Explained: Why India Is Saving More And Borrowing Less

In an interview with BOOM, Madan Sabnavis said that even though people are saving more, the low consumption rate is a matter of concern.

The Reserve Bank of India, in its annual report for 2020, has said that the net financial saving of households have increased to 7.6% of the gross national disposable income. According to the report, the increase in financial saving is due to a moderation of financial liabilities than in financial assets.

However, even though people saving more is a positive, the low consumption rate which is driving the economy down, is a matter of concern according to Madan Sabnavis, Chief Economist at CARE Ratings.

Speaking to BOOM's Govindraj Ethiraj, Sabnavis said, "Part of your consumption is also kind of savings because we're putting money into a television set, in an automobile. That would be analogous to saying it's a saving. So having less physical savings, more of financial savings is typically the syndrome which we have when there's a lot of uncertainty in the economy, something which has gotten exacerbated in the current year thanks to COVID-19."

Sabnavis believes that the immediate concern facing the country is to create more jobs so as to stimulate people's consumption and reversing the slowdown.

"This kind of thing is going to last for 2021. I do not see any kind of change in this particular trend, where people are going to continue to save more in financial assets rather than in physical assets. This is something which is going to become deeper in this particular year. And in terms of Indian manufacturing, I think this is going to be a concern for them. Because unless we address this entire puzzle of how do I create more jobs and increase overall income which improves the sentiment in the economy, only then will the households be position to say that look, I'm going to consume more," Sabnavis said.

Click here to watch the full interview

The full transcript of the interview can be read below.

Govindraj Ethiraj: Hello and welcome. Financial liabilities of Indian households have dropped across the country, net financial savings of households are estimated to have improved to 7.6% of gross national disposable income in 2019-20 according to preliminary estimates published by the Reserve Bank of India in its annual report. Now, this means quite simply that people are saving more and borrowing less. Now, it might seem like this is a good sign, because obviously, people are being more careful and not blowing up all their savings or their income, but it's also a cause of concern. Let's find out why. I'm joined now by Madan Sabnavis, Chief Economist at CARE Rating. Madan thank you very much for joining us.


Madan Sabnavis:
See, what you're saying is very interesting. And I would say it's more or less expected because we're talking of times when there is a lot of uncertainty So this was something which started even before COVID-19. So we're really talking of 19-20. So this is a time when jobs are not being created at a commensurate rate with growth, which had already slowed down to 4.2%. That this kind of an environment, what really happens is that people tend to save more than they spend. And we've also seen that last year, for example, the entire story of consumer demand picking up in the in the festival season post harvest season, that's not really happened, which means that people were preferring to save the money. And the corollary was, of course, that you were spending less.

So what you're saying yes, it's a good thing because people are saving more in financial instruments rather than putting it in gold, because we had all those restrictions on gold. So it was not really investing that much in gold, and property was down so real estate had its own problem. So therefore, people are investing more in financial assets. But since the major thing which has been driving the economy down today is low consumption, I think it would be a matter of concern. And that can be addressed only in case we're able to increase income, which can be done in case we create more jobs. So I think that's where the conundrum really lies.

Govindraj Ethiraj: So we'll come to the income part. So what is that figure? Or what is that band, after which things get worrisome. So at some point, obviously, it's good as we've all agreed that people are saving. At another point, if they save too much, then obviously, they're not buying things, which means I cannot consume products and services and therefore help the people who are manufacturing those products or delivering those services. But there must be some band that is the comfort zone on both sides.

Madan Sabnavis: Typically, the thing is, the difference between your savings and capital formation should not be more than 2%. Anything above 3% will be a problem from the point of view of investment. So we don't really have a specific number which can talk of savings. But today normally when savings get converted to investment. I think it's a good thing. So if we had these high rate of savings, financial savings, which have been used by banks in order to lend to people who want to invest, that will bring about growth and I will not see any major problem out there, because it would be growth which is being inspired by investment rather than consumption.

