Money Matters: Declining Savings, Surging Loans in Indian Households

Savings among Indian families have declined but the tendency to take loans has increased. India is often hailed as a nation that embraces the culture of saving. However, present indicators suggest a growing concern. 

The consistency in savings within Indian households is on a decline. Despite this, the ownership of properties and vehicles has seen a rapid surge. Yet, according to economic experts, India’s capacity to manage and recover from debt still surpasses that of many leading economies globally. Let’s explore the details: 

The release of the Reserve Bank of India’s (RBI) Monthly Bulletin in September revealed that households’ net financial savings had fallen to 5.1% from 11.5% in 2020-21. Financial liabilities of households rose faster than their assets, with many writers highlighting this trend as an indication of rising indebtedness and increasing distress. The government, however, countered these claims. 

The Finance Ministry explained that while household financial savings may be reducing, it did not imply total savings were falling, since households took advantage of low-interest rates after the pandemic to invest in assets such as vehicles, education and homes. 

There could be two contrasting narratives, one of pessimism and distress, the other of optimism. However, an examination of the data reveals that even though housing loans increased, other forms of loans which might possibly be used for consumption increased even faster. But does this imply distress?

It is difficult to say from just one year’s data, for we do not know if this is a trend or a one-time event. One could say that households are borrowing to maintain consumption in the face of income loss after COVID-19 and high inflation. On the other hand, it could also be that pent-up demand during the pandemic is being realized in the form of debt-financed consumption, with households optimistic about future repayment.

However, even if the optimistic narrative is true, there are grounds for concern. The U.S. Federal Reserve’s commitment to maintaining higher interest rates to combat inflation would have a knock-on effect on interest rates around the world.

Rising interest rates in India would cause significant stress for households to meet increasing liabilities. 

If households have invested in real estate, rising interest rates would curtail their consumption spending and reduce aggregate demand in the economy. If, however, the narrative of distress borrowing is true, households would be subjected to further stress if interest rates rise.