RBI has recently published data on household savings; and has reported that net household savings as a percent of GDP are at their lowest level in nearly 50 years. — Dr. Ashwani Mahajan

Traditionally, households save their earnings in two forms- financial assets and physical assets. The savings of households, who are traditionally considered to be surplus spenders, constitute a large part of gross domestic savings that finance investments by firms and also the government spending (both consumption and capital spending). In 1971, the households had contributed Rs. 4634 crore of savings out of Rs. 6649 crore of gross domestic savings (that is, nearly 70 percent). In the same year, out of Rs 4634 crore of household savings, households saved Rs 1371 crores (29.5 percent) in the form of financial assets and Rs 3263 crore (70.41 percent) in physical assets. However, in 2022-23, households contributed Rs 652 0404 crore of savings out of Rs 815 0008 crore gross domestic savings, which was 80 percent. Out of Rs 6520404 crore of household savings, 45 percent and 53 percent were saved in the form of financial assets and physical assets respectively.

We find that between 1971 and 2022, there had been a multifold increase in household savings. In proportionate terms also, it increased from 70 percent in 1971 to 80 percent of gross domestic savings in 2022. There had been an increase of around 10 percentage points.

Besides, the increase in households’ savings, the households have started to channelize their savings away from traditional form of assets, into various other forms, and have started investing a large chunk of their savings in varied types of financial assets, including bank deposits, shares and debentures, private and government bonds etc and their several types.

Borrowing for Building Assets

RBI has recently published data on household savings; and has reported that net household savings as a percent of GDP are at their lowest level in nearly 50 years. Some analysts have concluded that while gross savings remained steady, mounting loans have caused decline in net savings, leaving families with lesser disposables incomes. As per the data, financial liabilities of households increased from Rs 737350 in 2020-21 to Rs 1557190 by 2022-23 (an increase by Rs 819840). However, this startling hike in financial liabilities is clearly explained by increase in physical assets of the household, which have increased unprecedentedly from Rs 2135450 to Rs 3483370 between 2020-21 and 2022-23 (an increase by Rs 1347920). This means, that households have built assets worth Rs 13.5 lakh more, as compared to last year and their borrowings have increased by only Rs 8.2 lakh crores. 

Therefore, increase in financial liabilities cannot be considered to be an adverse phenomenon, if they have helped households to build more physical assets, say houses, cars and other consumer durables. Phenomenal creation of assets by households is definitely a good news, and certainly not a bad news, for the economy; and therefore assuming that households have gone into debt; and decline in net financial saving is in any way an alarm bell, for rise in debt burden on households., is not a wise conclusion.

Not only this there is a systemic under-estimation of gross financial savings of the household, explained in subsequent sections.

Why CSO’s Data on Households’ Financial Saving is Not Correct?

The national accounts statistics fails to correctly capture the financial investments done by the Indian households. The Securities Exchange Board of India (SEBI) has published a working paper on the September 4, 2024 titled as ‘Household Savings through Indian Securities Markets’, where it had questioned the RBI methodology, used for computing the households’ financial savings.

As per the SEBI report, the existing methodology of the RBI accounts for only 35 percent of the investment in primary equity market, 40 percent in primary debt market net inflow in mutual fund while computing the flow of households’ savings. Whereas, to compute the stock of households’ savings, the RBI counts the Assets Under Management (AMU) data for the High Networth Individuals (HNIs). However, the RBI doesn’t account the flow and stock of households’ funds into preferential issuance, sales executed through stock exchange platform, private placement of debt, mutual debt securities, securitized debt instruments and special rights shares (SRs), real estate investment trusts (REITs), infrastructure investment trusts (InfITs), resources mobilized in secondary market, holding of equity & debt, etc.

Moreover, even in the SEBI report, there is no mention about the Indian investment in the new financial assets, which is cryptocurrencies. It’s notable that around 20 per cent of the Indians have invested in cryptocurrencies. Though, cryptocurrencies even pose threat to the effectiveness of monetary policy, however flow of funds to cryptocurrencies cannot be ignored while estimating household savings and therefore gross domestic savings.

If we re-estimate the Indian households’ savings based on the data provided by the RBI and methodologies suggested by the SEBI, we get an altogether different figures for household savings. Here we compare two scenarios, one RBI's estimates of household savings and two, household savings after taking into consideration financial saving using SEBI's methodology. When we add-up the flows of households’ savings under the categories of mutual funds, equity, corporate debt, REITs, InfITs as estimated by using the RBI’s methodologies, we get a figure of Rs 106850 crore in 2020-21, Rs 213850 crore in 2021-22, and Rs 2057950 crore in 2022-23. However, for the same categories, (individually figures were estimated by the SEBI), we get the figures of Rs 68210 crore in 2020-21, Rs 352031 crore in 2021-22, and Rs 289475 crore in 2022-23.

The total discrepancies (difference between the SEBI estimate and the RBI estimate) of the households’ savings for the consequent years are (-)38640 crore, 138181 crore in 2021-22, and 83680 crore in 2022-23 respectively.

The gross financial savings as reported by the RBI for the years 2020-21, 2021-22, and 2022-23 were 3067021 crore, 2611974 crore in 2021-22, and 2973637 crore in 2022-23 respectively. Now, after taking account, the above discrepancies, the gross financial savings of the Indian households’ were Rs 3028381 crore in 2020-21, Rs 2750155 crore in 2021-22, and Rs 3057317 crore in 2022-23. Hence, it gives a more appropriate estimation of the gross financial savings that capture the changes in pattern of savings.

Corrections Needed?

Thus, from the above exercise, we make three points. First, The rise of financial liabilities, is also due to greater borrowing for building physical assets. It’s notable that with increased incomes, middle class has acquired higher capacity to borrow for the purpose of building physical assets, namely, houses, cars, and other consumer durables. Taking account of ‘gross’ financial is the right way to estimate the savings generated by the households- not ‘net’, after subtracting financial liabilities.

Second, there is an underestimation of financial savings by the RBI, which has failed to take account of changing savings pattern of households, namely investment in shares and debt instruments is not fully captured in RBI estimates. to overcome the problem of underestimation of financial saving, RBI needs to adopt methodology as suggested by SEBI. We need to understand that Indian households have not only built more physical assets, they have also added to their financial assets from stock market; and now they possess more diverse portfolio of financial markets.

Third, the RBI also takes into account, the new types of instruments, of which legality even is questioned, apart from their opaque nature. Large number of Indian households are putting their savings in these ‘assets’, i.e, cryptocurrencies. RBI needs to deploy its resources to estimate, net purchase of cryptocurrencies by households.