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RBI data on household savings and debts

RBI has recently released (March 19) household financial saving and con sumption data for the second quarter of financial year 2020-21 (Q2 of FY 21).


Sentinel Digital DeskBy : Sentinel Digital Desk

  |  26 March 2021 4:45 AM GMT


Udayan Hazarika

(The writer can be reached at

RBI has recently released (March 19) household financial saving and con sumption data for the second quarter of financial year 2020-21 (Q2 of FY 21). The private savings behaviour of the people during the quarter presents a peculiar trend which is not usually observable. This saving behaviour needs to be explained under the backdrop of lockdown imposed due to the pandemic. The lockdown was sudden and unaware of its characteristics, people did not know what to do during lockdown. The first quarter of the FY21 had the full impact of lockdown. But by the time the July-September quarter started (Q2), the lockdown was eased and despite opening up of almost all the major sectors of the economy, general people were not confident enough to spend. Increases in expenditure on essential consumption items do not lead to any significant increase in consumption and thereby the demands. The situation was such that -people who were regular income earners were shaky in making expenditure while there were also the huge segments of those category of people who were getting their salaries cut due to closure of firms during lockdown or had no additional money to spend and in most cases even the essential expenditures were withheld for making provisions for crucial days.

While the above were the usual behaviour of the general populous towards spending money during lockdown, the RBI had earlier estimated the household financial savings during the first quarter of 2020-2021 at 21 per cent of the GDP for that period. It was at a time when the GDP had registered a contraction to the tune of 24.4 per cent in the first quarter of financial year 2021. Thus, higher savings indicates withdrawal of money from circulation leading to slowing down of trading, and slump in the business activities leading to fall in GDP growth. All these have the roots in people's fear of losing money which induces people to save more than they usually do. This happens due to i) low purchasing power of the people – resulting from cut in income or delayed disbursement of income, ii) shortage of supply of essential items and imposition of taxes. But in the present case, it was due to lockdown which resulted in i) low purchasing power due either to low salary or no salary at all coupled with closure of the markets. Involuntary savings occurred mainly because of the lockdown which prevented even those persons who can afford to purchase. Thus in the first quarter, the high rate of household savings was exactly the handiwork of lockdown and market has absolutely no role to play in it. But in the second quarter, when the market reopened one cannot perhaps expect that people in large numbers will come out to the market and start spending on discretionary items that were withheld for long time. For this, first of all people need to have confidence in the market and they got to believe that quality products are available in the market. Usually, in respect of essential items and in absence of fresh information about the market, the sellers attempt to sell out whatever they have so as to save their money already invested and buyers also make panic buying for speculative motive. But this usually does not happen in case of buying household assets although it happened in Q2 FY 21. This led to the fall in the rate of savings to the extent of more than 50 per cent to 10.4 per cent in Q2 from 21 per cent of Q1. The consumption picked up not only because of the spending from disposable income but also due to availing of the borrowed fund which have become cheap due to government intervention in the market. In the second quarter also GDP remained at contraction stage (8.4%) but the rate of contraction have been significantly minimized. Some of the macro variables are paying dividends due to pumping of huge funds but still a long way to go to reach the pre-Covid stage.

Despite a situation of above type in the second quarter however the household consumption picked up significantly. The RBI has estimated that due to the overall consumption growth, the rate of contraction of private final consumption was 26.3 per cent in Q1 of FY 21 has come down to 11.3 per cent in the Q2 as against the same period of previous year. The Q3 figure as estimate by MOSPI shows a further down to 2.4 per cent leading us to believe that it's almost neutralizing the effect of Covid-19. However, while looking at its contribution to GDP which was 58.6 per cent, we find that it's still falling short compared to the last year which was 60.2 per cent in Q3 (FY21).

If we trace the growth path of the household debt to GDP ratio, it presents a gradually increasing trend from July 2019 at the level of 11.6 per cent to 13 per cent in July 2020. Thereafter, we have a sharply rising trend right from the first quarter of FY 21 from 35 per cent to 37.1 per cent in Q2 and 37.3 per cent in the Q3. The result of the growing indebtedness of the households is however not always having a boosting effect on the economy. The increase in household debt leads to increase in private consumption level usually only during the short periods. People takes household loans for buying household assets such as for buying a vehicle, constructing houses, for providing higher education to the wards, etc. Initially, in a short period this expenditure adds to the consumption and helps in increasing the demands which are a good sign for a recessionary economy. But as the time passes, the impact of this consumption expenditure turns out to be a liability with the interest rate and cost of debt management. People become busy in paying the interest even sometimes withdrawing or regulating the regular consumptions. Thus, in the long run the household debt affects negatively the growth of GDP. The effort therefore should be to reduce the household debt to GDP ratio within 20 per cent level otherwise experience shows that it is counterproductive (Chudik, Mahaddes, Pesaran & Raissil: 2016).

A growing economy under recession needs high doses of consumption expenditure which could be realized to some extent by motivating masses and then with the government intervention by making available low cost debt or by providing subsidies on items of gross demands. Creation of jobs on contract basis for a year or two will be demand driven and at the same time will take care of growing unemployment setting aside by recessionary forces. Care need to be taken at this stage so that inflation inherent on such corrective steps could be kept under control.

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