The truth about declining household savings and F&O trading

The main argument against Futures & Options (F&O) trading is that household savings are being diverted from productive capital formation to speculative bets in the stocks and indices option segment. Is this really what is happening in our economy? 

Perhaps not entirely. Thats what the experts believe. 

Dr Manoranjan Sharma, Chief Economist - Infomerics Ratings says the trading in the F&O segment is just one factor. Perhaps a much more important factor is the influx of money in the stock markets via the SIP route by mutual funds. On an average, SIPs mobilise Rs 25,000 crore every month. Hence an extrapolation over 12 months makes it more than Rs 3 lakh crore. Last month’s SIP mobilisation was even higher at Rs 40,000 crore. "There are also factors like higher returns in other asset classes, such as, gold and real estate and the high rate of inflation," reasons Sharma. 

Murthy Nagarajan, Head - Fixed Income, at Tata Asset Management says that the F&O segment, primarily traded by the organised sector benefiting from the formalisation of the economy, accounts for only 2 to 3 percent of the working-age population. "The rest of the population in the informal sector faces increased financial liabilities. Many people lost their jobs or had to take voluntary salary cuts during the Covid period, with some salaries still not restored to their original levels," says  Nagarajan,

Not much support from private corporate and public sector 

According to available data, the country's gross savings rate or gross domestic savings rate stood at 29.7 per cent of gross national disposable income in 2022-23, with households being the dominant savers with a share of 60.9 per cent of total savings. The other two constituents of gross domestic savings are private corporate and public sector units. So structurally, the savings from private sector and public units is not big for India. 

With public sector units currently getting better valuations in the market because of better business prospects, there is a hope of their share improving in the near future. But disinvestments or privatisation also has the effect of neutralising the gains. In case of private sector, they are having the best balance sheet with cash reserves as private capex is not improving in the last few years. If private capex improves, there will be an impact on savings from the private sector corporate.  

Return of physical assets in the household savings

Economic Survey 2024 makes an interesting observation that the sharp rise in household financial savings during the pandemic has been drawn down subsequently, as in many other economies, and shifted towards physical assets. In addition, households are also diversifying their financial savings, allocating more to non-banks and capital markets. The savings in physical assets as a percentage of GDP were around 15-16 per cent in FY12. 

Following that period, this share witnessed a steady decline, falling below 10 per cent of GDP by FY16. However, since then, the proportion of physical assets has been on the rise, reaching a peak of 12.9 per cent of GDP in FY23.Clearly, there is a shift of household savings to physical assets like real estate. 

The falling current and savings account (CASA) of banks also indicate that there is a shift taking place. "For the household sector, savings in physical assets have been the dominant and rising component. The share of net financial savings in total household savings has been declining: it stood at 28.5 per cent in 2022-23, from an average of 39.8 per cent during 2013-2022," states the survey. 

"The increase in investment in physical assets (re: real estate) is the main reason for decline in households savings in financial assets. As a corresponding  effect because of this, housing loans have also gone up resulting in higher financial liabilities. The net effect lower financial assets and higher financial liabilities because of pickup in activity in real estate sector," says Atul Shinghal, Founder and CEO, Scripbox.

Sticky inflation 

Inflation has been on the rise since the Russia-Ukraine war. In response to the inflationary pressures, the Reserve Bank of India has made a series of rate hikes, totaling 250 basis points in repo rate to 6.5 per cent. Despite these measures, current inflation remains above the RBI's comfort level of 4 per cent. 

Inflation is like a tax on every households as it impacts everyone by way of indirect taxes and erodes the disposable income of households and hence savings capacity.  

"Higher inflation, especially food inflation, and unemployment have significantly impacted household savings. The gig economy, which creates mass employment, typically pays around for instance Rs 25,000, is insufficient for households to save. This low income, combined with higher inflation in non-discretionary items like food, results in most of the household income being used to meet daily expenditures and service financial liabilities. As a result, households are unable to save, leading to a decline in overall savings," says Nagarajan.

Rising financial liabilities 

After physical assets, the second largest component of household savings is the net financial assets which is a difference between financial assets and financial liabilities. The gradual rise in financial liabilities is reducing the net financial assets and consequently the household savings. The financial liabilities of households have risen in the post-pandemic period, as reflected in the surge in retail loans especially unsecured loans which includes personal loans. The net financial savings have declined to 5.3 per cent of GDP during 2022-23. 

The elevated interest rates have also increased the EMI burden by almost 250 basis points in the last 2 years. There are some who attribute the rise in financial liabilities to growing personal loans which are going to F&O market. But there is no data to substantiate that point. "The food prices have doubled in the last five years, leading to higher daily expenditures and making it difficult for households to save. The decline in household savings can also be attributed to rising financial liabilities," says Sharma. 

Rise of equity cult 

The Indian capital markets have seen a surge in retail activity. The number of demat accounts rose from 11.45 crore in FY23 to 15.14 crore in FY24. For instance, the registered investor base at NSE has nearly tripled from March 2020 to March 2024 to 9.2 crore as of March 31, 2024. There is a large number of youngsters that have come to equity market both mutual fund and equity. In fact, many of them are also playing in the F&O market. 

According to experts, retail investors are very active in the options trades which require lesser money to take big positions. They are lured by the gains. 

Income not rising commensurate with the nominal GDP

The growth in wages and salaries has failed to keep pace with inflation and nominal GDP growth. Despite increases in nominal GDP, the income levels of workers have not risen proportionately, leading to a disparity between economic growth and personal earnings. This indicates that while the overall economy may be expanding, the fruits of growth are not being equally distributed. Unemployment remains a concern, which the Union Budget 2024 is also trying address with various public-private initiatives.