How is India's falling household savings rate worrisome for its development?

There has been a sharp reduction in the household net financial savings rate in 2022-23, leading to an overall decline in the financial savings rate.

- Kishore Kumar Biswas

The basic issue

The savings rate refers to the amount of savings as a percentage of GDP, while household savings measure the change in financial assets during a period. Financial savings include bank deposits, savings in mutual funds, pension funds, and payments for consumer durables. The gross financial savings to GDP ratio declined by 3 percentage points, from 7.3% to 5.3% in 2022-23. This sudden fall in household savings has become a cause for concern.

Some theoretical issues

Neo-classical economic theorists, such as Alfred Marshall and Arthur Pigou, argue that a mature capitalist economy will always maintain full employment, meaning no economic inputs remain unutilized. If some inputs are underutilized, economic activity will adjust until price fluctuations balance supply and demand, achieving general equilibrium. In this state, the supply of savings will equal the demand for investment. Excess savings will move to economies where investment demand exceeds savings supply, and vice versa.