A few days ago a deputy governor of the Reserve Bank of India made an interesting observation that household incomes in India were rising. He said while explaining why net financial savings were increasing.
It was a throwaway remark, made casually, to explain why more money was flowing into the stocks and bonds markets. I do wonder, however, if it would stand up to serious scrutiny. Not the rising flow into financial assets. That’s not in doubt.
But rising incomes? Really? A country’s incomes rise if employment and/or productive work increases; or if wages rise; or if both happen.
All the data, however flawed and incomplete their conceptual basis and collection may be, suggest that employment is not increasing, at least not at a rate that would be consistent with a huge increase in incomes from salaries. I don’t know how it works in the government sector but in the private sector salaries are either stagnant or rising at a snail’s pace.
Work, or self-employment, is doubtless increasing but we don’t know how much of it is sufficiently productive to leave net savings. I doubt it’s very much because net savings are defined as what’s left after you have paid all your bills and debt.
Au contraire, if these incomes are rising as fast as the deputy governor thinks, there may be a case for making the recipients pay more tax. It can’t be both — rising incomes and low tax rates for such a large cohort.
A different take
I have a different explanation for the increase in inflow into financial assets. It’s simply that there is now more money in the system — you can check the numbers — some of it is finding its way into the financial markets.
In June 2004 total money supply was ₹20.7 lakh crore. In June 2014 it was ₹98 lakh crore. And in June 2024, ₹257 lakh crore. I rest my case. Thus, it’s not rising incomes but the RBI that is the enabler. Ok so what, you might ask. A growing economy needs more money.
True, but if you read the magisterial work by Carmen Reinhart and Kenneth Rogoff who analyse 800 years of financial crises, this has been known to happen for at least 800 years. More money in the system has inevitably led to more money into the financial markets, which boom. Then they crash.
The deputy governor also said “…physical savings have also risen in the post-pandemic years to over 12 per cent of GDP and could rise further…”. He further said, “the private corporate sector has drastically reduced its net borrowings from the rest of the economy (from close to 9 per cent of GDP in 2007-08 to under 1 per cent more recently) reflecting a combination of rising internal accruals and subdued capacity creation.”
So which is the dominant factor? Rising “internal accruals” meaning higher profits or “subdued capacity creation”? If they are making more money (probably by reducing their wage bills) why aren’t they creating more capacity? Because, my dear Watson, incomes can’t rise if fresh investment doesn’t happen. Indeed, if incomes don’t rise, demand doesn’t either, and there’s no point in adding more capacity. In fact, in such a prolonged situation of depressed demand real incomes can actually decline because nominal incomes rise very slowly.
This is what’s happening in India now. If not, the BJP would not have suffered such a setback in the last general election.
The entire financial assets market, many analysts worry, is functioning on hope over experience. I agree. History shows that experience always triumphs. The RBI should be mindful of this, and not start believing that incomes are rising quickly enough to leave a lot of surplus for sticking into financial assets.