SAVE THE “SAVINGS”

Economist Saugata Bhattacharya from Axis Bank Ltd expressed, "Household financial savings not
keeping pace with growth is a matter of concern. Without adequate domestic savings, funding the
needed investment will require large foreign capital, which is often volatile."

Finance Ministry attributes 46-year low savings rate in 2022-23 to changing preferences, says higher
borrowings indicate confidence in ‘future employment and income prospects.’

Two contrasting perspectives have emerged regarding the record 5-decade low in household savings.
What does this mean? Let’s dive deep and establish the relevancy of Savings and how it can impact
the economy.

Concept of Savings

In a simple economy, the household income constitutes of two key components, consumption and
savings. In very simple terms, whenever you earn some income, you can either use it or keep some
part of it aside to provide a cushion of security for future adversities. Savings play a crucial role in the
economy as they ensure that Households don’t live a life at the edge of the cliff but rather far away
from it. Additionally, savings help moderate excessive demand to some extent and all in all, helps
reduce the volatility of the economy.

What exactly is causing the fall of Saving Culture?

After the New Economic Policy came into effect in 1991, we saw an increasing trend of a
phenomenon, popularly known as “Consumerism”. Following the implementation of the New
Economic Policy in 1991, private firms gained the ability to conduct production in India without
significant hindrances and slowly and slowly, private firms selling luxury items flooded the market
with their products and private banks too entered the market, which gave rise to competitive interest
rates on loans. Many such loans are available such as vacation loan, which are basically for
consumption purposes. These factors have collectively encouraged consumers to borrow and spend
recklessly, with little regard for future savings.

Apart from the above factors, there is an even bigger cultural reason behind the falling Saving
Culture. In the past few years, India has been shifting towards the Western Culture and disregarding
its own Indian Culture. Our culture has always been that one of a close joint family where everyone
co-existed together with our ancestral inheritance and further passing it on to the upcoming
generations. The component of saving for the future generations so that they can inherit it had
always been there. Even the concept of joint families has been steadily declining, still in nuclear
families, we can recall our parents telling us to save for ourselves and for our upcoming families. But
Western Culture is quite different, and the component of saving for the family is not persistent. As
such, the formula for income goes something like

Income=Expenditure
Young individuals are increasingly drawn to Western culture and this is why they don’t feel the urge
to save for the future, as they are exposed to such Culture through social media where people are
trying to over-glorify their life. The young minds get construed to only living in the present without
much concern for the future, and this lifestyle is then backed by borrowings which are only being
utilised for consumption.

How exactly the economy is affected by

decreasing savings?

To understand this, we need to first understand what a business cycle is.

Business Cycle can be understood by the help of a Sin Graph. It goes up, reaches the peak and then
starts going down. Similar is the case of an economy. The level of economic activity fluctuates like a
Sin Graph, owing to the Supply and Demand Factors. When the demand in the form of consumption
and investment goes up owing to various geopolitical factors, the level of economic activity also goes
up to cater to this demand, this phenomenon is termed as expansion. Similarly, in the opposite
scenario, the level of economic activity goes down, this phenomenon is termed as contraction or
recession. It is impractical that an economy is always in its peak.

The primary purpose of savings is to shield households from the fluctuations of the business cycle.
During a period of recession, employment decreases and income falls, and to ensure that households
get the least affected by it, savings come to the rescue providing the much-required cushion of
security. Now, imagine the component of savings being removed, we would become as volatile as the
economy. This is the primary reason why many Western countries have been consistently affected by
global recessions, whereas India has been relatively less impacted.

As we witness the declining saving culture, we are heading towards becoming a more and more
volatile economy. However, the real problem is that our economy is not strong enough to easily
overcome recessions, it can create lasting implications and a lot of time to recover.

The Current Picture

According to a recent report from the RBI, savings have declined to 5.1% of GDP in FY23 as compared
to 7.2% of GDP in FY22. This marks an all-time low over the past five decades, or precisely, a 47-year
low. The Household Financial Liabilities, which constitute all such borrowings taken either for
consumption or for productive purposes, have increased from 3.8% of GDP in FY22 to 5.8% of GDP in
FY23. However, what is even more alarming is that all this has not resulted in any significant increase
to the stock of assets as much of these borrowings were utilised for consumption. In fact, Household
Financial Assets have dropped from 11.1% in FY22 to 10.9% of GDP in FY23.

The Brighter Side

The decline in savings has led to an increase in liabilities. Even though the borrowings for
consumption have rose up largely which is a matter of concern, but at the same time, loans for
productive assets are also rising. The share of residential housing loans in total loans has increased
over the last eleven years to 14.2 per cent in March 2023 from 8.6 per cent in March 2012. Loans
given for Vehicle and Education have also risen although their rate of growth is not as high as
compared to consumption based personal loans. Overall, it's evident that financial institutions are
meeting expectations as it is evident from their services and competitive interest rates which has led
to a rise in borrowings.

Following Chart shows the growth in Personal Loans taken for productive purposes given by various
Financial Sectors: -

Analysis & Conclusion

Savings and Borrowings are two sides of the same coin. Both are used for the purpose to finance the
expenses. One is a conservative or conventional approach while the other is more daring and risky.
To reconcile these two contrasting perspectives, we need to analyse and look at the short-term and
the long-term effects.

If we talk about the short-term impact of decreasing savings and increasing borrowings, it shows that
the financial institutions are doing a great job in fulfilling the finance needs of the common
consumer and people too are expressing their faith in such institutions by borrowing more and more.
This can help send a message about the goodwill of such financial institutions and can promote
financial inclusivity. Especially in India, people hesitate to buy or try out anything new unless anyone
of their known relation tries it and recommends it to them. So, if we talk strictly from the perspective
of financial institutions and in the short-run, decreasing savings gives them an opportunity to
capitalize.

Now, if we talk about the long-term impact, it can be critical. Imagine a hypothetical situation of high
demand, a family has little to no savings and taking a loan is not an option because the interest rates
are too high. To ensure that such situations do not arise is why Savings are considered essential. But
with decreasing savings, we are becoming more prone and vulnerable to desperate economic
conditions and this will have large macroeconomic implications. Even Financial Institutions also suffer
due to such a situation, as more borrowings can cause shortage of funds and since people aren’t
saving, they will receive less deposits so the inflow of funds also gets limited.

Therefore, a more balanced and stable approach would be the coexistence of both savings and
borrowings and only borrowings for productive purposes should be encouraged. This calls for a dire
need of Financial Literacy all over the nation.
 References

https://rbi.org.in/Scripts/AnnualReportMainDisplay.aspx

https://www.thehindu.com/business/no-distress-says-finance-ministry-household-savings-down-
because-people-are-buying-homes-vehicles/article67329711.ece

https://thewire.in/economy/household-savings-fall-to-five-decade-low-in-fy23-debt-remains-
sharply-elevated-report

https://www.cnbctv18.com/personal-finance/household-savings-hit-multi-decadal-lows-financial-
liabilities-rise-assets-drop-17840861.htm

https://www.investopedia.com/terms/b/businesscycle.asp