Household savings plunge to 50-year low in FY23 as incomes fall, debt rises

Net financial savings of households fell to a nearly five-decade low of 5.1 per cent of GDP in FY23, down from 7.2 per cent in FY22, the Reserve Bank of India (RBI) said on Monday. The numbers suggest a severe income crunch and likely transience of the post-pandemic rise in consumption. 

Worryingly, annual financial liabilities of households rose sharply by 5.8 per cent of GDP compared with 3.8 per cent in FY22, indicating larger-than-usual resort to loans for consumption purposes and purchase of real estate. 

The rate of increase in financial liabilities during the last financial year was the second highest since Independence; only in FY07, the flow was sharper (6.7 per cent).

In absolute terms, net household assets dropped sharply from Rs 22.8 lakh crore in FY21, the pandemic year which saw a huge drop in spending, to Rs 16.96 lakh crore in FY22 and further to Rs 13.76 lakh crore in FY23. Household debt in terms of the stock of financial liabilities consequently remained sharply elevated at 37.6 per cent of GDP in FY23 as against 36.9 per cent in FY22. 

Falling or stagnant household and SME incomes at a time of raging inflation are probably the main reason for the subdued savings and higher borrowings. 

The latest RBI data on household assets and liabilities also raise worries about the immediate growth potential of the economy. The support to growth from private consumption may turn out to be weaker than anticipated, even as a private capex cycle appears to be delayed. 

Nikhil Gupta, an economist of Motilal Oswal, said that the combination of weak income growth and falling financial savings, led by borrowings, was unsustainable. “We believe that consumption growth is unsustainable. Whether it will be substituted by investments is not our base case, though the jury is still out,” Mr Gupta said.

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