If we re-estimate the Indian households’ savings based on the data provided by the RBI and methodologies suggested by the SEBI, we get altogether different figures for household savings. Here we compare two scenarios, one RBl’s estimates of household savings and two, household savings after taking into consideration financial savings using SEBl’s methodology.
Traditionally, households save their earnings in two forms: Financial assets and physical assets. The savings of households, which 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. 4,634 crore of savings out of Rs. 6,649 crore of gross domestic savings (that is, nearly 70%). In the same year, out of Rs 4,634 crore of household savings, households saved Rs 1371 crores (29.5%) in the form of financial assets and Rs 3,263 crore (70.41%) in physical assets. However, in 2022-23, households contributed Rs 652 0404 crore of savings out of Rs 81,50,008 crore gross domestic savings, which was 80%. Out of Rs 65,20,404 crore of household savings, 45% and 53% 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% in 1971 to 80% of gross domestic savings in 2022. There had been an increase of around 10% 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 disposable incomes.
As per the data, financial liabilities of households increased from Rs 7,37,350 in 2020-21 to Rs 15,57,190 by 2022-23 (an increase by Rs 81,98,40). However, this startling hike in financial liabilities is clearly explained by the increase in physical assets of the household, which have increased unprecedentedly from Rs 21,35,450 to Rs 34,83,370 between 2020-21 and 2022-23 (an increase by Rs 13,47,920).
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 underestimation of gross financial savings of the household, explained in subsequent sections.
Why is CSO’s Data on Households’ Financial Saving 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 September 4, 2024 titled as ‘Household Savings through Indian Securities Markets, where it had questioned the RBI methodology, used for computing the not a wise conclusion.
Not only this there is a systemic underestimation of gross financial savings of the household, explained in subsequent sections.
Why is CSO’s Data on Households’ Financial Saving 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 September 4, 2024 titled as ‘Household Savings through Indian Securities Markets, where it had questioned the RBI methodology, used for computing the 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 are cryptocurrencies. It’s notable that around 20% of the Indians have invested in cryptocurrencies. Though cryptocurrencies even pose a threat to the effectiveness of monetary policy, 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 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 savings 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 1,06,850 crore in 2020-21, Rs 2,13,850 crore in 2021-22, and Rs 20,57,950 crore in 2022-23. However, for the same categories, (individual figures were estimated by the SEBI), we get the figures of Rs 68,210 crore in 2020-21, Rs 35,2031 crore in 2021-22, and Rs 2,89,475 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 Rs. 30,67,021 crore, Rs. 26,11,974 crore in 2021-22, and Rs. 29,73,637 crore in 2022-23 respectively. Now, after taking account, the above discrepancies, the gross financial savings of the Indian households’ were Rs 30,28,381 crore in 2020-21, Rs 27,50,155 crore in 2021-22, and Rs 30,57,317 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, the 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 patterns of households, namely investment in shares and debt instruments is not fully captured in RBI estimates. To overcome
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, the 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 patterns of households, namely investment in shares and debt instruments is not fully captured in RBI estimates. To overcome the problem of underestimation of financial savings, RBI needs to adopt methodology as suggested by SEB1. We need to understand that Indian households have not only built more physical assets, they have also added to their financial assets from the stock market; and now they possess a 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. A 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.
