How to address India’s falling household savings

Understanding the decline in household savings

India’s gross domestic savings rate fell from 34.6% of GDP in 2011-12 to 29.7% in 2022-23—the lowest in four decades. This decline reflects a steep drop in household net savings, which historically constituted 60.9% of aggregate gross domestic savings.

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Key factors behind this trend include shifting consumption patterns and evolving investment behaviours among modern consumers. Households have increasingly prioritized physical assets as their primary savings vehicles, while financial liabilities have surged. Annual household borrowings now account for 5.8% of GDP, marking the highest levels since the 1970s.

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Declining interest rates on fixed deposits and other traditional savings instruments have made them less appealing. In their place, riskier investment avenues like equities and mutual funds have gained favour, driven by the promise of higher returns.

Shifting investment trends

Once conservative savers, Indian households are now embracing diversified investment portfolios. Equity markets, mutual funds, and real estate have emerged as popular choices. Between FY21 and FY23, household investments in equities and mutual funds nearly doubled—from ₹1.02 trillion to ₹2.02 trillion.

While this shift reflects a growing appetite for wealth creation, it raises concerns, especially for low-income households. A move away from systematic savings leaves many vulnerable to financial shocks. This trend, coupled with rising personal loan rates, suggests increased reliance on flexible financing options. The unrestricted nature of such loans often enables their use for speculative activities, such as investing in equities or trading.

The case for intervention

As households borrow more to fuel consumption, their savings erode. Higher debt burdens divert income toward repayments, leaving less room for savings. This decline in savings has significant economic consequences, reducing the pool of domestic capital available for investment and increasing reliance on external borrowings, which could exacerbate the current account deficit.

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To counter these challenges, the government must take proactive measures to rekindle India’s savings culture. Promoting micro-savings initiatives could be a game changer, addressing evolving consumer behaviour while fostering financial resilience.

Recommended measures

Tailored micro-savings products: Financial institutions should design savings products tailored to rural and urban needs. Urban consumers could benefit from digital micro-saving apps linked to everyday expenses, while rural households might prefer simplified savings accounts with flexible deposit options.

Incentives for savings: Offering tax benefits, higher interest rates, or government-backed guarantees for micro-savings schemes can make them more attractive.

Strengthening public savings platforms: Revamping post office savings schemes and initiatives like Kisan Vikas Patra (KVP) or Public Provident Fund (PPF) with better returns and easier access could encourage households to return to traditional saving methods.

Integration with social welfare programmes: Linking micro-savings initiatives with social welfare schemes, such as direct benefit transfers (DBTs), could help lower-income households save without immediate expenditure. For instance, a portion of DBT payments could be automatically diverted to savings accounts, with tiered benefits like matching contributions from the government or financial institutions.

Leveraging the business correspondent (BC) network: The BC model, which connects underserved regions with formal banking services, can be optimized to promote micro-savings. Monetary incentives for BC agents could encourage them to facilitate more savings transactions.

In conclusion

The decline in household savings is not an isolated issue but a reflection of broader socio-economic shifts. As rising costs and changing consumption patterns strain households, policymakers must create an environment conducive to rebuilding a culture of savings.

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Promoting micro-savings is not just a financial strategy but a social imperative to protect the economic resilience of millions of Indian families. A collaborative effort involving the government, financial institutions, and private players can ensure that savings remain central to Indian households, safeguarding both their futures and the nation’s economic stability.

Dharmender Jhamb is partner at Grant Thornton and a senior fintech industry leader.