The report recently published by the Reserve Bank of India is worrying. According to this report, there has been a decline in domestic savings in the country. Data shows that net domestic financial savings will remain at 5.1 percent of gross domestic product (GDP) in 2022-23, which is its lowest level in several decades. Last year it was 7.2 percent. There can be many reasons for such decline in financial savings. Since there has been an overall decline in savings, it is possible that the income of families whose income was hit during the pandemic may not have fully recovered. Therefore, it is possible that the improvement in the economy may be due to the profits of companies, which have been showing good growth for the last several quarters. Another reason could be that families have not been able to save due to continuously increasing inflation. The inflation rate based on Retail Price Index has remained at a high level since the pandemic. The Reserve Bank has also failed to achieve the inflation target set for 2022 and it had to explain this to the Central Government. The inflation rate is once again above the range set by the Central Bank. Financial liabilities of households also increased to 5.8 percent of GDP in 2022-23, which was only 3.8 percent in 2021-22. It can be assumed that people may have taken borrowing for consumption because their income was not sufficient. It is also possible that people may have spent and borrowed money to buy immovable property like houses etc. Loan availment figures also indicate that the pace of people’s borrowing has increased.
Domestic debt increased from 36.9 percent in 2021-22 to 37.6 percent of GDP in 2022-23. If consumption demand is also being supported by debt, which it seems to be to some extent, then there is a need to correct the household accounts. But demand will remain weak in future. This weak demand will clearly mean weak economic growth in the near term. It is expected that improvement in private investment will help growth. But in the absence of sustained growth in private consumption, companies may also not be willing to expand capacity. Since global demand is also expected to remain weak, companies may also not want to make new big investments. In such a situation, if private consumption, investment and exports remain weak from the macroeconomic point of view, the government will have to compensate for it. This is what the government has been doing for some time now through high capital expenditure. But given all the fiscal constraints, the government may not be able to do this for long.
A decline in household financial savings may also affect interest rates and investment. It is worth noting that government borrowing is greater than the supply of financial savings from the household sector. If the corporate sector starts borrowing more for investment. If the tax is imposed, interest rates will increase. Increase in investment along with low domestic savings will mean India will need to import capital. If it has to do so, then different types of problems will arise. In such a situation, it seems that the overall production will be affected by the shocks of the epidemic. While the recovery has been volatile and will take time to rebalance, the policy challenge therefore remains at a time when growth in the global economy is expected to remain slow and fiscal constraints may increase. How to achieve economic growth is a question worth considering. However, every possible effort will have to be made to increase domestic savings.