Financial assets of households drop to 5.1% of GDP in FY23; SBI economists say financial savings may have been channelled into physical savings due to the low interest rate environment in recent years.
Indian households saw their financial assets, which include bank savings, cash, and investments, shrink to 5.1% of the country’s gross domestic product in fiscal 2023, down from 7.2% in the previous year, according to RBI data. This marks the lowest level in almost 50 years.
Also, the amount of money households owe relative to their income increased by 5.8% in FY23, compared to 3.8% in the previous fiscal year.
This increase in debt is particularly alarming, with data showing that it’s the second-highest rate of increase since India gained independence. In terms of actual numbers, households’ net assets have seen a sharp decline, falling from Rs 22.8 lakh crore in the fiscal year 2021 (the pandemic year) to Rs 16.96 lakh crore in the following fiscal year and further dropping to Rs 13.76 lakh crore in 2023.
Consequently, household debt, when measured against the overall economy, remains high, accounting for 37.6% of GDP in 2023, compared to 36.9% in the previous year.
What SBI says
However, the State Bank of India (SBI) has suggested that low interest rates may have prompted a shift from financial savings to physical savings, such as investments in real estate. SBI points to an increase in housing loans and property prices as evidence of this shift, highlighting its policy implications for growth and investment revival.
According to Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India, a shift from financial savings to physical savings might have occurred in recent years due to a low-interest rate environment. Ghosh pointed out that the increase in financial liabilities, reaching Rs 15.8 lakh crore from the pre-pandemic period, should be considered alongside increased borrowing from commercial banks. Notably, 55% of this credit has been channelled towards housing, education, and vehicle loans.
Ghosh highlighted a significant long-term relationship between housing loans and physical asset savings, where every Rs 1 increase in housing loans resulted in a Rs 2.12 increase in household savings in physical assets over a 14-year period ending in FY22. This suggests a shift towards physical savings, supported by the recovery in the real estate sector and rising property prices. The house price index has been on the rise since FY21, recording an annual growth of 3.5% in Q1:2022-23 compared to 1.8% in the previous quarter and 2.0% a year ago.
