Subdued Savings and Rising Borrowings Cast Shadow on India's Economic Growth

Many families are finding it increasingly difficult to set aside money for future needs or investments. Instead, they are turning to loans and credit to make ends meet.

Srajan Girdonia
25 Sep 2023
New Update
Reduced Savings.jpg

India's economic landscape is currently undergoing a period of uncertainty and concern as rising inflation and stagnant household incomes are impacting the financial health of its citizens. Recent data released by the Reserve Bank of India (RBI) highlights a worrying trend of subdued savings and escalating borrowings among households, raising questions about the nation's immediate growth potential.

Rising Inflation and Stagnant Household Incomes

One of the central issues contributing to the financial strain on Indian households is the soaring inflation rate. Inflation has reached a concerning 11-12%, pushing up the prices of essential goods and services. This surge in inflation is not only eroding the purchasing power of consumers but also affecting their ability to save.

Simultaneously, household incomes have remained largely stagnant. Despite efforts to boost employment and wages, the average Indian household has not experienced significant growth in their earnings. This stagnation, when coupled with the high inflation rate, is putting immense pressure on the financial stability of households.

Subdued Savings and Higher Borrowings

The consequence of rising inflation and stagnant incomes is a noticeable decline in savings and an increase in borrowings among households. Many families are finding it increasingly difficult to set aside money for future needs or investments. Instead, they are turning to loans and credit to make ends meet.

Economists are expressing concerns about the sustainability of this trend. Nikhil Gupta, an economist at Motilal Oswal, warned, "The combination of weak income growth and falling financial savings, led by borrowings, is unsustainable." This trend not only hampers households' financial security but also has broader implications for the economy.

Impact on Economic Growth

The latest data from the RBI has raised red flags regarding the immediate growth potential of the Indian economy. Private consumption, which has historically been a driver of economic growth, may see weaker performance than anticipated due to the financial strain on households. As people prioritize essential expenses over discretionary spending, businesses reliant on consumer demand are likely to face headwinds.

Furthermore, the delayed private capital expenditure (capex) cycle adds to the concerns. The investment needed to propel economic growth is being postponed, potentially leading to a prolonged period of economic uncertainty.

Uncertain Road Ahead

As the Indian economy grapples with these challenges, the question of whether consumption growth can be substituted by investments remains unanswered. Experts suggest that the outlook is uncertain, and much will depend on how the government and policymakers respond to the current economic environment.

Addressing the issues of rising inflation and stagnant incomes will be crucial in restoring the financial health of households and bolstering consumer confidence. Additionally, measures to encourage private investments and reduce the burden of borrowings on families should be considered to stimulate economic growth.

India faces a challenging economic landscape characterized by high inflation, stagnant household incomes, subdued savings, and rising borrowings. These factors not only strain the financial well-being of individuals and families but also cast a shadow on the immediate growth potential of the economy. Policymakers and economists will be closely monitoring these developments as they work towards finding solutions to ensure the long-term economic stability of the nation.