The finance ministry on Thursday rejected the criticism over the impact of declining household savings on the economy, saying people are investing in different financial products and “there is no distress”.
The response from the ministry comes after Reserve Bank of India data showed net financial savings of households, as a percentage of GDP, fell to a near-five-decade low in 2022-23.
“Lately, critical voices have been raised w.r.t. to household savings and its overall effect on the economy.
“However, data indicates that changing consumer preference for different financial products is the real reason for the household savings and there is no distress as is being circulated in some circles,” the ministry said on X, formerly Twitter.
Net household savings declined to a 47-year low of 5.1 per cent of gross domestic product in FY23 compared with 7.2 per cent recorded in the previous year, as per the data released by the Reserve Bank in its latest monthly bulletin. At the same time, annual financial liabilities of households rose sharply by 5.8 per cent of GDP compared with 3.8 per cent in 2021-22.
“Weak income growth, coupled with robust consumption and investment growth (i.e., physical savings) can occur only if household net financial savings (HHNFS) declines significantly. This is exactly what has transpired. Notably though, such economic growth is highly unsustainable. In the current financial year, as nominal GDP growth is likely to be only 8 per cent, household income growth is also likely to be similar.
“If so, either consumption growth will be very weak or household investments will weaken substantially, since a further fall in HHNFS looks very difficult,” Nikhil Gupta, chief economist at Motilal Oswal Financial Services, noted.
“Further, with a unanimous expectation of narrowing the current account deficit (CAD), investments can increase only if savings rise faster. Not only this, HHNFS play a crucial role as they are the principal means for financing the fiscal deficit.
If HHNFS fails to pick up, it will become increasingly challenging to fund narrowing the fiscal deficit,” he added.