DK Joshi, Chief Economist, CRISIL, says what is currently playing out is that when the households put money in financial assets, they are moving a little away from the bank deposits towards higher paying assets like mutual funds or stocks or for that matter they could be acquiring more gold right now, and so there is that change of preference taking place towards financial assets that offer you higher returns that could even be small savings.
You have come out with a note where you have made some observations regarding the citizens and the country’s working class and their savings versus borrowing behaviour. What is a bit surprising and I would say a bit worrying also is that the borrowing growth rate is way higher than savings growth rate. Is it a worrying trend?
DK Joshi: What happened since the pandemic struck is that during the pandemic we had no option to consume, so we were saving. After that, savings slowed down a bit and consumption picked up. That was the broad trend. But coming to the savings part, there are two things happening.
One, the financial households account for about 60% of the total savings. They are very closely tracked. Households save either in physical assets or in financial assets or in gold and silver. So, what we have found in the last few years is that the financial savings of the households have come down.
Now, the financial savings are calculated as total savings or the gross savings of the financial savings of the household minus what they borrow. That is the net financial savings, that part has come down. But the physical savings, which means that households are buying houses or other physical assets, that part has gone up. So, there has been a switch in savings from financial assets towards physical assets.
Now, why is too much borrowing not a worry? The reason is pretty simple. If you look at what households borrow for, they are largely borrowing for acquisition of physical assets, which essentially gives one some positive vibes in the sense that it is not being splurged on consumption alone, it is being used for acquiring assets. Then the question arises why is this happening? Why are households borrowing more? There are a couple of reasons for that. The number one reason is that the banks have a higher proclivity towards retail credit and the less opportunity to lend to the corporate and the retail credit also has less delinquencies, etc, so there has been a push from the banks. Second, we have also seen that the households now are borrowing more, particularly the younger ones. They have a very high proclivity to borrow and they are buying houses and cars at a much younger age. Finally, the technology is allowing a lot of non-bank finance companies, the fintechs, to reach out to people. So, it has eased the provision of credit in that sense.
So there has been a broad push towards making credit available and there is a high proclivity to take that credit and that is why we have seen this unique thing play out where financial savings of the households have come down, the physical savings have gone up, and savings in gold and silver have also gone up but not that much.
I want to understand a slightly broader point from you. The GDP growth of the country is very strong, the affluence is also rising, with wider participation from women in workforce and new sectors creating a lot of jobs. Where is all this extra savings going on a longer term? In 5-10 years, with the size of the economy becoming much larger, do you see the savings pool of our country rising exponentially? Also, where do you see it go? Would it go more towards financial assets or hard assets?
DK Joshi: I think there has been a tilt towards physical assets which is going to correct going ahead. We have looked at the data for the year that just went by. So, the trends that I was referring to are for 2022-2023 because the data is not published beyond that. But we have got some information which tells us that savings are going to rise in 2023-2024 both financially as well as physical assets are still being acquired, housing is an attractive proposition.
What is going to happen and what is currently playing out is that when the households put money in financial assets, they are moving a little away from the bank deposits towards higher paying assets like mutual funds or stocks or for that matter they could be acquiring more gold right now, and so there is that change of preference taking place towards financial assets that offer you higher returns that could even be small savings.
Second, the housing market has seen a lift after a long time and so housing has become an attractive proposition and households are also acquiring those assets. All these trends are continuing. Now, as far as the borrowings of the households are concerned, the central bank has tried to restrict credit in some of the riskier areas where the NBFC, etc, are raising risk weights. So there is going to be some moderation in the borrowings of the household and the overall savings of the economy are going to rise both in financial assets as well as to some extent in physical assets, slightly slower than what they were earlier.
Now, we can look at the savings pool in a number of ways. If I look at 2023-2024, for that matter, we have a fundamental identity in economics, which tells us that savings minus investment is equal to current account. Now, the current account deficit is expected at around 1% of GDP. Investments are around 33, a little over 33% of GDP as per the most recent data. So, the savings which you get as a residual are going to be higher than what they were in the previous year. Whether you look at the micro side of it or the macro side of it, savings seem to be going up and in 2023-2024, the domestic savings would have financed more investments than they did in 2022-2023 and something similar could play out in 2024-2025 as well.
