Weak household finances could weaken India's growth

India continues to clock the fastest GDP growth among major economies, drawing headlines that suggest resilience and dynamism.

- AJIT RANADE

Yet, the financial foundations of Indian households, which are the backbone of both consumption and investment, are showing signs of strain. Declining financial savings, rising dependence on gold loans as well as overall indebtedness and a collapse of net foreign direct investment (FDI) do not portend a strong foundation for growth.

One of India's structural determinants of sustained, high and inclusive growth has been the resilience of household savings. This provides the crucial financial capital to fund growth and acts as a stable domestic base to fund fiscal deficits. Also, net foreign investment inflows act as supplementary savings for investment capital. India has been a unique Asian country to attract healthy net foreign capital flows despite a consistent external trade deficit. If our savings pool begins to dry up, both fiscal sustainability and growth will come under pressure.

India's macroeconomic savings rate has fallen from a high of 36-38% of GDP to about 30% in the last two decades. Within this, the net financial savings of households has seen the steepest drop, from a pandemic peak of 11% to just about 5% in 2023-24, a multi-decadal low. This is not a statistical curiosity. High and sustained growth, the kind that generates jobs for the youth, requires a correspondingly high savings rate. East Asian economies that grew at double digits consistently had a savings rate of 35-40% of GDP. Hence, a low household savings rate will pose a structural constraint to achieving 8%-plus GDP growth in the medium-term.