A visit to local fruit and vegetable market last evening was quite revealing. The summer seasonal fruits like muskmelon (Rs140/kg); safeda mango (Rs180/kg) and watermelon (Rs45/kg), mulberries (Rs350/kg) all appeared becoming unaffordable for common households. Even if we assume that it is still early season and the rates will correct in next few weeks, my experience is that peak season rates are usually not less than 50% of the early season rates. Similarly none of the seasonal vegetables was available less than Rs50/kg.
An article in March
Bulletin of RBI highlights that the rate of financial savings of household
may have contracted to 10.4% of GDP in 2QFY21 from 21% in 1QFY21. It is also
suspected that the household savings rate may have further declined in 3QFY21.
The article reads that “The Covid-19-induced spike in household financial
savings rate in Q1:2020-21 waned substantially in Q2 in a counter-seasonal
manner. While households’ deposits and borrowings picked up, their holdings of
currency and savings in mutual funds moderated.” The article suspects that
“This reversion is mainly driven by the increase in household borrowings from
banks and non-banking financial companies (NBFCs), accompanied by a moderation
in household financial assets in the form of mutual funds and currency.
Nonetheless, households’ financial savings rate for Q2FY21 ruled higher than
that of 9.8% witnessed in Q2FY20.”
The AMFI data on mutual fund flows over past 8 months also
corroborates this trend.
The persistent fall in net household savings, especially due to
higher household debt must be a matter of serious economic study. While some
argue that this fall is a healthy corrective trend indicating towards improving
financial inclusion of Indian households. Better access of debt is leading to
higher household borrowing and therefore lower net savings rate.
This could be music to the ears of managers at retail banks,
consumer finance NBFCs and MFIs; but certainly not a good news for household
savers, who are struggling with negative interest rates on their savings (when
deflated by their respective household inflation not the official headline CPI
data).
I have stated this couple of time household savings is one of
the most critical elements of Indian economy. Ignoring it or undermining it, is
certainly fraught with grave risk.
During five year period between FY15 and FY20, annual household
savings in India have grown 64% from Rs24.4trn to Rs39.91trn. However, in this
period the household debt has increased 133% from Rs10trn to Rs23.4trn.
Traditionally, domestic savings, especially household savings,
have been a stable and sustainable source of funding for both private as well
public investments. Though liberalization of capital controls has opened the
doors for foreign capital. It still is not a major source of funding for
domestic enterprise. More particularly, the decline in financial savings of
households that begun in early 2000's has accelerated in recent years. This has
serious implications for the economy and therefore equity markets.
I sincerely believe that the government and policymakers have
not taken a holistic view of the problem and the steps taken so far are not
only inadequate but to some extent misdirected also.
I feel the issue needs to be analysed comprehensively for making
any worthwhile step to augment household savings, especially financial savings.
For example, the following questions may need to be answered:
The key cause for this trend, in my view, could be listed as
follows:
(a) Fall in average
age of house ownership. Higher income levels in urban areas, rise in nuclear
families and rise in real estate prices has prompted people to buy houses
earlier in their life cycle.
(b) Rise in personal
automobile ownership.
(c) Low growth in
white collar employment opportunities as compared to growth in workforce has
led to phenomenal rise in self owned enterprises leading to diversion of
savings to physical assets.
(d) Rise in gold
prices in 2000’s and subsequent rise in household gold holdings.
(e) Persistent
negative real rates in pst two decades.
(f) Stagnant real
wages for past one decade.
There are reasons to believe that the rate of household savings
may stay lower or even diminish further. For example, consider the following:
(a) Consumer prices
for households may remain high, even if the rate of yearly inflation moderates.
Expenses on items like education, health, energy, transportation,
communication, rental, protein, and fruit and vegetable shall continue to rise
disproportionate to rise in income. Hence the savings rate may remain lower.
(b) Material rise in
income and wealth disparities post demonetization and GST implementation.
Lockdown induced by pandemic has further accelerated the trend of rising
disparities.
(c) Factors like
lower investment growth, higher productivity gains through automation &
elimination of redundancies, restructuring of PSUs shall continue to impact the
employment growth, especially for skilled labor.
(d) Lower employment
opportunity may force more and more people towards self-enterprise, leading to
higher household debt.
(e) Last but not the
least, the trend for changes in consumption pattern shall continue. Bicycle and
Transistor Radio have already given way to motor cycle and smart phone as
essential marriage gift (dowry) in hinterland. The running expenses are to be
paid by someone after all - be it the bridegroom, his parents or the bride's
parents. Consumption of services like telecom, transportation, health and education
may continue to rise, leading to even lower savings.
The economic growth will have to find an alternative source of
funding (no capital control) or a way to grow household savings (lower taxes,
higher real rates, cheaper houses/rent, good public health/education/transport,
and farm employment).
In the meantime, the authorities will have to make some effort
to ensure that due to unaffordability of fruits, vegetables and milk, lower
middle class does not shifts majorly to unhealthy eating habits. If this
happens (if not already happened) the health of Indian society may worsen
further. Remember, we are already struggling with very high incidence of
diabetes, tuberculosis, hypertension, cardiovascular diseases, cancer and
female health issues like PCOD.
