Household Borrowings Reach Record Levels

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Household financial borrowings in FY23 have risen sharply, reaching 5.8% of GDP, marking the second-highest level in the post-independence period according to a report by Motilal Oswal Financial Services. This surge is reflective of increased financial stress among households, with the previous peak observed in FY07 at 6.7% of GDP.

Household savings at 50-year low: Rising Debts and Plunging Savings

The Reserve Bank of India (RBI) reveals that household net financial savings (HHNFS) plummeted to 5.1% of GDP in FY23, the lowest level seen in 47 years since FY77. Additionally, a downward revision was observed for FY22 as well, diminishing to 7.2% of GDP from previously higher estimates.

This decline in HHNFS in FY23 primarily stems from a significant jump in household borrowings as the gross financial savings (GFS) remained largely stable at around 11% of GDP between FY22 and FY23. The GFS, composed majorly of deposits, also included currency, insurance, pension and provident funds, capital market investments, and small savings. Notably, the share of capital market investments has seen a fourfold increase to an average of 0.8% of GDP in the last seven years from FY17-FY23, reflecting a shift in investment preferences among households since demonetization.

In the upcoming financial year, with nominal GDP growth predicted to be around 8%, it is anticipated that household income growth will mirror this trend. This could potentially lead to weaker consumption growth or substantial weakening in household investments, given that a further fall in HHNFS appears unlikely.

HHNFS is integral as it serves as the main vehicle for financing the fiscal deficit. If the HHNFS continues to remain low, it poses significant challenges in funding the narrowing fiscal deficit. The report concludes that a rise in savings is paramount for increasing investments, especially in the face of unanimous expectations of a narrowing current account deficit (CAD).

Important Points:

1. Drastic Fall in NFS: The Net Financial Savings (NFS) of households in India has experienced a significant decrease, reaching a nearly five-decade low, moving from 11.5% of GDP in FY21 to 5.1% in FY23, according to the Reserve Bank of India (RBI).

2. Increase in Financial Liabilities: The sharp fall in household NFS is mainly attributed to a surge in financial liabilities, with households' financial liabilities experiencing a 53% increase from 3.8% of GDP in FY22 to 5.8% in FY23.

3. Stable Financial Assets: The share of household financial assets in GDP has remained relatively stable, varying between 10.9% to 12.0% over the past years.

4. Drivers of Increased Liabilities: Several factors have contributed to the increase in household financial liabilities, including stress on household incomes due to the Covid-19 pandemic, high inflation rates, and a negative real rate of interest stemming from RBI’s monetary policy.

5. Access to Loans: A negative interest rate and the banking sector's willingness to lend have led to easier access to loans for households. This increase in retail loans is due to lower delinquency levels, making it more attractive to banks, with retail loans growing at a compound annual growth rate of 24.8% from March 2021 to March 2023.

6. Impact on Asset Allocation: While there has been an impressive increase in household investments in the stock market, it has not resulted in a corresponding increase in the share of gross financial assets in GDP.

7. Financial Savings and Economic Growth: The stability in the share of gross household financial assets in GDP is a matter of concern, particularly given the increasing financial liabilities.

8. Government Intervention: The government should consider implementing measures to incentivize financial savings, as they play a crucial role in financing growth, either through government borrowings for capital expenditure or by debt raised for investment projects by the private sector.

Important News of the Day

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2. Bank staff’s first duty to meet needs of customers, not targets: RBI deputy gov

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3. ‘India-US are natural partners,’ says JPMorgan Chase CEO Jamie Dimon: Report

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5. Pakistan get visa hours before travelling to India

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8. Food ministry extends time period for stock limits on tur, urad to prevent hoarding

The Indian food and consumer affairs ministry has extended the time period for existing stock limits on tur and urad by two months until December 31, 2023, to prevent hoarding. According to the ministry's notification, the stock limits for wholesalers and big chain retailers at the depot have been reduced from 200 tonnes to 50 tonnes each. The move is aimed at ensuring adequate supply of pulses in the market and keeping prices under control.

9. Aviation leasing watchdog cuts India's rating amid Go First legal tussle

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