Finance Ministry responds to worries about savings drop, points to more investments and growing assets

The finance ministry has responded to concerns regarding the impact of declining household savings on the economy, asserting that there is no cause for distress as people are diversifying their investments in various financial products.

The ministry's statement, published on X, rebuffed criticisms regarding the decade-long drop in household savings and its potential repercussions on the overall economy.

The Reserve Bank's latest monthly bulletin disclosed that net household savings had plummeted to a 47-year low of 5.1% of the gross domestic product (GDP) in FY23, down from the previous year's 7.2%. During the same period, households' annual financial liabilities surged by 5.8% of GDP compared to 3.8% in the previous fiscal year.

In defence of this situation, the finance ministry pointed out that the stock of household gross financial assets had risen by 37.6%, while the stock of household gross financial liabilities had increased by 42.6% between June 2020 and March 2023. The ministry emphasized that although households added fewer financial assets to their portfolios in FY23 compared to the previous years, their overall net financial assets continued to grow.

This apparent decrease in financial asset addition was attributed to households taking loans to purchase tangible assets like homes. The ministry cited RBI data on personal loans, highlighting that a significant portion of these loans is used for real estate and vehicle purchases, both of which are collateralized. This trend indicated that households were not in financial distress but were instead investing in real assets with the help of loans.

The finance ministry also underscored the steady double-digit growth in housing loans since May 2021 and substantial growth in vehicle loans since April 2022 as evidence that households were actively engaging in asset acquisition.

Furthermore, the ministry emphasized that overall household savings, including financial, physical, and jewellery assets, had grown at a Compound Annual Growth Rate (CAGR) of 9.2% between 2013-14 and 2021-22, aligning with the CAGR of nominal GDP during the same period at 9.65%.

The ministry attributed the increase in net financial assets in FY23 to the substantial flow of credit from Non-Banking Financial Corporations (NBFCs) to the household sector, including unincorporated enterprises. While commentators raised concerns about the magnitude of this credit flow, the ministry highlighted the context of these figures as 'flow' numbers rather than representing distress.