INDIA’S SAVINGS CRISIS: WHY HOUSEHOLD FINANCES ARE UNDER PRESSURE

                                                                                                            By-Siddharth Bhadoriya

INTRODUCTION

A recent report by Blume research (The research arm of Blume Ventures – an early-stage venture capital firm) underlines a concerning trend in the Indian economy: A reduction in household savings. India has traditionally relied on strong domestic financial savings to fuel its economic growth. However, there has been a sharp reduction in household savings from 34.6% of GDP in 2000 to 29.7% in 2023. At the same time, financial liabilities have increased sharply from 2% to 5.8% of GDP over the same period. All this coincides with a decrease in FDI (Foreign Direct Investment) inflow.

The reports also mention that in 2000, household savings accounted for 84% of total savings in the economy, falling to 61% in 2023. The report also signifies that the rise in debt is due to an increase in consumer loans. The share of consumer loans in total credit has surged from 21 per cent in FY16 to 34 per cent in FY24. On the other hand, the proportion of industry loans has decreased from 42% in 2016 to 34% in 2024. The rise in small ticket personal loans (Up to Rs 1,00,000 or less) is one of the main causes of increase in household liabilities. Fintech companies and other non-banking financial companies are becoming the main providers of this loan and they frequently disburse these loan amount digitally. In contrast to conventional banks, these lenders provide rapid loan availability, which reduces the cost of borrowing, hence increases household debt levels.

UNDERSTANDING THE DECLINE

Major factors behind the decline in household savings are: 1) Increasing appetite for consumption - A growing middle class along with improved financial literacy, easy access to digital banking platforms and aspirational spending has led to a boost in demand leading to an increase in consumption of goods and services.

2) Shifting Investment trends - Decline in interest rates on fixed deposits and other traditional savings instruments have made them less appealing. Riskier investment avenues like equities, mutual funds and physical assets like real estate have gained favour, driven by promise of higher returns.

Indian households are embracing diversified investment portfolios. While this shift reflects a growing appetite for wealth creation, it leaves low-income households vulnerable to financial shocks. This trend along with rising personal loan rates enables speculative activities in equities and trading.

3) Rising inflation - Inflation has been on the rise, which results in household incomes being used to meet daily expenditures and service financial liabilities. This erodes the disposable incomes of household and hence savings capacity.

4) Stagnant Wage growth – The growth in wages and salaries has not kept pace with inflation. Despite increases in nominal GDP, the income levels have not risen proportionately, leading to a disparity between economic growth and personal earnings and hence savings.

IMPACT

A decrease in household savings, combined with a reduction in FDI inflows, has dealt a double blow to capital markets as –

1) FDI and domestic savings contribute to the liquidity of capital markets. A decline in both leads to lower trading volumes, making it harder for investors to buy and sell shares.

2) Lower liquidity can cause high volatility as small market movements can trigger massive price swings.

3) With lower domestic savings and FDI inflow, banks and financial institutions have less money to lend, driving up interest rates and making borrowing more expensive.

4) Higher cost of borrowing reduces profitability, negatively impacting stock prices.

RECOMMENDED MEASURES

To overcome the challenge of boosting investment in capital markets with reduced household savings, the government must take measures such as:

1) Introduction of accounts where capital gains, dividend and interest income are tax free,

2) Allowing households to deduct a portion of their investment contributions from taxable

3) Provide tax exemptions on dividend earnings to encourage stock investments.

4) Government backed investment bonds should be promoted which are risk free and offer higher than inflation yields.

5) Lowering of management fees to encourage investment in stock markets.

6) Government should offer partial guarantees to reduce risk perception among first time investors in stock markets.

7) Strengthening regulations against fraud and market manipulation.

CONCLUSION

Savings has long been the financial backbone of the Indian economy. The act of saving has traditionally ensured resources for future uncertainties, the decline in household savings is not an isolated issue but a reflection of broader socio-economic shifts. As rising costs and changing consumption patterns put pressure on households. Policymakers must create conditions that restore the culture of savings. Promoting a culture of savings is not only a financial necessity but also a social obligation to ensure the economic resilience of millions of families and protect their investments. A collaborative approach involving government agencies, financial institutions and private entities can help keep savings at the heart of Indian households, thereby protecting their future well-being and the country’s economic stability.