To fuel GDP growth, government must incentivise financial savings

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covid pandemic, high inflation, and a negative real rate of interest (thanks to the Reserve Bank of India’s loose monetary policy in response to covid). These factors made it both necessary and easier for households to borrow.

Stressed budgets meant households found it necessary to borrow to maintain their standard of living at a time when many had lost their jobs due to the pandemic. Meanwhile, negative rates of interest and greater willingness on the part of banks to lend to retail borrowers (thanks in part to growing dis-enchantment with corporate borrowers and lower credit demand from the latter) meant easier access to bank loans for households.

Lower levels of delinquency in retail loans also helped to make these more attractive to banks, as is reflected in the sharp increase in retail bank lending. Retail loans grew at a compound annual growth rate of 24.8% from March 2021 to March 2023, nearly double the growth in gross advances during the same period, according to RBI’s latest Financial Stability Report.

While an increase in households’ financial liabilities is the inevitable consequence of greater financial inclusion and higher financialisation as the economy moves from the low-income to middle-income category, what is distressing is that the share of gross financial assets in GDP has not shown a corresponding increase. This despite one of the great successes in recent years, the dramatic increase in stock market investment by households through systematic investment plans.

Clearly, increased flow of savings to stock markets has come at the cost of other forms of financial assets, primarily bank deposits. Capital-market investments rose from ₹1.24 trillion in FY21 to ₹2.14 trillion in FY23, even as bank deposits