Indian households saved more and borrowed less in FY20: Why this is a worrying trend

According to data from RBI, in FY20, disposable income expanded by only 0.8 times, and liabilities have only 1.1 times.
Savings
Savings

Households in India saved more and borrowed less in 2019-20, data from the Reserve Bank of India’s annual report showed. While a reduction in financial liabilities of households may look like a welcome sign, it points towards a worrying trend that people have been extra cautious, and averse to spend in a year when India saw a slowdown and GDP growth hitting new lows. This points towards consumer sentiment remaining damp, likely worsened further this year by the COVID-19 pandemic.

According to data from the RBI, in FY20, disposable income expanded by only 0.8 times, and liabilities have thus grown by only 1.1 times. In other words, people aren’t earning more, and therefore saving more (and borrowing less) but because of the current economic slowdown, households want to save whatever they have.

RBI said in the annual report that household financial savings improved to 7.6% of the gross national disposable income (GNDI) in FY20. However, this improvement is not because households had more disposable income, but because there was a sharp moderation (decrease) in how much households were borrowing. Given the economic slowdown, households have been risk-averse and staying away from accumulating debt even before the pandemic set in.

The economic situation has only gotten worse this year with the pandemic having a massive impact on the economy, leading to pay cuts and job losses.

Analysing the data in the annual report, Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India says that household debt may have further slowed down in FY21 with perhaps even a negative growth in disposable income.

“But the bottom line is grim: Consumer demand will be a nonstarter even in FY21 and continue to be pandemic proof through increased precautionary savings,” he added.

Data also shows that households completely removed their exposure to government-related funds and invested more in insurance, pension funds and provident funds. Compared to 2016-17, households are also not parking funds in bank deposits amid the economic uncertainty. This shows that people are a lot more risk averse and would rather save what they have, than borrow or spend more.

The RBI’s survey for the month of July too, indicates that consumer confidence fell to an all-time low, with a majority of respondents reporting pessimism relating to the general economic situation, employment, inflation and income. Urban consumption demand has suffered a bigger blow.

RBI has said that the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum.

Soumya says that the government should use this opportunity to still incentivise households to save more by maybe increasing the 80C or Public Provident Fund (PPF) limit.

“We estimate that an increase in PPF limit by even Rs 50,000 for individual households will lead to additional savings of more than Rs 1 lakh crore compared to the revenue foregone of Rs 10,000 crore,” he adds.  

This will ensure that people have lesser tax liabilities and hence save more not because they’re worried about their future financial position, but because they have enough in hand to put into saving instruments.

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