The share of Indian households in the total savings of the country has dropped by 20 per cent in the past few years. Also, household savings are growing the slowest compared to public sector and private sector savings.
Household savings, which accounted for 68.2 per cent of the total savings in FY12, fell to 54.2 per cent by FY17, finds India Ratings and Research. As a result, household savings rate - gross household savings as a percentage of gross domestic product (GDP)- plunged from 23.6 per cent to 16.3 period during the period. The share of households in total investment is also falling. It has come down from 43.3 per cent to 31.4 per cent during the period.
At 3.7 per cent, the growth of household savings was the lowest during this period. Savings of the private corporations grew 17.4 per cent, while that of the public sector at 12.9 per cent during FY12-FY17.
As a result, the share of private corporations to the country’s savings went up from 27.3 per cent to 40.4 per cent, and that of public sector companies inched up from 4.4 per cent to 5.4 per cent between FY12 and FY17. In the total investment pie, the share of private corporations is now the highest at 43.4 per cent.
Tighter financial conditions have been one of the key reasons for the slowdown in the household sector’s growth. Credit to resident household has been rising at a faster pace after they emerged as a preferred choice for the banks post the deterioration in their asset quality due to corporate lending.
Though the rising leverage of resident households is still not alarming, Ind-Ra believes that if this trend continues, particularly against the backdrop of falling savings rate of household sector, it has the potential to turn into a major challenge and growth disruptor in the medium-to-long term. “Unless household savings recover, rising personal loan may pose a challenge,” finds Ind-Ra.
Although the twin policy shock of demonetisation and Goods and Services Tax had economy-wide ramification, it was more pronounced in case of the household sector. The savings rate of the household sector plummeted 153bp YoY in FY17.
The study also found that households are investing nearly three-fourth of their savings in dwelling, other buildings and structures. Their investment in machinery and equipment has gone up from 17.9 per cent to 24.7 per cent.