Fall in household savings not a worry as of now, says former chief statician Pronab Sen

India's net household financial savings growth rate has fallen to the lowest in eight years at 6.5 percent according to the latest data released by the National Statistics Office (NSO).

The data states gross savings have dropped in absolute terms from 20 trillion in FY18 to 19.9 trillion in FY19. CNBC-TV18’s Latha Venkatesh explains the numbers and later former chief statistician Dr Pronab Sen shared his views on the same.

India’s total household savings have fallen in aggregate terms from 20 trillion in FY18 to 19.9 trillion. From the gross, if you deduct household liability – that is loans taken by households – you get net savings and that has dropped to 6.5 percent of gross domestic product (GDP). When the new base year started, our percentage of household savings to GDP used to be at 9 percent and before that 11 percent but then the methodology changes and we were at 9. Now we have dropped to 6.5 percent, so that is a little worrisome.

Net savings have dropped because gross has dropped. It has also fallen because households are taking more loans. The liabilities or loans could have grown because of MUDRA and because banks are pushing a lot of retail credit. Now because corporates are not borrowing, there is a lot of retail credit borrowing and that is another reason why you are seeing a lot of fall in net household savings.

There are also methodology issues in this. Reserve Bank of India (RBI) used to publish both savings and investment data and NSO also used to publish – the two numbers didn’t match because NSO was not including enough of mutual fund (MF) and insurance data. Now the two institutions have got together and cleaned up the data. So, there is no disputing this data that our net household savings has genuinely fallen.

Dr Sen said “You have to keep in mind that 2017-2018 was a very unusual year, the post-demonetisation year. In that year, the gross savings went up because all of us simply transferred our tax reserves into the banking system. If you look at the data – what you find is in 2017-2018, the gross savings of households went up by more than Rs 4 lakh crore, while the trend was of Rs 1-1.5 lakh crore So there was a huge bump up, almost four times bump up in 2017-2018. Some of that has corrected. So, if you look at the trend, in fact we are above trend as of now,” Pronab Sen said.

“As far as household savings are concerned they have not fallen. What has fallen is corporate savings are down and government savings are down. So far as households are concerned, if you leave out 2017-2018 - which was an unusual year – there has been no fall in savings. The real issue is that household sector which includes unincorporated businesses are borrowing more, which is a good thing. So, I wouldn’t worry too much about it as of now,” he added.

When asked if the new tax regime would have any impact on the savings rate, he further mentioned, “If you look at what is happening to the savings behaviour of households, small savings weren’t doing very much until the banking crisis erupted and then suddenly small savings took a spurt. In the last couple of year’s small savings have gone up by over 20 percent a year. What it means in effect is that the large corpus in small savings is essentially a result of lack of confidence in the banking sector or in the MF sector."

"Whether the change in income tax rate is going to lead to a shift in behaviour is very difficult to say because we really don’t know what is driving it. I don’t think we need to worry too much about the savings at the moment because in India most household savings are not that sensitive to interest rates. What they are sensitive to is people’s expectations about the future.”