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What are India’s excess household savings…

…and how does it compare with other nations?

* One of the most important features of CY20 was the build-up of household (HH) savings due to many different factors. This characteristic has continued in 1HCY21. In our recently released note, we had emphasized that while HH savings rate has increased globally, the rise has been the slowest in India compared to other major nations.

* The savings rate, however, can surge due to two factors: the rise in savings (the numerator) and/or the fall in the personal disposable income (PDI, the denominator). The former indicates a likely pick-up in private demand and thus, inflationary pressures, while the latter reflects the weak financial position of households, pointing towards a muddled growth trajectory. Since these two factors have very different implications, it is important to understand the extent and the primary driver of a higher savings rate.

* Even with or without the COVID-19 pandemic, assuming an unchanged savings rate, nominal savings would have increased globally in CY20/CY21 in line with HH income. What matters are the ‘excess savings’, the additional savings that would not have occurred in the absence of the pandemic. In this note, we discuss and estimate India’s excess savings and compare it with other major nations.

* Based on our assumptions, India’s cumulative excess HH savings (since 1QCY20 to 2QCY21) ranged from -1.0% to +1.6% of CY20 PDI, compared to as high as 8-19% of PDI in advanced nations. India is the only nation in our sample, where cumulative excess savings have declined in 2QCY21, while it is still rising in other economies.

* Apart from precautionary motives and forced savings, fiscal support played a very important role in the build-up of the excess HH savings. A cross-country comparison suggests that India’s low excess HH savings are a clear result of much lower fiscal support.

* We reiterate that the financial position of the Indian HH sector has weakened considerably during the past 18 months, which is in stark contrast to most rich nations. The households incurred the maximum share of COVID-led income losses in India, while governments suffered the most in other economies. Overall, it indicates that the economic growth is likely to remain subdued over the next few years.

Excess HH savings and its determinants:

A large part of the world economy was under physical lockdown in 2QCY20 on account of the COVID-19 outbreak. Such restrictions led to a huge buildup of ‘forced savings’ among households across the world. They are called ‘forced’ because whether one wants it or not, the absence of an opportunity to spend on many goods and services led to higher savings among the general population.

Further, as the world economy witnessed a collapse in economic activity, risk perception of households made them save more than usual on account of ‘precautionary savings’ – to prepare for a rainy day. This is true during each slowdown and every uncertain period leads to such an increase in HH savings.

Third, unlike a general economic slowdown, the fiscal response during COVID-19 was very swift and coordinated across the globe. According to the International Monetary Fund (IMF) Fiscal Monitor, global fiscal deficit rose to ~11.5% of GDP in CY20 from about 3.5% of GDP in CY19. Moreover, the quality of fiscal support has also been different as a significant part was directed towards individuals to help replace lost income and/or support minimum spending.

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