Indians are diverting their savings away from traditional bank accounts, signaling a shift from the age-old mantra of “save more, spend less.”
Recent data from the Reserve Bank of India (RBI) bulletin, released in September 2023, reveals that India’s net household financial savings, encompassing bank savings, cash, and investments, declined to 5.1 per cent of the Gross Domestic Product (GDP) in FY23, down from 7.1 per cent in FY20-21.
The changing trend indicates a departure from the conventional approach of stashing money in bank accounts. So, where is the money going?
From financial savings to physical asset creation
Following the RBI’s data, concerns were raised about lower financial savings and higher liabilities. However, the finance ministry countered the argument and explained that households started spending more on the creation of physical assets such as houses and vehicles, taking advantage of low interest rates after the pandemic.
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The same fact was stated by SBI Research in a report. While higher spending on physical assets has led to a sharp rise in financial liabilities among Indian households, an analysis by SBI Research argued that “household savings must be looked into as a sum total of physical and financial savings”.
Essentially, therefore, the rise in liabilities is primarily associated with the creation of physical assets like properties and vehicles. The SBI report highlighted that over 50 per cent of retail credit to households over the past two years went towards housing, education and vehicle purchases.
The report noted that a low-interest regime resulted in a “paradigm shift of household financial savings to household physical savings in the last two years”.
Simply put, financial savings among Indian households have declined drastically, but that’s solely because of higher spending on the creation of physical assets, especially with the recovery in the real estate sector and the increase in property prices.
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So, are Indians truly saving less? Perhaps not in the context of traditional bank accounts, but evidently, there’s a substantial shift towards asset creation.
