And What is Fueling the Household Savings in India Once Again?
Among all the reasons Indian households are expected to become the top net lenders to the economy for the decades ahead due to an increase in their income leading to an increase in their savings. This optimistic outlook was expressed by Reserve Bank of India (RBI) Deputy Governor Michael Patra when he spoke at the Confederation of Indian Industry’s Finance Summit.
The Shift in Household Savings: This article originally appeared in the Journal of Financial Planning as Moving from Financial to Physical Assets.
Patra pointed out a clear decoupling of households’ savings where net financial savings are down nearly half of the levels seen during 2020-21. This decline was mainly due to the portfolio rebalancing from the prudential savings that were made during the period of the pandemic and changing from financial assets to real assets.
But as incomes are on the rise households have started accumulating financial assets again. Apart from COVID-constrained years, Patra pointed out that DIS FMI indicated that IME household financial assets rose from 10. Genlment shifted from 6% of GDP in 2011–17 to 11.5% in 2017–23. He also said physical savings have risen to above 12 percent of GDP in the post-pandemic period and are capable of rising more; physical savings reached a high of 16 percent of GDP in 2010-11.
Household Savings and Its Contribution To Economic Investment
In Patra’s opinion, domestic savings have been instrumental in funding most of the demand for investment in the economy because of improving productivity and the conservativism of the Indian labor force. He conjectured that the sum of investment and savings ratio would widen in the wake of a rise in domestic savings emanating from the households and businesses, and government dis-savings following fiscal rationalization.
Capital Efficiency and Workforce Productivity: The Source of Economic Development
Human capital is important for value addition for the economy while capital assets support the process. In this line of thought, Patra stated that continuing with vigorous capital efficiency will reduce the capital-output ratio and thereby boost economic growth.
Call to Action for The Private Sector and Financial Institutions
Patra also said that the private sector should contribute more to funding the infrastructure deficit to support infrastructure development. He encouraged the NBFCs and fintech companies to work for the financial requirements of the MSMEs sector.
Investment in Skill Development: It has been considered one of the top priorities of the United States in the twenty-first century.
While emphasizing the need to invest in skill development, much emphasis was laid by Patra that India is standing at the precipice of a major demographic dividend. He said that about Rs 2-3 trillion would be needed in the next six years every year for skill development, re-skilling, and up-skilling. Sovereign green bonds were also supported by Patra to support these efforts of conservation.
The Role and Significance of Corporate Bond Market and External Finance
Lastly, Patra stressed the need for a greater depth of the corporate bond market to underpin the growth of the financial sector and finally, spoke of the fundamentals of external finance that will provide a fillip to India’s growth trajectory.
