Unpacking India’s Household savings

The conversation around the decline in India's household savings rate has stirred much debate, of late,  especially given the recent data showing a drop from 7.1% of GDP to about 5.2% of GDP. Critics have labeled this decline "alarming," but is it really a cause for concern? Let’s explore this phenomenon from a social anthropologist’s perspective rather than an economist’s.

Household Net Savings: A Primer

Household net savings encompass the total money and investments families possess, such as deposits, stocks, and bonds, minus their liabilities like loans and debts. Note that this excludes any home loans, and purchase of consumer durable goods and services. Despite a steady increase in the nominal income of the average Indian household over the past 50 years, the savings rate has seen a decline. This raises the question: why are people worried?

A Sign of the Times?

The Union Finance Ministry has countered the critics, suggesting that the reduction in household savings is not a distress signal but a sign of growing confidence in future employment and income prospects. Households are now more inclined to take loans for real assets like homes and vehicles rather than accumulating financial assets.

Historically, obtaining a loan was a Herculean task for the average Indian. The late 80s and early 90s marked a turning point with an unprecedented credit expansion. This era saw the common man gaining access to loans, which were previously limited to large businesses and a few small and medium enterprises. The rise of consumer durables, home loans, and credit facilities opened new avenues for the lower and middle classes to achieve home ownership and acquire other luxuries.

Simultaneously, the global rise of China as a manufacturing powerhouse significantly influenced India's consumer market. The influx of affordable goods from China made it easier for Indian households to purchase items that were once considered luxuries.

The Shift in Household Dynamics

India's demographic landscape has also evolved. Joint families have given way to nuclear families, necessitating self-reliance and individual savings for household needs. This shift has redirected savings towards consumer goods and services, leading to a culture of unprecedented consumerism.

The digital revolution has further fueled aspirations, with even rural areas witnessing a surge in the ownership of consumer durables like refrigerators, TVs, and vehicles. The rise in income, albeit slower than the rise in aspirations, has driven this consumerist trend.

Implications of the Savings Rate Decline

Is the decline in savings rates entirely detrimental? The answer is complex and multifaceted.

1. Social Safety Nets: The move towards economic independence has left some of the weakest sections of society—like the sick, elderly, and those without family—vulnerable. The absence of robust social safety nets means society will bear significant costs to support these groups.

2. Culture of Entitlement: Government handouts and freebies have fostered a culture of entitlement, diverting the youth from hard work and long-term economic prosperity. The easy availability of goods and services has amplified aspirations, often outpacing income growth.

3. Economic Growth: On a positive note, the boom in residential construction has had a self-sustaining impact on the economy. Attractive consumer loans have empowered the common man to invest in homes and consumer durables. The confidence in rising household incomes supports this trend, indicating a broader economic optimism.

Conclusion

The drop in household savings rates reflects a broader socio-economic transformation rather than a straightforward economic distress signal. It underscores the evolving aspirations, increased access to credit, and the shifting dynamics of Indian households. While it poses certain challenges, it also heralds new opportunities for economic growth and societal change.