The changing money habits of Indians

The changing money habits of Indians

Net financial savings of Indian households have fallen to 5.4% in FY23, a five-decade low. Meanwhile, retail’s role in Indian equities has expanded, and savings are also being channeled into real estate assets.

Post-pandemic fall in household net financial savings :

This is explained by income stagnation, a sharp rise in short-term credit and an apparent attempt among households to unwind prudential savings accumulated during the pandemic. A shift from financial to real estate assets also played a role. While gross financial savings of households stood at 11% of GDP in FY23, the financial liabilities stood at 5.8% of GDP. Typically, financial savings include deposits, investments in mutual funds, shares, government securities, insurance, as well as small savings.

 

Has the trend reversed already?

There are divergent views on whether the trend is already reversing. Household savings are expected to accelerate with rising income, retaining their position of being top net lenders to the rest of the economy in coming decades. Rising incomes, households will likely build back their financial assets and might have already begun this. Many economists, however, believe the fall in household net financial savings continued through FY24, if not further, citing the rising consumption levels.

Trends in household physical savings

The physical savings of households have been rising in the post-pandemic years- from barely 11% of GDP in FY21 to over 12.9% of the GDP in FY23 and is predicted to rise further. Such savings were erratic, in FY16 they were at 9.6% of GDP and in FY12 they were at 16%. Savings in physical assets, that is real estate, galloped at 17.1% year-on-year in FY23. Savings in physical assets accounted for 70.2% of total household savings in FY23.

 

Uptick in household financial assets?

Household financial net wealth (HHFNW), as per a recent Motilal Oswal report, reached an all-time high of 115.9% of GDP in Q1FY25. While household gross financial assets (HHGFA) reached a new peak of 157.9% of GDP during the quarter, household financial liabilities touched 42% of GDP The sharp uptick in HHFNW, is due to more retail investors in equity markets. The share of investments in equity and investment funds has risen to 28% of HHGFA in Q1FY25 – the highest ever and more than double the level a decade ago. In contrast, the share of deposits (including small savings) was 38% of HHGFA in Q1FY25, declining from about 50% between FY10 and FY14. The surge in equity markets has expanded equity market capitalization to 146% of GDP in Q1FY25 from 105% a year ago, and in turn, pushed up HHGFA.

Fall in savings and CAD

The fall in net financial savings done not indicate that India has to rely more on foreign savings for its investment needs. In fact, our investment needs are significantly funded through corporate savings as well as the government budget. Some economists believe that household savings will continue to be on a gradual decline along with a rise in household debt. This trend, is line with developed economies. The current account deficit (CAD) narrowed to 0.7% of GDP in FY24, indicating that the gap between overall investments and savings has actually narrowed. The dependence on foreign capital to finance investments has reduced.

 

Implications for the economy

Investments in equities help companies to raise money for long-term capital formation. While households moving towards creating more financial wealth could lead to faster economic growth in the long run, the shift in household behavior presents a mixed bag for the economy. As households invest more in equities, mutual funds, and real estate (as opposed to parking funds in small savings/ term deposits), asset prices get a boost. This creates a “wealth effect” encouraging higher growth. But the key is how household debt is managed, as retail loan delinquencies could have an adverse effect on the banking system.

Savings / Investment dichotomy

Many economists believe the definitions of savings and investment need to change. As the growth in cost-effective fintech has led to a diminished role for banks’ financial savings and financial wealth. This also reflects a strong structural change, necessitating a re-look at “savings” and “investments” as well as financial intermediation. When net savings are computed to be low, it must be noted that when households borrow, it is largely used for creating assets like homes which leads to capital formation.

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com

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