Drop in aggregate savings and household savings matter of concern, says new report  

A new research paper has raised concerns over the drop in aggregate savings as well as total household savings in the country pointing out that these are crucial for financial stability and can constrain the availability of resource for investment.

“This decline in savings rate raises concerns as reduction in savings can constrain the availability of resource for investment. This situation creates a conflict between the need to boost consumption to drive economic growth and the necessity to maintain adequate savings to support investment,” said the paper titled “Household Savings in the Indian Economy: What has caused the changes in the savings ratio over time?”

Authored by C Rangarajan, Chairman, Madras School of Economics and Priya Benny, Research Assistant, noted that the conflict between investment-led and consumption-led growth is particularly relevant in the context of declining savings. While investment-led growth relies on high savings rates to fund capital investment, which is crucial for long-term economic development, it said, adding that on the other hand, consumption-led growth focuses on boosting demand through increased consumption, which can provide short-term economic stimulus.

The paper noted that post-independence in FY 1951, India’s Gross Domestic Savings (GDS) as a percentage of Gross Domestic Product (GDP) was 9.4%, and it went up to the peak of 37.8% in FY 2008.

Over the past few years, the aggregate savings rate has declined by 1.5 percentage points, from 31.7% of GDP in FY 2019 to 30.2% in FY 2023. During the same period, the household savings rate experienced a sharper drop, falling from 20.3% in FY 2019 to 18.4% in FY 2023, which is a decline of 1.9 percentage points. The public sector savings rate also declined in the same period by 0.3 percentage points, from 0.9% in FY  2019 to 0.6% in FY 2023. However, this decline was partially offset by an increase in the corporate savings rate by 0.7 percentage points, from 10.5% in FY 2019 to 11.2% in FY 2023.

“Although the corporate savings rate did increase during this period, it was insufficient to compensate for the reduction in the household savings rate and public sector savings rate. Savings, in general, are crucial for financial stability,” it said, adding that they provide a buffer against economic shocks and uncertainties, enabling households and businesses to weather adverse conditions without resorting to excessive borrowing.

The decline in savings rate raises concerns, as reduction in savings can constrain the availability of capital for investment, it cautioned.

Within household savings, net financial savings fell from 7.3% in FY 2022 to 5% in FY 2023, while gross financial savings remained at 11.1% in FY 2022 and 10.9% in FY 2023. It is the increase in the financial liabilities of households from 3.8% in FY 2022 to 5.9% in FY 2023 that resulted in a fall in net financial savings.

As per the latest data available for FY 2024, net financial savings stood at 5.3%, while gross financial savings increased to 11.7%, and the liabilities have also increased to 6.4%.  “Net financial savings has implications for the borrowing programme particularly of public sector,” it noted, adding that corporate sector may not be affected that much because of increase in corporate savings.

The current decline in savings rate in the Indian economy is a matter of concern. The reduction in household savings rate has been only partially offset by an increase in private corporate savings rate. The future borrowing program of public sector will have to be modified in this context of changing size and pattern of savings. “This has implication for the level of fiscal deficit,” it further said.