Do Indians save enough money? There is no obvious solution

 Do Indians save enough money? There is no obvious solution

According to Reserve Bank of India (RBI) statistics that was just made public, household borrowing in India dramatically increased in 2017. As a result, household net financial savings—defined as household financial savings throughout the course of the year minus financial borrowings—fell to slightly under 5% of nominal gross domestic product (GDP) in 2022–2023—a decrease of 2.5% per year.

Many op-ed pieces have stated that we need to stop this trend. According to the classic economic theory, the reason is that in order to finance their investment plans, which would spur economic development, the Indian government and business sector need money. Additionally, there is worry that family debt may be getting close to unsupportable levels.

How legitimate are these worries? Why would this be happening, and should we be concerned?

First off, we don't currently have information on household (physical) savings in the form of gold and real estate for the previous year. Because household borrowing for home loans has been high, it is probable that their real estate holdings have increased. If real estate transactions are largely conducted in the formal sector after demonetization, then formal financial markets would have experienced a gain in share. Families have also used debt to pay for the buying of vehicles, another category of durable goods. Outstanding automobile loans from banks increased by 25% in 2022–2023. Large non-bank financial organizations provided more loans for automobile finance than banks did.

Second, household behavior in the years after COVID was crucial to a resumption of economic development. The recovery was significantly aided by purchases of cars, houses, and other durable goods for consumers. Corporate investment would not have paid off without this. Saving is postponed consumption, and in order to jump-start the economy, consumers needed to stop delaying their purchases.

Third, Indians are saving more money via mutual funds and the stock market. People feel richer when asset prices—stocks and real estate—rise and may not save as much as they should. Additionally, they experience realized capital gains from the sale of shares, which are not recorded as savings.

Fourth, the government now offers low-income people health insurance up to £500,000 each year. The unexpected result of this might be less savings for prudence. It makes sense for families, particularly those with low incomes, to spend more of their earnings, especially if those earnings are not increasing quickly.

Fifth, the formal economy has seen consistent growth. It often provides access to retirement and pension funds for those working in it. In 2022–2023, there were 13.9 million more subscribers to employee provident funds than there were in the two years before (12.2 million and 7.7 million, respectively). People may underestimate the extra savings required after retirement given their contributions to their retirement plans.

Sixth, have family debt levels gotten out of hand? Back-of-the-envelope estimates indicate that although household borrowing has increased recently, it still accounts for less than 10% of household income on average. In actuality, net household financial savings—roughly computed as household consumption from GDP plus household savings—appear to still be about 20% of family income.

Of course, averages may be deceptive. Borrowers and savers may vary among families. Mortgage borrowers may have much lower salaries and savings than non-borrowers, which increases their risk of default. What remains to be seen, meanwhile, is if tax breaks and other government initiatives encourage house ownership and make getting a mortgage appealing.

The standard deduction that may be claimed on taxable income, together with an interest subsidy, make home ownership appealing. The government promotes access to reasonably priced houses via a credit-linked subsidy program in order to achieve its goal of "housing for all." We must change this policy if we don't want Indians to invest in real estate.

Seventh, corporate profits and tax revenues both increase if people spend more or invest more in tangible assets. They need to save more money. It is probable that business savings will rise and household savings would contribute less to total savings (bit.ly/3LOu9jp).

Eighth, rather than requiring people to increase their savings, foreign debt flows may help pay for some of the government's deficit. Indian government bonds are owned by foreigners far less often than those of other developing markets. By the beginning of 2025, inclusion in the JP Morgan EM Bond Index may generate $30 billion. Additional debt inflows might result from potential inclusion in the FTSE EM and Bloomberg Barclays EM bond indexes.

In order to assist businesses and families in reducing their expenditure, inflation must also be under control. High inflation increased borrowing costs in the fiscal year 2022–2023 since the RBI repo rate increased from 4% to 6.5%, in addition to rising the price of necessities. Controlling inflation would ease the strain of paying interest and boost savings.

The youth of today may put off saving money far more than their parents did. They can mistakenly think that they don't need to save much money for the future because of their insurance coverage and pension payments. Due to their overconfidence in the economy and oneself, they may also underestimate the likelihood of negative shocks like a job loss or health problems.

Households may eventually need to save more. However, it is contradictory to anticipate that they would concurrently increase their savings and spending as a percentage of income.