IMPACTS OF REDUCING HOUSEHOLD SAVINGS – ECONOMY
News: Have household savings reduced?
What's
in the news?
●
The release of the Reserve Bank of India’s
(RBI) Monthly Bulletin in September revealed that households’ net financial
savings had fallen to 5.1% from 11.5% in 2020-21.
Key
takeaways:
●
Financial liabilities of households rose
faster than their assets, with many writers highlighting this trend as an
indication of rising indebtedness and increasing distress.
Household
Savings:
●
Household savings refer to money left
after the household pays taxes and spends on the consumption of goods and
services.
Components:
Household savings has
three components such as
●
Financial
assets - Currency, bank deposits, pension, insurance, equity
and related products.
●
Physical
assets - Investment in fixed assets of construction.
●
Gold
and silver ornaments.
Factors
influencing Household Savings:
1.
Income:
●
High-income households usually allocate
more income to savings than consumption. Because they cannot full fill the most
desirable items, low-income households consume more than they save.
2.
Interest rate:
●
High real interest rates make savings more
attractive. The high nominal interest rate will be useless if inflation is also
high. When it is lower than the inflation rate, the actual returns cannot
offset the decline in the purchasing power of money. Hence, households are
reluctant to save.
3.
Future income expectation:
●
Households increase consumption rather
than saving when they are optimistic about their future income. It commonly occurs
during economic expansion.
4.
Wealth:
●
Increased asset value encourages
households to consume more. As the assets value rise, households find reaching
their wealth accumulation target without saving more.
5.
Tax:
●
Higher personal taxes reduce disposable income,
hence decreasing money allocation for consumption and saving
Status
of Household Savings:
1.
Household financial savings:
●
The Reserve Bank of India (RBI) data
showed that household financial savings were at 5.1% of GDP in FY23, almost a 40-year
low.
2.
Household financial liabilities:
●
The annual financial liabilities of
households increased by 5.8% of GDP in FY23, signalling an unusually high
reliance on loans for consumption and real estate purchases.
●
This rate of increase in financial liabilities
was the 2nd highest since India's Independence.
3.
Household assets:
●
Household assets saw a sharp decline from
Rs 22.8 trillion in FY21, to Rs 13.76 trillion in FY23.
4.
Household debt:
●
Household debt, as measured by the stock
of financial liabilities, remained significantly elevated at 37.6% of GDP in
FY23.
Importance
of Household Savings:
1.
Supply source:
●
They are the supply source of domestic
funds for capital investment.
2.
Profit:
●
Households save their money into various
types of assets, such as deposits, stocks, and bonds. In return, they receive
interest income, dividends, or capital gains.
3.
Increase production:
●
Companies require money to purchase new
equipment and other capital assets, they raise funds by issuing bonds etc.,
4.
Financial market:
●
Supply-demand of the money takes place in
the financial market. As the household invests in the corporate bonds, money
flows to the business sector. Now, with money, companies can invest and
increase their productive capacity.
5.
Investment in capital assets:
●
It is essential for economic growth. It is
a key driver in increasing the productive capacity of the economy.
●
Higher production capacity leads the
economy to produce more goods and services, without causing inflationary pressures.
6.
Accumulate wealth:
●
It allows households to accumulate wealth.
In addition to income, wealth is a crucial determinant for consumption. An
increase in household consumption drive up aggregate demand and stimulates a
growing real GDP.
7.
Buffer:
●
By saving, households sacrifice current
consumption for future consumption. For this reason, savings allows households
to support their well-being.
Reasons
for Fall in Household Savings:
●
The primary reasons behind the subdued
savings and increased borrowing seem to be stagnant or declining incomes for
households and small and medium-sized enterprises (SMEs), occurring in the
midst of high inflation.
Implications
of Fall in Household Savings:
1.
Choke capital investment:
●
The Indian government depends on household
savings to finance its capital investments in physical assets such as
infrastructure, machinery, and equipment.
●
A dip in the savings could choke major
sources of funds for the government's capital investments.
2.
Dependence on foreign capital:
●
Dip in household savings would lead to
more dependence on foreign capital to fund the growth.
3.
Impact on investment cycle:
●
Households are leveraging themselves by
borrowing funds. This directly impacts the investment cycle, given that private
consumption demand accounts for 60% of the country's GDP.
4.
Increase in debts:
●
As borrowing goes up, future income gets
tied up for the repayment of debt, leading to fewer investments.
5.
Rising inequality:
●
The rise in financial liabilities with falling
asset levels could be a sign of rising inequality.