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Sunday, July 25, 2021

A depleted reserve

Prospects of households drawing down their savings to boost consumption in near future appear dim

By: Editorial |
Updated: June 25, 2021 8:07:44 am
financial year, India Lockdown, GDP, Reserve Bank of India, impacts of coronavirus on economy, indian economy, economy news, indian expressLast year, as the lockdown restrictions were gradually lifted in India, the build-up in savings provided a fillip to household demand.

In the first quarter of the last financial year, household financial savings in India witnessed a sharp surge as compared to previous years. This surge in savings was driven by several factors. First, the imposition of the national lockdown for much of this period meant that households had significantly curtailed their discretionary spending, leading to a rise in forced savings. Second, during this period, there was also a rise in precautionary savings as households built buffers against job and income losses. Coupled with a decline in household borrowings and a contraction in GDP during this period, this meant that households’ (net) financial assets touched 21 per cent of GDP during April-June 2020-21. But, with the gradual unlocking of the economy in subsequent months, as activities began to normalise and avenues for spending opened up, household savings, both forced and precautionary, began to unwind. The latest data from the Reserve Bank of India shows that household (net) financial savings dipped to 10.4 per cent in the second quarter, and further to 8.2 per cent in the third quarter of the last financial year.

In comparison, in developed economies, especially in countries like the US, this combination of forced and precautionary savings, along with a massive fiscal stimulus unleashed by the government, has kept household savings elevated. In fact, US household balance sheets are in a much better position. According to recent estimates by Moody’s Analytics, US households have excess savings worth $2.6 trillion which will help drive the economic recovery — though the composition of spending will be driven in part by the distribution of savings across the income distribution. A similar scenario exists in other developed economies where direct government support was more generous than what was seen in economies like India, despite the latter struggling more during the pandemic.

Last year, as the lockdown restrictions were gradually lifted in India, the build-up in savings provided a fillip to household demand. Private consumption, which had contracted by around 26 per cent in the first quarter, declined only by 11 per cent in the second quarter, and, in the second half of the year, was at almost the same level as it was before the pandemic. But this time around, the situation appears to be different. Recent data on the decline in bank deposit growth, and the rise in currency in circulation suggests that a combination of falling incomes, and rising health expenses has contributed to a build-up in household financial stress, especially among those at the middle and lower ends of the income distribution, leading them to draw down their savings to finance expenses. The decline in savings, when seen in conjunction with financial stress stemming from the second wave of the pandemic, suggests that, unlike last year, the prospects of households drawing down on their savings to provide a fillip to consumption going forward are dim.

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