Household financial savings dip to 6.5% of GDP despite new RBI methodology

Net financial savings by Indian households dropped to 6.5 per cent of gross domestic product (GDP) in 2018-19 (FY19) — the lowest in at least eight years. The drop has been fuelled by both a drop in gross financial savings as well as a rise in liabilities, shows the data recently released by the National Statistics Office (NSO). 

But more importantly, the decline in gross financial savings has surfaced despite the new revised methodology adopted by the NSO scaling up financial savings. The Reserve Bank of India (RBI) uses a methodology which captures savings more accurately. After due deliberation with the central bank, the NSO published the data with the new methodology.

While the NSO revised gross financial savings for 2016-17 and 2017-18 (FY18) upwards by nearly Rs 2 trillion, there was a drop in absolute terms in gross financial savings in FY19, from Rs 20.6 trillion to Rs 19.9 trillion. 

The RBI, which used to publish the data on household financial savings in its annual report, did not do so in 2019. The reason: their estimates did not match that derived by the NSO. After a long deliberation between the two, the NSO finally approved the new and improved methodology. 

“The NSO data did not capture savings in mutual funds (MFs) and insurance to the level it should have,” a person familiar with the data tussle said. 

Financial liabilities, on the other hand, had risen sharply after demonetisation after people heavily stashed cash in bank deposits, insurance schemes, and MFs. More than a year later, they have actually risen, nearly touching Rs 8 trillion in FY19. 

Pronab Sen, former chief statistician of India, said that the rise in liabilities is linked to Mudra loans, which were pushed hard by banks to negate the adverse impact of demonetisation. 

 “FY18 was when Mudra took off. In this regard, the rise in household financial liabilities could be attributed to banks which, by choice, expanded their personal loan portfolio, as corporate loans started dipping, showing risk aversion,” he told Business Standard. 

Incidentally, the Union Budget took a decision that could possibly have a downward impact on already diminishing savings. The new income-tax (I-T) regime, wherein a taxpayer would pay tax at a lower rate only if she lets go of tax exemptions on savings such as provident funds and medical insurance, incentivises consumption, experts said.  

“It is surprising that a tax policy that does not incentivise savings has come when the savings rate in India is low, and declining, too. Savings form the pool available for investments, and long-term household savings are especially crucial for investments in infrastructure,” said Ila Patnaik, who teaches economics at the National Institute of Public Finance and Policy.  “This puts the new I-T policy in direct conflict with the goals of the National Infrastructure Pipeline,” she told Business Standard.

Observers said that not just household savings, but even those from corporates and government are on a falling slope. 

“The investible surplus of domestic savings in the economy has been falling on all fronts, and this is being tackled by bringing measures that tap foreign capital, such as external commercial borrowings or foreign portfolio investments, which are heavily dependent on the growth trajectory and the stability in the economy,” said Rajni Thakur, economist at RBL Bank. 

The NSO data shows that savings by private non-financial companies too fell in absolute terms in FY19, and declined from 10.7 per cent to 9.5 per cent of GDP in a year.  She said that the move to reduce tax and disincentivise savings is primarily meant for those in the early stage of their careers, and would boost consumption only if a sizeable chunk goes to the new I-T regime. 

“The incentive to spend or consume could dent savings, but the adverse impact on investments, if that happens, would be visible in the medium term.”

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