The worrying trend in household savings

With the share of physical assets rising, the responsibility to free up resources to fund corporate capex shifts to the government

- JANAK RAJ

Household sector savings play a critical role in financing corporate investment, as this is the only sector that is a net saver. Financial savings of households have assumed a special significance as the private corporate sector's capital expenditure (capex), which had some false starts in the recent past, could now be expected to pick up, with the uncertainty about the outcome of the general elections behind us, suggesting policy continuity. Other conditions continue to be conducive, such as healthy twin balance sheets (of companies and banks) and buoyant equity market. Additionally, the domestic interest rate cycle seems to have peaked and is likely to turn early next year, if not before.

Household savings are held both in financial assets (such as bank deposits) and physical assets (mainly dwellings). Financial savings of households, after peaking at 18 per cent of gross domestic product (GDP) in 2006-07, declined to 10.7 per cent in 2011-12, and have since moved narrowly between 10 and 12 per cent (except during the pandemic year).

Households also have financial liabilities such as borrowings/loans from banks, nonbanking finance companies (NBFCs) and housing finance companies (HFCs). For financing investment by the corporate sector, what matters is net financial savings by households (savings in financial assets less financial liabilities), which, however, declined from 7.3 per cent of GDP in 2021-22 to 5.2 in 2022-23. This is the lowest rate in the last five decades, pulled down by a surge in financial liabilities from 3.8 per cent of GDP to 5.7 per cent. An increase in financial liabilities of households not only reduces net financial savings directly, but also indirectly as a part of their future savings is used for debt servicing (payment of interest).