Savings to consumption via debt—warnings from India’s households

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Also read | Household savings plummet to 5-year low in FY23: Where did young India’s savings go? Savings, debt, and consumption are key considerations for households. Given that households are the biggest savers in India—who help fund the government’s fiscal deficit, along with helping private firms to invest—and private consumption is the largest component of the GDP, the three variables mentioned above have much to reveal about the state of the economy.

Multiple reasons have been put forward to explain the slump in the net financial assets of households in 2022-23 to less than half the 11.5% of GDP in 2020-21. Chief among them is the explanation that households took advantage of the low interest rates during the pandemic to borrow heavily to buy physical assets such as homes and vehicles.

It also has been reasoned that the fall in net financial assets in 2022-23 should not be compared to the level that prevailed during the peak pandemic year of 2020-21, when spending opportunities were greatly reduced. Indeed, the fall in households’ net financial savings from the high of 11.7% of GDP (up from 11.5% after considering revised GDP numbers) during the pandemic has coincided with a rise in savings in the form of physical assets.

As per data from the statistics ministry, savings in physical assets rose to 12.9% of GDP in 2022-23 from 10.8% in 2020-21. But have households borrowed heavily in the past few years only to buy homes and cars? Probably not! The share of outstanding housing and vehicle loans in banks’ personal loans segment has remained either constant or reduced over the past five years.