Education and vehicle loans from Scheduled Commercial Banks increased significantly between 2021-22 and 2022-23, growing at 17% and around 25% respectively. This has led to significant changes in the composition of household savings.
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. These are two contrasting narratives, one of pessimism and distress, the other of optimism. What does data tell us about the state of the economy?
The optimistic claim
There is evidence to support the government’s narrative of a shift from financial to physical assets. Post-COVID, there has been an increase in household construction. Between 2020-21 and 2021-22, the construction sector was the fastest growing sector, growing at nearly 15% (when measured in 2011-12 prices), and 10% between 2021-22 and 2022-23. Only the trade, hotels, transport and communications sector grew faster in the latter period. Housing loans from Scheduled Commercial Banks (SCBs) grew at double-digit rates in all years between 2018-19 and 2022-23, with loans from housing finance companies growing almost 17 times between 2019-20 and 2022-23.
Liabilities in other non-financial assets have also increased. Education and vehicle loans from SCBs increased significantly between 2021-22 and 2022-23, growing at 17% and around 25% respectively. This has led to significant changes in the composition of household savings. The share of physical assets — excluding gold and silver — is almost 60% of households’ total net savings, with the share of financial savings reducing from 39.6% in 2017-18 to 38.77% in 2021-22. That is, by taking advantage of the low interest rates set by the RBI in the wake of the pandemic, households may have increased their liabilities not to fuel consumption, but to purchase non-financial assets such as houses.
Published in: The Hindu
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