The Finance Ministry has dismissed “critical voices” about household savings in the country falling to a multi-decade low, arguing that households are now adding lesser financial assets than in the past because they have started taking loans to buy real assets such as homes and vehicles which is “not a sign of distress but of confidence in their future employment and income prospects”.
Data released by the Reserve Bank of India this week showed net household financial savings dropped to 5.1% of the GDP in 2022-23, reckoned to be the lowest since 1976-77, from 7.2% in 2021-22. This, combined with an uptick in households’ financial liabilities from 3.8% of GDP in 2021-22 to 5.8% last year, had prompted concerns that the recovery from the COVID-19 pandemic is still incomplete for many households and high inflation had dented savings.
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‘Changing consumer preference’
In a 630-word statement on X, the Ministry presented what it termed “the correct position with true facts and right inferences” to emphasise there is no distress as is being “circulated in some circles” and data indicates that changing consumer preference for different financial products is the “real reason for the household savings”.
“Between June 2020 and March 2023, the Stock of Household Gross Financial Assets went up by 37.6%, and the Stock of Household Gross Financial Liabilities went up by 42.6% — no big difference between the two,” the Ministry asserted, noting that overall net financial assets are still growing despite lower fresh inflows.
“Households added Net Financial Assets of ₹22.8 lakh crore in FY21, nearly ₹17 lakh crore in FY22 [2021-22] and ₹13.8 lakh crore in FY23. So, they added less financial assets to their portfolio than in the previous year and the year before… They added financial assets by a lesser magnitude than in the previous years because they have now started taking loans to buy real assets such as homes,” it said.
Sharing data on growth in personal loans from the Central bank, the Ministry said there has been “a steady double-digit growth in loans for housing since May 2021” indicating that financial liabilities have been incurred to buy real assets.
“Vehicle loans have been growing at double digits since April 2022 and more than 20% since September 2022. The household sector is not in distress, clearly. They are buying vehicles and homes on mortgages,” the Ministry averred.
“Overall household savings [current prices] — which includes financial, physical and jewellery — has grown at a CAGR [compounded annual growth rate] of 9.2% between 2013-14 and 2021-22 [8 years]. Nominal GDP has grown at a CAGR of 9.65% during the same period,” the Ministry highlighted.
This, it noted, showed that the ratio of household savings to nominal GDP has remained constant from around 20% to 19% as of 2021-22. The Ministry, however, did not share 2022-23 data for these metrics.
The Ministry also sought to point out that as per the Central Bank’s definitions, the household sector includes unincorporated enterprises or the quasi-corporate sector. “The biggest item that seems to have swung it [the reduction in net financial assets added in 2022-23] is the net flow of credit from Non-Banking Financial Corporations (NBFCs) to the Household Sector, which includes unincorporated enterprises,” it noted.
In 2021-22, NBFCs had lent only ₹21,400 crore to the household sector, which shot up by “a whopping 11.2 times” to almost ₹2,40,000 crore, the Ministry said. “That has set off alarm bells as commentators forgot that these are ‘flow’ numbers,” it explained.
“Overall, NBFC retail loans outstanding were ₹8.12 lakh crore in FY22, and it went up to ₹10.5 lakh crore in FY23, a growth of ‘only’ 29.6%,” it said. The two big components in NBFC retail loans are vehicle loans and ‘other retail loans’, which increased from ₹3.4 lakh crore and ₹3.95 lakh crore in 2021-22 to ₹3.82 lakh crore and ₹5.22 lakh crore in 2022-23, respectively. “These are microfinance loans, loans to Self-Help Groups, Advances to individuals against gold and other loans,” the Ministry noted.
“So, 36% of NBFC’s Outstanding Retail Loans are for the purchase of vehicles. That is not a sign of distress on the part of households but of confidence in their future employment and income prospects. That has been amply brought out in the recent Consumer Confidence Survey of RBI, and the C-Voter Survey of Consumer Optimism conducted in July and August, respectively,” the Ministry’s statement concluded.