Is there something wrong with trends in Indian saving? For a country that is among one of the fastest growing big economies in the world, can the trend in savings rate (i.e., the ratio of savings to GDP at current market prices) be non-increasing?
Lately, there have been opinions and counter-opinions on the underlying numbers. While we do not believe in the dictum of Ronald H. Coase, the Nobel Laureate economist, who reportedly said, “If you torture the data long enough, it will confess to anything”, we start with an eyeballing of the relevant data.
Recent Trends
The official National Accounts Statistics (NAS) data show that India’s Gross Domestic Saving as a percentage of GDP at current market prices came down from around 34 per cent in 2011-12 to little above 30 per cent in 2022-23.
A similar downward trend is also noticeable in the household sector (Figures 1a & 1b). The household saving rate decreased from 23.6 per cent of GDP in 2011-12 to 18.42 per cent of GDP in 2022-23. If instead of GDP, the saving rates are expressed as a percentage of Gross National Disposable Income (GNDI), the trend looks very similar. The two series are highly correlated; hence, we use GDP to calculate saving rates.
Because India is one of the leading high-growth economies in the world, do such downward trends in savings ratios pose a riddle? How does a declining trend in the savings ratio coexist with an increasing trend in the growth rate? Or, since the key to understanding the relationship between growth rate and savings ratio is the productivity of capital, does it mean the economy is becoming more and more efficient over the years so that it can grow higher with a lower savings rate?
Or, have we, as a nation, finally become believers of the philosophy of the ancient sage Charvaka, who reportedly said, ‘Rinam kritva ghritam pibet’, literally meaning, “Drink ghee even by borrowing money”? Such questions tend to haunt the common man and policy makers alike.
Since the household sector constitutes the lion’s share of household savings (figure 2), it may be worthwhile to look into further details of household saving. Some of the inferences that can be drawn from the NAS data are as follows. It should be noted that here we are discussing saving rates (components of household savings expressed as a percentage of GDP):
(a) The net household financial savings (i.e., change in financial assets minus financial liabilities) declined to 5.26 per cent of GDP in 2022-23 from 7.26 per cent in 2021-22. This has happened partly because the financial liabilities of the household sector increased dramatically from 3.81 per cent to 5.78 per cent in 2023-23. RBI Monetary Policy Report of April 2024 suggests that this increase is “for financing fixed assets/investment”.
(b) This increase in financial liabilities of the household sector has happened in a regime of high inflation and high interest rates.
(c) The decline in net financial savings of the household sector is, however, associated with an increase in saving in physical assets plus gold. However, the increase in savings in physical assets has not been significant enough to offset the decline in net financial savings. To illustrate, saving in physical assets went up from 10.76 per cent of GDP in 2020-21 to 12.93 per cent of GDP in 2022-23. Saving in gold and silver went up from 0.2 per cent in 2020-21 to 0.24 per cent in 2022-23. But net financial saving of the household sector (as a percent of GDP) declined from 11.73 per cent in 2020-21 to 5.26 per cent in 2022-23 (Figure 3).
(d) Households are holding a lower percentage of their savings in currencies, while the share of bank deposits has gone up significantly in 2022-23. (e) Household savings in the form of shares and debentures, including mutual funds, account for less than 1 per cent of GDP. There does not seem to be any upward trend in this pattern.
(f) The data also shows that 2020-21 is a stand-out year for financial saving. Gross and net financial savings increased to 15.45 per cent and 11.73 per cent, respectively. These numbers are around four percentage points higher than in previous years. Conversely, savings in physical assets declined to a low of 10.76 per cent of GDP. Possibly, this has something to do with the pandemic and associated behavioural changes among economic agents.
Plurality of opinion
This topsy-turvy pattern of saving rates in India has generated a debate among economists and policymakers. While on one hand, there are views that this sharp decline in saving rate is a matter of grave concern, some others have pointed out that there has been a substitution between financial saving and physical saving, and the aggregate change in household saving rate is relatively benign.
Some other authors have used the aggregate number to suggest that household savings have increased. Here it is important to remember the distinction between the gross numbers and the rates. Especially because the data on savings are reported on a nominal basis by the NAS. And there are multiple conceptual/statistical notions of saving used — like stocks of wealth vis-à-vis flows of saving, absolute amount of saving vis-à-vis ratio of savings with respect to GDP at current market price/gross disposable income.
How much savings do we need?
There are multiple views of the necessity of savings in an economy. Particularly, it varies between the short- and long-run perspectives. In the short run, typically, savings is often seen as a leakage from the aggregate effective demand.
Thus, an increase in saving in a demand-constraint economy in the short run could lead to a paradoxical result of lower GDP. On the other hand, in the long run, saving provides surplus funds for investment, which can push up the growth rate.
Especially in a capital-scare labour surplus country like India, a higher rate of savings will be imperative for sustained long-term growth.
Way Ahead
Legitimately, India aspires to become a large and fast-growing economy. To achieve this, the country’s savings rate needs to be further higher. Going ahead, this will be a major concern for policymakers.
Given the data, we are not entirely sure about the trend and trajectory of the Indian saving rate. Though there is an overall negative trend, it appears that the pandemic has influenced the behaviour of economic agents in India. This has also been seen in other countries where households have rebalanced their saving portfolios or have engaged in pent-up spending.
As macroeconomic data on savings are available for only a short period after the pandemic, we are yet not entirely sure if the data on household savings reflects a post-pandemic shift of economic behaviour or it reflects a genuine downward trend in the household saving rates. Policymakers should keep a close eye on this, as a high domestic saving rate will be an essential ingredient for high economic growth.
Pal is a Professor of Economics at IIM-Calcutta; and Ray is Director of the National Institute of Bank Management Pune. Views expressed are personal.