New Delhi [India]: India’s savings rate, while not alarming, is weaker than expected, especially in the context of low foreign direct investment (FDI) inflows, according to a recent report by Blume Research.
The report identifies household financial savings as the key concern, citing a sharp increase in financial liabilities, particularly unsecured personal loans, as a primary reason for the decline.
“A high savings rate is necessary given low FDI rates. A deep dive into savings illustrates that the culprit is financial savings (as opposed to physical savings), and the reason is rise in financial liabilities, chiefly led by rising (unsecured) personal loans,” the report stated.
Declining Household Savings: A Major Concern
Although India’s overall savings rate appears stable, the household savings component—the largest contributor—has been shrinking over the years.
- In FY00 (Year 2000), household savings made up 84% of total savings in the economy.
- By FY23, this share had dropped to just 61%, signaling a worrying trend.
The report points out that household financial savings have seen a drastic fall from 10.1% of GDP in FY00 to just 5% in FY23. At the same time, financial liabilities have increased from 2% to 5.8% of GDP in the same period.
Rising Household Debt: Shift from Housing to Consumer Loans
A significant portion of household debt in India now comprises non-housing debt, which is higher compared to many other economies.
- The share of consumer loans in total credit has surged from 21% in FY16 to 34% in FY24.
- In contrast, the share of industry loans has fallen from 42% in FY16 to 34% in FY24.
This trend indicates a shift from productive business investments to increased consumer borrowing, which could have long-term economic implications.
Small Ticket Personal Loans (STPL): A Key Driver of Debt Growth
One of the major reasons behind the growing household indebtedness is the rise of Small Ticket Personal Loans (STPL), which are unsecured and easily accessible.
- Non-Banking Financial Companies (NBFCs), including fintech firms, have emerged as the primary lenders.
- These loans are often disbursed digitally, offering quick credit but also contributing to a rise in financial liabilities.
Economic Implications and Future Risks
The increasing burden of household debt raises concerns about India’s financial stability. With a higher proportion of income going toward loan repayments, household savings are likely to continue shrinking, potentially impacting long-term economic growth.
The report suggests that addressing this issue will require policy interventions to boost financial savings and regulate unsecured lending.