Understanding the fall in household savings

  • September 26, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Understanding the fall in household savings

Subject: Economy

Section: National Income

Context: Recently released data showed that the Household sector’s savings in financial assets has shown a sharp decline to 5.1 per cent of GDP in 2022-23.

Key Points:

  •  From 2011-12 to 2019-20, the financial savings of the household sector have moved in a narrow range of 7 to 8 per cent of Gross National Disposable Income (GNDI).

The recent trend in household savings:

  • In 2020-21, it touched 11.3 per cent during the Covid period. That was a lone exception.
  • In 2021-22 the financial savings of household sector was 8.3 per cent of GDP.
  • The figure for 2022-23 stood at 5.1 per cent.

What explains the drop in household financial savings?

  • The fall in household financial savings can be explained in terms of changes in household financial assets and liabilities.
  • Compared to the pre-Covid five-year average over 2015-16 to 2019-20 which was 7.8 per cent of GDP, the 5.1 per cent figure is lower by a margin of 2.7 percentage points.
  • This fall is made up of 2.2 percentage points of increase in change in gross household financial liabilities and 0.5 percentage points fall in gross household financial assets over the corresponding periods.
  • There was also a sharp rise in bank advances including personal loans in 2022-23 as compared to pre-Covid years.
  • The reduction in the net financial assets rate is primarily due to a rise in Financial Liabilities.

How the Government views the rise in personal loans?

  • 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 (MSME).
  • This sector is buoyant and has borrowed more.

How household savings affect the economy?

  • That is, the transferable savings ratio of the economy has come down and this will affect the borrowing programme of the government and corporate sector.
  • There is likely to be budget stress if the household saving rate stays at low levels.
  • The way out is to ensure that Gross Financial Assets of household sector go up, if financial liabilities are to rise.
Explaining the role of Household financial savings

  • As a rule, the acceptable level of fiscal deficit of the Centre and the States taken together is taken to be around 6 per cent of GDP.
  • This is based on the assumption that household savings will be around 7 per cent of GDP and the net inflow of resources from abroad will be around 2.5 per cent of GDP.
  • This borrowing space of 9.5 per cent of GDP could be shared by the government to the extent of 6 per cent of GDP, and by the public sector enterprises to the extent of 1 to 1.5 per cent of GDP, leaving the remaining borrowing space of 2 to 2.5 per cent for the private corporate sector.
  • Thus, if the savings rate of the household sector fell to 5 per cent of GDP permanently, we cannot have the 6 per cent rule. The fiscal deficit will have to be lower. This will put the budgets under a stress.

Note: National Disposable Income is the sum of the disposable incomes of all resident institutional units. Gross National Disposable Income measures the income available to the nation for final consumption and gross savings.

economy Understanding the fall in household savings