Indian households are traditionally known to spirit away their surpluses in land, property and gold, depriving the economy of capital for more productive uses.
Therefore, data presented in RBI’s latest Annual Report showing that households sharply raised their financial savings in FY18 is cause for celebration. Gross financial savings recorded a jump from 9.1% of gross national disposable income in FY17, to 11.1% in FY18, the highest reading in the last seven years.
But the data hides some disquieting trends too.
Back to cash
In FY17, bank deposits absorbed 70% of the incremental financial savings of households, or 6.3% of their disposable income. Savings in hard currency were negative as demonetisation forced householders to ferret out their cash holdings and park it with banks.
Had this trend continued, that have would meant more resources for lending to government and industry.
But RBI data shows that, in FY18, households went right back to hoarding cash in their mattresses. The proportion of disposable income that went into bank deposits plummeted from 6.3% to 2.9% in FY18. Savings in hard currency shot up from a negative 2% to a positive 2.8% in FY18.
The shift becomes clearer in money terms. FY17 saw savers draw down their cash holdings by ₹3.1 lakh crore, to deposit ₹9.4 lakh crore into banks. In FY18, they halved their bank deposits to ₹4.7 lakh crore but added ₹4.7 lakh crore in hard currency.
Bank deposits in FY18 fell below pre-demonetisation levels. In the six years to FY16, savers put an average ₹5.8 lakh crore into bank deposits every year.
One can only speculate as to why they did this. Expectations of higher inflation and dismal interest rates on deposits may have prompted savers to sit on cash while they re-evaluated their options. Or, faith in the banking system may have been shaken by scary news on bad loans, bail-ins and mega fraud.
Market beckons
While banks were losers, marked-linked products reaped a bonanza. ‘Shares and debentures’, a category of financial savings, saw a significant jump in FY18. This includes investments in shares and bonds issued by both the private and public sectors and units of mutual funds. Market instruments bagged 0.9% of income in FY18, up from 0.2-0.3% in the previous 6 years.
RBI estimates that household money flowing into these instruments jumped more than fourfold from ₹36,265 crore in FY17 to over ₹1.5 lakh crore in FY18.
While this contrasts sharply with the risk-aversion evident in hoarding cash, it’s possible that different segments of savers reacted differently to falling rates.
Between FY12 and FY17, while bank deposit rates fell, a soaring stock market made for double-digit returns from shares and mutual funds, which may have drawn more affluent savers to these assets.
But right now, deposit rates are edging up and stock prices are seeing sharp setbacks. Data for FY19 would show if investors have embraced market instruments for good or were simply chasing returns.
Borrowing spree
While gross financial savings witnessed a material jump to 11.1% in FY18, households’ net financial savings were much lower at 7.1%, a mild improvement from 6.7% in FY17.
RBI arrives at the ‘net’ financial savings, by deducting the borrowings of households from their gross savings.
Therefore Indian households seem to have gone on a borrowing binge last year, with new loans taken shooting up from 2.4% of disposable income in FY17 to 4% in FY18. In money terms, the households’ new financial liabilities jumped from an average ₹3.5 lakh crore in the six years to FY17, to ₹6.7 lakh crore.
One segment of savers may have put away more money towards emergencies while another is on a debt-driven spending spree.
Recent studies have flagged the millennials’ aversion to savings, and affinity for debt. But the jump in loans could also be a sign of small businesses borrowing more to tide over tough times.
After all, the official definition of ‘household sector’ in national income accounting also covers family-owned businesses which make up the bulk of India’s informal sector.