Concern over Falling Household Savings in India

Syllabus: GS3/ Economy

Context

• India is witnessing a structural transformation marked by declining net financial savings, rising household debt, and a shifting asset composition.

What is Household Savings?

• Household saving is the difference between a household’s net disposable income and its total consumption expenditure, including taxes and debt repayments. 
• It reflects the ability of households to defer current consumption for future security, investment, or emergencies.

Recent Trends in Household Savings

• India’s gross domestic savings rate has fallen from 34.6% of GDP in 2011–12 to 29.7% in 2022–23, the lowest in four decades. 
• Household financial savings as a percentage of GDP fell from 11.5% in 2020–21 to 5.1% in 2022–23.
  • Simultaneously, household liabilities rose to 6.4% of GDP in FY24, near the 17-year high.
• Rural–Urban Divide in Savings Behaviour: Urban households show greater financial participation due to better access and higher financial literacy.
  • In contrast, rural households often depend on informal savings, and remain vulnerable to income shocks.
  • Household investments in mutual funds and equities nearly doubled from ₹1.02 trillion (FY21) to ₹2.02 trillion (FY23).

Key Drivers of the Decline of Household Income

• Macroeconomic Factors: Persistently high inflation has eroded household purchasing power.
  • As per Fisher dynamics, rising interest rates and slower nominal income growth have diminished savings potential.
• Decline in Real Wages: Real wage growth has remained stagnant, especially in the informal sector.
  • High youth unemployment and underemployment have limited income growth and reduced household saving capacity.
• Low real interest rates on bank deposits and small savings schemes have discouraged saving in conventional products.
• Changing Consumption and Investment Patterns: Post-Covid consumption revival led to increased borrowing for consumption, housing, and education.
  • Households are now turning to higher-risk assets like equities and mutual funds. SIP contributions increased 8.5 times from ₹3,122 crore (2016) to ₹26,632 crore (2025).
• Rising Aspirational Spending: Urban middle-class households are increasingly spending on lifestyle goods, foreign travel etc. This cultural shift towards living in the present is undermining traditional saving behavior.

Concerns over Declining Household Savings

• Reduced Capital for Investment: Household savings contribute nearly 60% of India’s gross domestic savings.
  • A fall in savings reduces the pool of domestic capital available for infrastructure and industrial investment.
• Rising Household Debt: With increasing liabilities and declining savings, households face higher financial stress.
  • A prolonged debt overhang can reduce creditworthiness and impact banking sector health due to rising defaults.
• The increasing financialisation of savings may displace productive investment into speculative financial avenues.
• Inadequate Retirement Security: Declining long-term savings jeopardise retirement preparedness. A rising elderly population without sufficient savings could increase future fiscal pressure on the state.

Policy Roadmap for Rebuilding Household Savings

• Fiscal and Tax Reforms: Rationalise capital gains tax and savings-related tax structures. Offer tax breaks or guaranteed returns on small savings schemes like PPF and KVP.
• Expanding Financial Inclusion: Universalise the National Pension System (NPS) with auto-enrolment for informal workers. Promote customised micro-savings products for rural and informal sector households.
• Strengthen Regulatory Oversight: Ensure transparency in digital lending, mutual funds, and insurance schemes. Tighten unsecured lending norms to curb procyclical credit growth.
• Technology Innovations: Leverage fintech platforms for micro-savings, AI-based financial advice, and blockchain for secure savings instruments.
  • Use behavioural nudges like default savings enrolment and reminders to promote regular savings.
• Institutional Coordination: Develop a National Strategy on Household Savings with measurable targets. Tailor financial products and outreach for rural India’s seasonal income patterns and socio-cultural constraints.

Source: TH