State of Economy-VIII: Falling household savings may haunt new government

By Rituraj Baruah

New Delhi, May 22 (IANS) As the five year term of Narendra Modi-led NDA government finishes and with the results of the general elections 2019 are just a few hours away, a major task for the next government will be to boost household savings in the country, the net supplier of funds to the economy.

The savings rate of the household sector declined from 23.6 per cent of GDP in 2011-12 to 17.2 per cent in 2017-18, according to data from the Reserve Bank of India. This is the lowest rate since 1997-98. Household savings were at their peak in 2009-10 at 25.2 per cent.

While the private corporate sector finances its investment predominantly through its own savings, the public sector continues to rely heavily on households for resources.

Household is a heterogenous group which includes resident households, non-profit institutions, along with unorganised and unregistered enterprises. It excludes corporate and government savings. According to N.R. Bhanumurthy, professor at the capital's National Institute of Public Finance and Policy, household savings are a major factor of economic growth and lead to higher investment.

If household savings go down, this would either pull investments down or increase the current account deficit, said India's former Chief Statistician Pronab Sen. The decline in investment in line with household savings is apparent. Investment rate came down from its peak of 41.5 per cent in 2011-12 to a little above 31 per cent in 2017-18.

The RBI's biannual monetary policy report, released in April, said: "Notwithstanding recent improvements, the investment rate has declined significantly since 2012-13, mirroring the decline in the saving rate over these years."

Interestingly, in an ideal situation, the decline in savings should translate in rise in expenditure and consumption, but the situation is quite different on ground with a slacking consumption rate in the country.

A Kotak report in March observed that India's net household financial savings rate has stagnated over the past few years despite high real interest rates in the economy which "quite puzzling and poses large challenges to India's policymakers already besieged with the problem of high credit-deposit ratio in the banking system".

Emphasising on the need for higher household savings, Bhanumurthy told IANS: "The high growth that India achieved during 2003-2008 was largely due to increase in the household savings, added to that of public sector savings. It was a savings-led growth rather than investment-led growth."

In order to strengthen the household savings scenario, he said that the upcoming government would have to ensure increase in public sector savings as it aids household savings and also not go ahead with interest rate cuts. "Whichever government comes in, it needs to be seen that there are no more public dissavings. If we see the government savings during the pre-crisis period, there was actually positive savings. During 2005-2008 there, there was positive saving but after that there is only negative public sector saving," he said.

"Second, there is a need to look at the overall interest rate, investment and savings relationship. I have always opposed interest rate cut. Any cut in interest rate will actually discourage savings, more than it encourages investments."

He noted that savings should be key factor when the government and the central bank talk about interest rate in policy matters. Bhanumurthy observed that whenever there is an interest rate cut, the transmission is firstly felt on deposit rates, rather than lending rates.

Further, going by the incumbent government and Finance Minister Arun Jaitley's repeated emphasis on rate cuts shows that if the Modi government returns, the push might continue, leaving little room for increase in household savings.

"My guess is that NDA may not be in favour of all this," Bhanumurthy said.

(Rituraj Baruah can be reached at rituraj.b@ians.in)

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