The Reserve Bank of India (RBI) on Friday said that the initial uptick in household savings seen in the June quarter has waned substantially in the next three months on the back of rising consumption and higher borrowing.
Household financial savings stood at 10.4% of the nation’s gross domestic product (GDP) in the July-September period of FY21, down from 21% of the GDP in Q1 of FY21. It is estimated to have further declined in the December quarter as consumption intensified.
This decline, it said, is also driven by the increase in household borrowings from banks and non-bank financiers accompanied by a moderation in household financial assets in the form of mutual funds and currency. Household debt to GDP ratio rose sharply to 37.1% in Q2 from 35.4% in Q1. To be sure, household financial savings rate for Q2 of FY21 was still higher than that of 9.8% of GDP seen in the same period last year.
“While households’ deposits and borrowings picked up, their holdings of currency and savings in mutual funds moderated. Increased household consumption, particularly its discretionary component, could be attributed to resumption in economic activity following the easing of lockdown," the central bank said in the March issue of its monthly bulletin.
This article on estimates of household savings has been written by Sanjay Kumar Hansda, Anupam Prakash, Anand Prakash Ekka and Ishu Thakur of the National Accounts Analysis Division (Department of Economic and Policy Research), RBI. It was accompanied by the usual disclaimer that the views expressed in this article are those of the authors and do not represent the views of the central bank.
“With the gradual reopening of the economy, households switched from an essentials only spending pattern to discretionary spending, which resulted in the reversal of household financial savings from the peak it attained in Q1 FY21," it said.
The paper also pointed out that the pick-up in private consumption is reflected in various high frequency indicators for the second quarter. For instance, production of consumer durables, which registered a contraction of 67.6% in Q1 FY21 moved into the positive territory towards the end of Q2 with a growth of 5.3% in September 2020.
It pointed out that the real GDP contraction of 24.4% in Q1 was accompanied by household financial savings rate of 21%, a moderation in GDP contraction to 7.3% in Q2 coincided with the reduction in household financial savings rate to 10.4% of GDP. Interestingly, the paper said that while the inverse relation between household financial savings rate and GDP growth may sound counterintuitive, but studies have shown that households tend to save more during the economic slowdown and greater income uncertainty.
The paper also gave some insights into the global household savings rate. The personal savings rates in the United States, the United Kingdom, Australia and Canada, which moved up to more than the 20% mark in April-June 2020, corrected significantly in the next quarter but sustained at a much higher rate than the pre-pandemic levels. In contrast, financial savings of Indian households reverted closer to the pre-pandemic levels.
“India appeared to be faster in raising spending probably on account of the approaching festive season demand along with the release of pent-up demand, thereby reaching closer to the pre-pandemic levels of household financial savings in Q2 2020-21," it said.
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March 19, 2021 at 08:18PM
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Household savings decline as consumption, borrowing increase - Mint
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