The claim that Indian net household financial savings have declined to a 50-year low is misleading, said SBI in its research on Thursday. SBI economists contended that household financial savings cannot be the lone indicator of the saving capacity of households, and physical savings also need to be considered to get a holistic picture.
“It is entirely possible that a low-interest rate regime resulted in a paradigm shift of household financial savings to household physical savings in the last two years,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
RBI, in its latest monthly bulletin, had shown that household financial savings, which are an important source of funds for general government and non-financial corporations, had declined to the lowest level of 5.1% of GDP in FY23 compared with 7.2% in the previous year and 7.6% in the post-pandemic period.
Ghosh noted that the Rs 8.2 lakh crore rise in financial liabilities to Rs 15.8 lakh crore from the pre-pandemic period needed to be juxtaposed with an increase in borrowing from commercial banks, where 55% of the credit over the last two years has gone toward housing, education and vehicle loans.
“It may be noted that there is a significant long-run relationship between Housing Loans and household savings in physical assets. Every Rs 1 increase in Housing loans has resulted into Rs 2.12 increase in household’s savings in physical assets for the 14 year period ended FY22,” Ghosh said, pointing to the recovery in real estate sector and increase in property prices as another evidence of shift to physical savings.
The house price index has been rising since FY21. Last month, data released by RBI showed that the house price index recorded an annual growth of 3.5% in Q1:2022-23 as compared with 1.8% in the previous quarter and 2.0% a year ago.
“If this is indeed the proximate story of the revival in household investment, this has strong policy implications for growth and investment revival,” according to the note.
SBI further said that even with financial savings falling, the total savings are expected to rise in FY23 compared to the previous year, as the share of physical savings is set to rise again.
SBI expects physical savings to have nearly a 70% share in total household savings in FY23, up from 48% in FY21 and equal to a level last seen in FY12.
India saved 3.5% of the GDP in FY23 in shares and debentures, insurance, provident and pension funds. Deposits accounted for 4% of GDP. The total gross financial savings in the economy were 10.9% in FY23.
