Savings have long been the backbone of financial stability in Indian households. Saving is deeply ingrained in the country’s ethos and has traditionally provided resources for future uncertainties, children’s education and retirement. However, recent trends tell a disturbing story. Household savings rates have fallen sharply, raising questions about its causes, its broader implications and what steps can reverse this worrying trajectory.
Understanding the decline in household savings
India’s gross domestic savings rate fell from 34.6% of GDP in 2011-2012 to 29.7% in 2022-2023 – the lowest in four decades. This decline reflects a sharp decline in net household savings, which historically accounted for 60.9% of total gross domestic savings.
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Key factors behind this trend include changing consumption patterns and evolving investment behavior among modern consumers. Households have increasingly prioritized physical assets as their primary savings instrument, while financial obligations have skyrocketed. Annual household borrowing now accounts for 5.8% of GDP, the highest level since the 1970s.
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Falling interest rates on fixed deposits and other traditional savings instruments have made them less attractive. Instead, riskier investment options such as stocks and mutual funds have gained popularity, driven by the promise of higher returns.
Shifting investment trends
Once conservative savers, Indian households are now embracing diversified investment portfolios. Stock markets, mutual funds and real estate have become popular choices. Between FY21 and FY23, household investments in equities and mutual funds almost doubled ₹1.02 trillion ₹2.02 trillion.
While this shift reflects a growing need for wealth creation, it raises concerns, especially for low-income households. By moving away from systematic saving, many are vulnerable to financial shocks. This trend, combined with rising interest rates on personal loans, indicates an increased reliance on flexible financing options. The unrestricted nature of such loans often allows their use for speculative activities such as stock investing or trading.
The plea for intervention
As households borrow more to boost their consumption, their savings erode. Higher debt loads divert income toward repayments, leaving less room for savings. This decline in savings has significant economic consequences, reducing the amount of domestic capital available for investment and increasing dependence on external borrowing, which could worsen the current account deficit.
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To overcome these challenges, the government must take proactive measures to revive India’s savings culture. Promoting micro-savings initiatives could be a game changer, addressing changing consumer behavior while promoting financial resilience.
Recommended actions
Customized micro savings products: Financial institutions must design savings products that are tailored to the needs of rural and urban areas. Urban consumers could benefit from digital micro-savings apps linked to daily expenses, while rural households may prefer simplified savings accounts with flexible deposit options.
Incentives for savings: Offering tax breaks, higher interest rates or government-backed guarantees for micro-savings schemes can make them more attractive.
Strengthening public savings platforms: Revamping post office savings schemes and initiatives like Kisan Vikas Patra (KVP) or Public Provident Fund (PPF) with better returns and easier access could encourage households to return to traditional savings methods.
Integration with social welfare programs: Linking micro-savings initiatives to social security schemes, such as direct benefit transfers (DBTs), could help lower-income households save without immediate outlay. For example, some DBT payments could be automatically diverted to savings accounts, with tiered benefits such as matching contributions from the government or financial institutions.
Utilizing the business correspondent network (BC).The BC model, which connects underserved regions to formal banking services, can be optimized to promote micro-savings. Monetary incentives for BC agents could encourage them to facilitate more savings transactions.
Finally
The decline in household savings is not an isolated problem, but a reflection of broader socio-economic shifts. As rising costs and changing consumption patterns put pressure on households, policymakers must create an environment conducive to rebuilding a savings culture.
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Promoting micro-savings is not just a financial strategy, but a social imperative to protect the economic resilience of millions of Indian families. A concerted effort involving the government, financial institutions and private players can ensure that savings remain central to Indian households, securing both their future and the country’s economic stability.
Dharmender Jhamb is a partner at Grant Thornton and a senior leader in the fintech industry.