But today we have a situation where banks had these funds deposits growing, but the money was going more into government securities. So, therefore, it was a comfortable situation as far as the government is concerned the banking system RBI everybody put together, but it did not help to bring about growth. The growth comes from consumption and investment. It has to be backed up by domestic savings or by foreign investment. And what we talk about the current account deficit the last year we saw current account deficit coming down meaning our savings were high, domestic savings were high, investment was also not happening. So therefore it was was a comfortable situation but a very uncomfortable one.

Govindraj Ethiraj: Okay, so in terms of how much people are actually saving and what they are perhaps not saving, because let's say they were buying gold, and now they are not so let me put it differently. So people were maybe saving in other kinds of assets that they are now either liquidating and moving into financial savings. That means if I had gold, I sold gold. And I instead went and put it in my bank deposit, which obviously doesn't give me that much of a return, but maybe I feel more secure. So if that is the case, then why should this have an impact on consumption because this is money that I'm only moving from one asset to another asset.

Madan Sabnavis: Actually it's bit that way I look at it is that A, I have an income and B, it's a growth in this income. Now my income is not been growing, and I'm not certain, my consumer confidence is lower. So therefore, what do I really do is that I'd say, look, let me not spend money today. I'm not quite sure of the future tomorrow. So therefore, let me put the additional income into savings. That's how I compromise on consumption. Because part of your consumption is also kind of savings because we're putting money into a television set, in an automobile. That would be analogous to saying it's a saving. So having less physical savings, more of financial savings is typically the syndrome which we have when there's a lot of uncertainty in the economy, something which has gotten exacerbated in the current year thanks to COVID-19.

Govindraj Ethiraj: Okay, so if we were to now look a little ahead, how does this play out? How could this play out if financial savings remain high and people continue to spend less? And how will it affect and can we quantify the impact on the consumption or on the manufacturing of products or the delivery of services?

Madan Sabnavis: See this kind of thing is going to last for 2021. So, I do not see any kind of change in this particular trend, where people are going to continue to save more and save more in financial assets rather than in physical assets, which includes gold and other consumer durable goods. So this is something which is going to become deeper in this particular year. And in terms of Indian manufacturing, I think this is going to be a concern for them. Because unless we address this entire puzzle of how do I create more jobs and increase overall income which improves the sentiment in the economy, only then will the households be position to say that look, I'm going to consume more.

But I think in terms of India INC, I think you have to be more cautious in terms of what kind of projections you're making for this year. Because we have seen a number of corporates, especially in the discretionary spending, as well as in terms of FMCG actually saying that they're very sanguine about things turning around in this particular festival season, which I think may not really happen, because of this particular trend, which we've seen where people are going to continue to save more. And we've already seen bank deposits are growing, mutual funds are doing fairly well, because the stock market is doing well. Individuals are saying, okay, I don't go for bank deposits. Let me go for a mutual fund, which is a relatively better deposit and relatively more safe, safer than investing directly into the stock market. But ultimately, it's going to affect overall consumption. And when we're talking about negative GDP growth this year, is going to be fueled by a very high negative growth in consumption.

Govindraj Ethiraj: Any broad trends that you're seeing? So we focused on one aspect which is individual borrowing and savings. Any other trends that you feel that are linked to this or will be an outcome of this?

Madan Sabnavis: See another thing that you have seen because of this conservatism which is there in the Indian household, if you look at the overall level of borrowings also has come down. Earlier, it was a case of saying that I would also continue to borrow in the market from the banking system. The reason being I want to buy a house, I want to buy a vehicle or what just wanted for a marriage or whatever personal reasons it is. But what we're seeing is low growth in credit. And this is primarily because of your retail segments going down.

But today we have a situation where SMEs are actually getting funds, but there's some kind of positive momentum there. But if we're looking at other sectors, non-agriculture, non-SME sector, one is of course, there is demand coming from the manufacturing sector. But if you look at a retail credit, also, there's definitely signs of a slowdown out here, because individuals who don't have a job who are having a lower income, I'm not going to get into borrowing money for consumption purposes. So I think this would also be adding to the fact that I'm not feeling secure. I don't want to borrow to buy something. Something which was not there in the past when we had witnessed solid growth. But I think both these two engines are going to fire.

Updated On: 2020-08-28T16:12:49+05:30
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