Indian household savings hit 34-year low in FY23

Indian households experienced a significant drop in their net savings during the fiscal year 2022-23, with data from the Reserve Bank of India revealing a 19% decrease compared to the previous fiscal year.

This decline brought the total savings down to just 5.1% of the nation's GDP, reaching its lowest point in 34 years, as stated by Nikhil Gupta, the chief economist at Motilal Oswal Financial Services.

In contrast, during the fiscal year 2021-22, household net financial savings represented 7.2% of GDP. The onset of the pandemic in 2020-21 had limited spending options, leading to a significant increase in net financial savings to 11.5% of GDP from 8.1% in 2019-20.

The RBI data attributes the decline in household financial savings in the past year to a substantial increase in liabilities, which rose by 76%, while financial assets only saw a 14% growth compared to the previous fiscal year. Among the assets, bank deposits increased by 32%, while small savings (excluding Public Provident Fund) and investments decreased when compared to 2021-22.

On the liabilities front, borrowings from commercial banks surged by 54% in 2022-23 compared to the previous fiscal year. In terms of GDP, household financial assets decreased from 11.1% in 2021-22 to 10.9% in 2022-23, while liabilities increased from 3.8% to 5.8% – marking the second-highest level in independent India's history.

Nikhil Gupta from Motilal Oswal Financial Services highlighted that the decrease in household financial savings played a role in bolstering consumption and real estate investments in 2022-23 due to weak income growth.

GDP data reveals that private final consumption expenditure rose by 7.5% in 2022-23, down from the 11.2% growth observed in 2021-22. Meanwhile, the gross value added of the financial, real estate, and professional services industry increased by 7.1% in 2022-23, a significant improvement from 4.7% in 2021-22 and 2.1% in 2020-21, according to statistics from the Ministry.

Gupta warned that the combination of weak income growth and declining household net financial savings, driven by increased borrowings, is unsustainable and may affect consumption growth. He added that whether this will be offset by increased investments remains uncertain.

Interestingly, an RBI staff study published on September 18 discovered a long-term relationship between real private consumption, income, and wealth.