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However, liabilities at an 18-year low of just 2.5% of GDP is perplexing

* According to the Reserve Bank of India (RBI), household gross financial savings (GFS) in India touched a five-year low of 10.8% of GDP in FY22, as compared to a 14-year high of 16% of GDP in FY21. In contrast, financial liabilities of households touched an 18-year low of 2.5% of GDP last year, as compared to ~4% of GDP each in the preceding four years. Consequently, household net financial savings (NFS) dropped to 8.3% of GDP in FY22, as compared to the near record high of 12% of GDP (it was 12.1% of GDP in FY10) in FY21 and slightly higher than the average of ~8% of GDP in the preceding five years.

* Details of GFS reveal that the share of ‘deposits’ was just 27.2% of GFS in FY22, the second-lowest in the last 50 years, and the share of ‘currency in hand’ was also at a five-year low of 10.5% of GFS. In contrast, the share of Insurance, provident, and pension fund (IP&PF) rose to a multi-decade high of 40% (with a higher share only in FY17). The share of small savings (i.e. claims on the government) is estimated to have touched a 16-year high of 13.3% and the share of risky assets (i.e. shares and debentures) was also at a five-year high of 8.9% of GFS.

* The share of small savings and risky assets has averaged 9.5%/7.3% over the past six years, registering a multifold increase from an average share of just 0.6%/2.9% in the previous decade.

* At the same time, household liabilities from Banks, as per the RBI’s estimates, shrank by ~24% YoY in FY22 – the sharpest decline in 14 years, which is perplexing. As per the RBI’s quarterly Basic Statistical Return (BSR-1), the share of the household sector in bank lending rose to 53.8% in FY22 from 52.6% in FY21. This was due to the 13% growth in lending to the household sector in FY22, while total loans rose by just 11%.

* We have prepared our own in-house estimates of household savings. A comparison of RBI data vis-à-vis MOFSL estimates suggests that while our GFS estimates show a divergence of +/-5% (or -0.4/+0.6pp of GDP), the divergence in liabilities over FY19-21 was between -5% (-0.2pp) and +2% (0.1pp). Our estimates suggest that household liabilities stood ~4% of GDP in FY22.

* This is important because if household liabilities are revised upward, then household NFS can be revised to ~7% of GDP – the lowest in more than three decades (it was 7.1% of GDP in FY15). Household debt will also be revised to 36.8% of GDP in Mar’22, as against RBI’s data of 35.3% of GDP. In any case, it is down from its peak of 39.3% in FY21, but higher than 33.4% of GDP as of Dec’19.

* The analysis of HH savings is incomplete without physical savings as NFS accounts for 35-40% of total HH savings in India. As per our estimates, physical savings rose by one-third to 11.8% of GDP in FY22, from a multi-year low of 10.6% of GDP in FY21. It means that: a) Total HH savings stood at 20.1% of GDP (or 25.2% of PDI, as per our estimates) in FY22, down from 22.6% (or 27.1% of PDI) in FY21, but similar to the pre-COVID levels; b) The share of (net) financial savings fell to 41% (from a 24-year high of 53.2% in FY21) of HH total savings in FY22; and c) Unlike most Western economies, there were (and are) no excess savings in India.

* As per our estimates, HH GFS fell to just 7.1% of GDP in 1QFY23, while liabilities eased to 3.6% of GDP. HH NFS, thus, eased to ~3.5% of GDP in the quarter-ending Jun’22, marking the lowest level in any quarter since 1QFY19, when the quarterly data became available. Financial savings are generally weaker in the first quarter and the strongest in the fourth quarter of any fiscal.

* Going forward, we expect household savings and India’s domestic savings to weaken sharply in FY23. The sharp surge in India’s current account deficit (CAD) towards 3.8% of GDP in FY23 can be attributed either to a rise in investments or a fall in savings. Our forecasts suggest that total investments may remain unchanged ~31% of GDP in FY23. If so, it implies that almost the entire widening of CAD is due to a reduction in savings, at least partly led by high inflation. At 27% of GDP, GDS in FY23 will be the lowest in the past two decades. This is, in fact, a direct cause of higher GDP growth in a rising inflation environment.

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