In the midst of all the chatter about the Coronavirus, the impending Trump visit, and rising inflation; most readers missed out on an extremely important data point. India’s savings rate has fallen to a 15-year low and is down nearly 600 bps from the peak of 2007. Why is the savings rate so critical and what are the implications of dwindling savings?
Look at the savings numbers
There have been some disconcerting statistics pertaining to savings. Here we are referring to overall savings and also to household savings. In India, the household savings account for over 60% of all the savings. While private business accounts for the balance, PSUs are actually dis-saving. Some numbers are really startling. The savings rate had touched a peak of 36.4% in 2007 at the peak of the bull rally. However, between 2007 and 2012, the savings rate fell to 34% and since then it has fallen further to just above 30%. This is marginally above the savings rate of 29% recorded in the year 2003. It is not only overall savings, but even household savings are sharply down. For example, household savings accounted for 23% of the GDP in the year 2012 but now accounts for just about 18%. That clearly implies that Indian households are saving much lower than they used to save 10 years ago. This is partly due to a greater propensity among Indians to spend and partly due to the sharp increase in the cost of most goods and services.
Why falling savings is worrying?
Back in the early 2000s, the US used to have an annual dis-saving ratio of (-5%). That means; for every Rs.100 earned, the average American was spending an additional Rs.5 by borrowing. The US had the exorbitant privilege of the US dollar but the rupee has no such major advantage. Falling savings means 3 things and all three are a concern. Firstly, it means that the average Indian household is financially a lot more vulnerable today than in the past. Secondly, this changing equation has led to a spurt in retail borrowings and that explains how individuals are spurring the demand for credit. Lastly, Indian corporates and the government cannot rely on domestic savings to fund their plans. As they increase reliance on foreign borrowings, the sovereign ratings and the INR come under stress.
Is the budget ill-timed?
To an extent, one can argue that some of the Budget-2020 proposals may be ill-timed. At a time when Indian savings are falling to multi-year lows, the budget has encouraged consumption spending at the cost of long term savings. Doing away with the tax incentives for savings with the lure of lower taxes could take away the incentive to save. What India needs right now are more savings and not less savings? It is time to seriously think up ways to increase the savings and not to reduce the savings rate!