Indian Household Savings and Impact on Economy
Any discussion on improvement or otherwise in the macroeconomic conditions in India would be insufficient if we do not incorporate the structural changes witnessed in past decade or so.
It may itself be a matter of debate whether some of the changes highlighted herein are structural or just cyclical. Nonetheless, I find these changes structural and see them impacting Indian economy in the long term.
First of all, the composition of household finances is changing structurally in my view. Household savings have historically funded the fiscal deficit and corporate profligacy at relatively much cheaper rate. Availability of large pool of household savings, even in the long phases of negative real rates, has kept Indian economy reasonably insulated from the turmoil in global economy, including Asian crisis of late 1980s, dotcom burst of 2000 and global financial crisis of 2008-09.
Of late the household savings have been shrinking and the share of household credit (personal loans) has been rising. This has forced government to increase the quota of foreign investors in deficit funding. This has made our debt markets and deficit financing more vulnerable to global events. In fact, it would be interesting to study the recent spike in domestic yields in light of selling of Indian bonds by foreign investors.
Lower household savings have also resulted in lower overall private consumption in past few years. Private consumption again has been a key strength of the Indian economy. Despite higher personal loan levels, household consumption has witnessed a declining trend. This, read with poor growth in per capita income over past many years, highlights another structural weakness that is creeping into Indian economy. Trying to emulate the advanced economy, we may end in a deep abyss. Brazil is a classic example, what we must not do. But unfortunately, we may be doing exactly that.
Growth in housing sector is key to sustainable growth for any developing economy. As a policy, the focus of the government has been on developing the affordable housing sector. The effort has yielded some results in past 2years. However, affordability of the households has not increased much beyond a few metro cities. As per RBI housing price index (HPI), house prices have increased on average 8-10% in past four years, approximately the same as the rise in per capita income.
We may rejoice the spikes in monthly IIP data or the tag of fastest growing economy in the world. But, we must lose sight of the fact that long term growth trend has stayed mostly flat in past five years, and there is little visibility of situation changing in next couple of years at least.
Phenomenal rise in sale of personal vehicles is often cited as a barometer of sustainable economic growth in India. In my view, we must analyze all dimensions of this phenomenon, rather than focusing just on the headline numbers.