“The household sector is consuming by borrowing more,” said Rupa Rege Nitsure economist with L&T Finance Holdings Ltd. This happens when income level stays stagnant but inflation creeps up. The recovery is not broad-based — while a section splurges on luxury goods, others are borrowing to stay afloat.”
Household financial assets, including bank deposits, cash and equity investments, after deducting debt servicing and consumption, eased to 5.1 per cent of gross domestic product in the fiscal year ended March from 7.2 per cent in the previous year, according to the latest data from the Reserve Bank of India.
That level, according to calculations by IndusInd Bank Ltd.’s Chief Economist Gaurav Kapur, is the lowest since the fiscal year ended March 2007, and will crimp resources for the rest of the economy.
India’s government depends on these savings to finance capital investments on physical assets such as infrastructure, machinery and equipment.
While savings increased for many households globally during the pandemic, most used up the resultant extra spending power as Covid curbs ended. That contributed to the recovery of economies the world over, and in part, to higher inflation.
India’s own consumer price-growth, which has remained above the Reserve Bank of India’s 2 per cent-6 per cent target range for 14 of the past 20 months, has kept inflation-adjusted real wages stagnant, reducing the ability of households to save. Falling household savings can narrow the avenues available to the government to plug its funding gap, say economists.
“Household financial savings not keeping pace with growth is a matter of concern”, said Saugata Bhattacharya economist at Axis Bank Ltd.
“Without adequate domestic savings, funding the needed investment will require large foreign capital, which is often volatile.”
For now, India’s GDP is projected to grow 6.1 per cent in the current fiscal year ending March, making it the quickest pace among major economies. To keep that world-beating title, India needs to sustain investment spending, and not just rely on debt-fueled private consumption as an engine of growth.
More than 300 million Indian households have seen debt levels increase following aggressive lending tactics by banks after the pandemic.
Record low rates offered to meet pent-up demand doubled banks’ retail loan portfolio between 2019 and now, building up some distress in the process. Credit card spent hit a record high of 1.47 trillion in May.
The rise in financial liabilities with falling assets levels could be a sign of rising inequality.
“The household sector is consuming by borrowing more,” said Rupa Rege Nitsure economist with L&T Finance Holdings Ltd. “This happens when income level stays stagnant but inflation creeps up. The recovery is not broad-based — while a section splurges on luxury goods, others are borrowing to stay afloat.”
Meanwhile, S&P Global Ratings on Monday retained India’s growth forecast for current fiscal at 6 per cent citing slowing world economy, rising risk of subnormal monsoons and delayed effect of rate hike.
The US-based agency sees the recent spike in vegetable price inflation as being temporary, but revised up the full fiscal retail inflation forecast to 5.5 per cent, from 5 per cent earlier, on higher global oil prices.
“Growth this year will be weaker than in 2022, but our outlook remains broadly favourable. Notwithstanding the strong expansion in India in the June quarter, we maintain our forecast for fiscal 2024 (ending March 2024), given the slowing world economy, the delayed effect of rate hikes, and the rising risk of subnormal monsoons,” S&P said in its Economic Outlook for Asia Pacific Q4 2023 report.
Indian economy grew 7.2 per cent in 2022-23 fiscal year which ended March 2023.
While retaining its growth forecast for the current fiscal at 6 per cent, S&P also maintained that India’s economy will grow 6.9 per cent in both 2024-25 and 2025-26 fiscal years.
S&P said India’s consumption growth as well as capital expenditure remained “strong” in the June quarter.
With regard to growth in the Asia Pacific region, S&P said it remains a “multi-speed region” and slightly raised its forecast for 2023 to 3.9 per cent amid domestic resilience.
“In all, growth in the region has generally remained resilient. Year-on-year GDP growth picked up in the second quarter in both developed and emerging Asian economies. India led again, with GDP growing 4.2 per cent quarter on quarter to a level 7.8 per cent up on a year ago,” S&P said.
Agencies