India's household savings update - June 2021

Indian household savings data is now reflecting the full impact of the pandemics multiple waves.

 India's household savings update - June 2021

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• RBI data on household savings: In June, when the Reserve Bank of India (RBI) released data on household savings for the third quarter of 2020-’21 (October-December 2020), it captured the aftermath of first Covid-19 wave in India and the economic disruptions by lockdowns. The numbers are disappointing as they show a sharp dip in the net financial assets (NFA) of households. ["Households" refers to unregistered businesses also, whose assets and liabilities are not counted as part of private corporate data.]
• Interpretation of dropping NFA: It points to the economic hit the Indian middle class has taken and also shows emerging problems for India’s post-Covid economic recovery. Why? It might lead to reduced spending as well as a lower funds available for investment.

1. The RBI tracks household assets and liabilities; Assets include items such as bank deposits, provident funds and mutual funds investments, among others. Liabilities, on the other hand, are loans that a household has taken.
2. Net assets are total assets minus liabilities. In FY21, from Q1 to Q3, the NFA dropped from 21% of India’s GDP to just 8.2%, after two consecutive quarters of decline.
3. Total assets dropped from 19% of GDP to 12.7%.

• From banks to MFs: Bank deposits first rose from 2.9% of GDP in Q1 of FY21 to 7.7%, and then dropped to 3%. The spike was due to the lockdown which cut discretionary spending. A large number of fixed deposits were broken from January to March, showing financial distress among the Indian middle class.

1. But investments in mutual funds rose sharply, going up from 0.3% of the GDP in Q2 of FY21 to 1.2% in Q3.
2. The MF fund figure for Q3 is higher than the averages for 2019-’20 (0.2%) and 2018-’19 (0.3%), which means more flows went into the stock market as it rose sharply, and as interest rates in traditional saving instruments (fixed deposits) declined steadily. This is also known as "financial repression".

• Loans fell in Q3: Total loans dropped from 5.4% of GDP in Q2 of FY21 to 4.6% in Q3. Since loans are drivers of economic activity, this is bad news. The flow of loans in Q1 was negative, which meant a cessation of economic activity during the national lockdown.
• Why savings matter: Savings are important for individual households but on a bigger scale, they help the economy by providing capital for investment. India has traditionally had a high rate of saving, much more than in developed countries (United States) and comparable to developing economies (Brazil and South Africa). The lion’s share of India’s savings are due to households, with the corporate sector and the public sector being the other minor contributors). In 2017, out of a total savings of 30% of the GDP, 17.2% was due to households. Now, household savings have taken a hit. The “twin shocks of demonetisation and GST” have hit the MSMEs hard, leading to this scenario. As stated earlier, "hoseholds" in India includes unregistered businesses also.

 

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