%
  2. 2019-20 to 2022-23: 9.4%
  • Average Household GDI Growth Rate:
  1. 2019-20 to 2021-22: 8.0%
  2. 2019-20 to 2022-23: 9.3%
  • Household GDI Growth Rate minus Average WALR:
  1. 2019-20 to 2021-22: -1.3%
  2. 2019-20 to 2022-23: -0.1%

Current Economic Context:

  • Inflation-Adjusted Growth of Household Savings: Remained positive during 2022-23.
  • GNI Growth Rate in 2023-24: Lower than the average WALR.
  • Debt Servicing Ratio: India’s debt servicing ratio is still lower than that of many other countries.

Analysis:

  • The data indicates a significant structural shift in the household savings pattern, with increased borrowing and financial stress.
  • The declining household net financial savings to GDP ratio and the rise in borrowing underscore the financial strain on households.
  • The average growth rate of household disposable income being lower than the lending rate indicates higher financial burdens and increased debt levels.

Implications:

The declining household financial savings to GDP ratio and increased borrowing highlight the financial vulnerabilities of households. The growing debt-income ratio and higher interest payment burdens point to deeper structural issues that require comprehensive macroeconomic policies focused on supporting household income growth and stabilizing the economy. This approach will be crucial in mitigating financial stress and sustaining economic growth.

Debt Servicing Ratio measures the proportion of household income required to meet debt obligations, including both interest and principal payments.

Significance:

  • Indicates the financial burden of debt on households.
  • A lower DSR means households can manage their debt payments comfortably.
  • A higher DSR suggests households are under financial stress, as a larger share of their income is needed for debt repayment.

Fisher Dynamics

Fisher dynamics, named after economist Irving Fisher, describe the relationship between interest rates, income growth, and the debt-to-income ratio.

Key Components:

  1. Interest Rate (i): The cost of borrowing money.
  2. Nominal Income Growth Rate (g): The rate at which household income is increasing.
  3. Debt-Income Ratio (D/Y): The ratio of total household debt (D) to household income (Y).

Mechanism:

  • Rising Debt-Income Ratio: If the interest rate (i) is higher than the nominal income growth rate (g), the debt-to-income ratio (D/Y) will increase over time, leading to higher financial stress.
  • Falling Debt-Income Ratio: If the income growth rate (g) exceeds the interest rate (i), the debt-to-income ratio (D/Y) can decrease, easing financial stress.
economy Falling Savings: Substantiating the Article with Data and Figures Rising Interest