Our problem is a drop in gross savings rather than net

livemint.com:

RBI) latest data on household financial savings has generated a lot of interest. India’s gross financial savings rate declined from 15.4% of GDP in 2020-21 to 10.9% in 2022-23 and net financial savings rate has declined from 11.5% to 5.1%. Is there a problem here? The answer is ‘yes’ and ‘no.’ Yes, because it can impact our growth prospects, leaving us more dependent on foreign capital to finance investment.

Ironically, the answer is also ‘no’ because there exist models (like the US) of consumerism fostering growth even with high levels of household debt. Lower gross savings means that people are saving less and consuming more. Higher consumption can be attributed to pent-up demand after the pandemic’s repression.

‘Revenge spending’ was in evidence as people went shopping and on holidays to make up for covid deprivation. There is nothing amiss in such behaviour, but the broader question is of sustainability. If moderation follows peak satiation and acts as a corrective, there would be little to worry about.

But then, there is also the inflation factor. We have had relentlessly high inflation in the last three years, so enlarged spending by consumers need not have translated into a real sales boom for companies, which is what the commentaries of businesses on their recent results suggests. Their topline growth has been lacklustre, with actual declines in turnover in several cases.

Now, if households have maintained or increased consumption even as prices rose, saving less, then we face an economic challenge, as lower savings enable less domestic investment. Another point to note is that there has been a change in the pattern of savings in this time period. The share of interest bearing savings like bank deposits and small