The first article in this series on household savings (Chinks in household finances, businessline July 15), had looked at the decline in household net financial savings, an increase in borrowings and a faster growth in spending vis-a-vis income. The second examines the reason for the rise in personal income tax collections despite this situation (Surge in personal I-T collections, businessline July 24). This article looks at the impact of household financial savings on current account balance and investment dynamics.

Household net financial savings (HHNFS) was at 47-year low of 5.3 per cent of GDP in FY23, but it has likely inched up in FY24. Physical savings continue to remain strong, which means HH total savings are likely at around 19 per cent of GDP in FY24 (up from a six-year low of 18.4 per cent of GDP in FY23). Should we be concerned about HHNFS then?

Every rupee invested (physical) in an economy must be financed either through gross domestic savings (GDS) or foreign savings (i.e., current account deficit, CAD) — , i.e., that is, total investments = GDS + CAD.

CAD is — barring some errors and omissions — the sum of the difference of investment and savings of all the three institutional participants — household, corporate and government — in an economy.

The higher the savings, given a level of total investments, the lower the CAD will be (or higher surplus) and vice-versa. Therefore, one must analyse the sectoral balances — savings minus investments — to understand the likely implications on CAD. Commenting on only savings or investments isn’t as comprehensive and helpful.

This is why, HHNFS holds special importance since it represents the net surplus of the household sector, which is available to fund net borrowings/deficit of the government and the corporate sectors.

All other things constant, lower HHNFS implies higher CAD.

India used to run a large foreign trade surplus of about 3 per cent of GDP on its consumption basket (primarily including agricultural products, textiles and electronic goods) in the mid-1990s, which declined to +1 per cent of GDP by mid-2000s and turned into a small deficit in the pre-Covid years (beginning FY16) to a trade deficit of 0.7 per cent of GDP in the last three years (FY22-24). Therefore, if higher consumption drives lower HHNFS, it is very likely to lead to higher CAD.

The conclusion would not be different if a surge in physical savings drive lower HHNFS — by changing the composition of HH total savings.

Ceteris paribus, higher physical savings would push India’s total investments higher by the same extent. India’s CAD, thus, will widen by the same extent since household surplus (i.e., HHNFS) has declined amid higher total investments.

Situation concerning?

But what if HHNFS remains stuck at the current low levels and physical savings stay at the current elevated levels, which means consumption growth remains weak? Is the persistence of the current situation concerning?

The answer depends on what happens to India’s total investments. If total investments increase in India led by the corporate sector, which is what the broad narrative is, then it is very likely that net borrowings/deficit of the corporate sector will rise, leading to higher CAD.

On the other hand, if corporate investments, and thus total investments, remain stuck at the current levels, then the current level of low HH savings is also not a concern. One must note that the corporate sector has run a balanced account (savings similar to investments) in the past many years, compared to a very high net borrowings/deficit of 6-7 per cent of GDP in the mid-2000s. What is the role of the government here? Even if HHNFS remains stuck at the current low levels and corporate sector invests more, won’t lower fiscal deficit, and thus, lower government dis-savings, lead to higher GDS and fund higher corporate borrowings/deficit?

Well, lower fiscal deficit can happen only if either tax receipts go up and/or the growth in government spending moderates.

The former, as we have discussed in the previous article in this series, could mean higher tax payout by the household sector, leading to either lower household savings or slower consumption growth, while the latter (lower government spending) means lower GDP growth in general (with a possibility of its dampening corporate investments).

So, it is pertinent to ask: What would incentivise the corporate sector to commit to more investments? This dynamic quandary goes to show how closely the three participants are linked in an economy.

The producers need an environment of rising spending growth to increase capacity. If they smell weak financial position of the consumers (including the government), with a potential slowdown in their spending growth, the pick-up in corporate investment will remain muted. If the corporate sector still goes ahead with higher investments amid weak consumer/fiscal spending growth, it could pose serious challenges in the future.

Since savings are eventually the difference between income and spending, an improvement in spending growth would lower savings, making it difficult to fund higher investments through domestic resources.

And if savings pick up, weak spending growth may keep the corporate sector on the sidelines and they may continue to shy away from committing substantial investments.

If so, India’s total investments may find it difficult to rise further on a sustainable basis. Consequently, we may remain stuck at 6-7 per cent real growth, and 8 per cent growth may remain elusive.

Not only household surplus has declined sharply, but their leverage has also risen substantially in the past few years. Is it at a threatening stage? We will discuss this in the last article.

The writer is Senior Group Vice-President - Institutional Research - Economist, Motilal Oswal Financial Services Ltd. He is the author of The Eight Per Cent Solution

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