Declining Savings Rates in India

In the past decade the Indian economy has performed exceptionally well, with annual GDP growth rates staying constantly above 6% (except for 2021 due to COVID) and even crossing 7% in the past few years. Among other factors, increasing investment have been one of the major factors that have aided this economic growth. During the last decade the investment rate has consistently remained above 30% of nominal annual GDP (as per data from CEIC) during which period, India's nominal GDP increased from ₹99 trillion in 2013 to over ₹295 trillion in 2024. This shows how important investment is for the growth of our economy. In order to continue this growth in the future, it is essential for us to be able to grow our levels of national investment. However this is coming under risk.

Importance of Savings

Circular Flow of Income

It is a basic principal of economics that savings funds investments. Theoretically, assuming the case of a closed economy, all of the national investment is funded by national savings and even in open economies like India, although foreign investments backed by foreign savings do play a role, national savings still hold significant importance. We can see this in the following diagram showing the Circular Flow of Income in an economy. The basics of national income studies in economics tells us that in any economy, household savings is the foundation for all investment in the economy. The household savings are mobilised by financial institutions and financial markets and then put into productive uses. This is what forms investment in an economy. 

Situation of Indian Household Savings

CRISIL Report

Household savings in India have been on a decline in the past decade. From 23.6% of GDP in FY12, household savings have fallen to 18.4% in FY23. This is a concerning trend in the economy. In India, household savings constitute approximately 60% of the total savings in the economy and supports a large part of the investment needs of the country. To understand the reasons behind the fall in the savings rate we need to first look into a few key figures about the economy.

The NSO bifurcates the household savings data into three broad categories:

• Saivngs in financial assets.
• Savings in physical assets (mainly real estate).
• Savings in gold and silver.

The figure for financial savings is caclulated as the net difference between gross financial savings and financial liabilities. Gross financial savings is comprised of household cash balances and deposits and other financial market instruments, while financial liabilities includes household borrowings from financial institutions.

According to the data from the NSO for FY23, savings in physical assets was the highest at 12.9% of the GDP followed by  net finanial assets at 5.3% and gold and silver at 0.2%.

Comparing this to long term trends showed that the share of overall household savings in GDP, at 18.4% was below the pre-covid decadal average of 20.1%. The share of gross financial savings in GDP was on par with the decadal average of 11%. However, share of financial liabilities, at 5.8% of GDP, was much higher than the average of 3.4%. This resulted in the net financial savings, at 5.3% of GDP, to fall below the average of 7.6%. Meanwhile, savings in physical assets, at 12.9% of GDP was nominally higher than the average of 12.2%.