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Depleting household savings need urgent attention

Depleting household savings need urgent attention

Written By-

  • Dr. Anuradha Jain, Professor of Economics, VIPS Delhi
  • Dhruv Jain, Student of Business Management, University of Delhi

The April-June quarter of 2020 was unusual on many counts. It recorded a surprise surge in household financial savings, which peaked at 21 percent as a percentage of the gross domestic product (GDP) when the pandemic-induced lockdown restricted people at home.

A silver lining it was as the GDP growth had fallen by a record 23.4 percent during the same quarter. Fast forward to the December quarter; the household financial savings rate tanked to 8.1 percent of GDP in the quarter ended December. The data for the fourth quarter is not out yet.

It is a grim situation. The second wave of the pandemic has caused another round of pay-cut and job losses. Add to it the rising Covid cases between March and May. Many households have channelised their precautionary savings towards medical expenses, and some may have taken loans. The borrowing levels had gone up in FY21 itself. Household debt-to-GDP in the country inched up in 2QFY21 to 37.1 percent from 35.4 percent in 1QFY21.

Advances by commercial banks showed a significant jump of 2.7 percent quarter-on-quarter in the December quarter compared to tepid growth of 0.2 percent in the previous quarter. Deposits moderated to 1.5 percent as against 2.9 percent over the same period.

Moreover, many employees in the organised sector have nibbled into their future savings by withdrawing money from the Employee Provident Fund Organisation (EPFO). The total withdrawal from the EPF accounts stood at Rs 73,498 crore between April and December 2020 compared to Rs 55,125 crore during the same period last year. The government has allowed withdrawals due to Covid-19 for the second time now.

Investments in equity mutual funds also started seeing withdrawals. Redemptions continued for eight consecutive months between July and February, amounting to Rs 52,724 crore. The inflows are back, but only moderately. Even if inflows are back, remember that very few people save via mutual funds.

The depleting savings are a severe economic issue that needs urgent policy action. What we need immediately is a push to employment. India’s unemployment rate in May hit its highest in the last one year at 11.9 percent compared to 7.97% in April. Household savings will shoot up only when people have jobs and disposable income. Savings is both the cause and the effect of income.

Low savings and low demand quandary

The year 2020 had seen revenge buying as the lockdown eased. So, even as savings and investments were going down, the pent-up demand supported the growth. Such pent-up demand is unlikely in 2021. According to Keynesian economics, when the demand dwindles, corporates reduce investments.

Wages go down, and people get laid off to control costs. High unemployment leads to low consumption, and there comes a vicious cycle. Chief Economic Advisor KV Subramanian recently accepted that the second wave has moderated the recovery momentum, impacting rural demand. Rural demand was intact in 2020. This time urban and rural, both will be hit.

The fourth quarter of the FY21 has seen a meager 1.6 percent growth. If the growth momentum has to be maintained, a focus on job growth is imperative. Demand and consumption will take time. As job growth returns and people have more money in their hands, they will be inclined to save more than spend.

According to Keynes, consumption is important for higher growth, but he also says savings are equally necessary unless people are not hoarding them. This calls for attractive investment avenues.

Savings to investments

The RBI has maintained the repo rate at 4 percent in the latest monetary policy. Interest rates are not going up anytime soon. Real rates factoring in inflation on bank deposits are negligible. People need better yields on investment. The government recently launched three successive tranches of sovereign gold bonds.

In July 2020, the RBI had launched a new Savings Bonds Scheme – Floating Rate Savings Bonds 2020 (Taxable). Similarly, more such savings bonds such as infrastructure bonds should be announced to channelize savings into financial instruments.

A report from Motilal Oswal suggests that almost four-fifth of all income losses in CY20 were incurred by the private sector in India (including households). The government sector bore only about a fifth of the losses. This contrasts Australia, Canada, and the US, where the government sector incurred all the losses and eventually ended up transferring net resources to the private sector last year. The income losses incurred by the Indian government were the least (only ~20 percent).

Time has come for the government to play its part and support the household sector with employment guarantee. Directly income transfer is needed in rural India.

Sustained economic growth in the post-Covid world is possible only when there is an increase in aggregate savings. This increase in savings, in turn, contributes to higher investments and more growth. The government has experimented with uncollateralised and low-interest loans to the unorganised sector. The need of the hour is job creation.


  • Dr. Anuradha Jain, Professor of Economics, VIPS Delhi
  • Dhruv Jain, Student of Business Management, University of Delhi

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