Government Explains Why Household Savings Are Falling, Claims It's Not Bad For Indian Economy

Ministry of Finance has come out with a statement to counter the claims of declining financial health of Indian households. The household savings data has come under the scanner after some economists raised concerns.

In a recently released note, Nikhil Gupta, chief economist at Motilal Oswal, said that household net financial savings (HHNFS) collapsed to 5.1 per cent of GDP in FY23, which was the lowest in 34 years. Gupta opined, "This combination of weak income growth and falling HHNFS (led by higher borrowings) is highly unsustainable, which is why we believe that consumption growth is unsustainable."

In a webinar held on Wednesday, Sunil Kumar Sinha, Principal Economist at India Ratings and Research, also highlighted the data on rising household leverage and declining savings.

While the economists highlight the concerns over household savings, finance ministry has released an explanation on why the situation is not worrying.

Ministry's Clarification

According to ministry's statement posted on X, the trend in household savings is not a sign of distress but rather a reflection of changing consumer preferences for different financial products.

As per the government data, the stock of of Household Gross Financial Assets went up by 37.6 per cent, and the Stock of Household Gross Financial Liabilities went up by 42.6 per cent between June 2020 and March 2023. Additionally, households added net financial assets of Rs 22.8 lakh crore in FY21, Rs 17.0 lakh crore in FY22 and Rs 13.8 lakh crore in FY23.

The ministry said, "[Households] added less financial assets to their portfolio than in the previous year and the year before, but it is important to note that their overall net financial assets are still growing."

The ministry cited the robust growth in loan books of banks for real estate and vehicles as evidence of good position of household sector. As per the data, there is a steady double digit growth in loans for housing since May 2021. Not only real estate, vehicle loans have also seen a double digit growth since April 2022.

Commenting on these numbers, it said, "The household sector is not in distress, clearly. They are buying vehicles and homes on mortgages."

Explaining the trend in overall household savings (current prices) data, the government noted that they have grown at CAGR of 9.2 per cent between FY14 and FY22 while nominal GDP grew in the same period at 9.65 per cent. Hence, the household savings to nominal GDP ratio has remained nearly constant. In the period mentioned above, it has changed from 20.3 per cent to 19.7 per cent.

The ministry concluded that there is no distress in household sector at all, as is being "circulated in some circles".