Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The conundrum of financial distress and higher household savings amid covid

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Explaining the increased savings during the covid lockdown

The article explains the paradoxical increase in savings of Indian households during the pandemic.

Increase in savings during lockdown

  • Counterintuitively, the financial savings of people went up in April-June 2020.
  • Data compiled by the RBI reveal that in April-June 2020, household financial savings was 8.16 trillion.
  • For a perspective on how big this is, in April-June 2019, household financial savings was 2.02 trillion.
  • In July-September 2019, it was 4.85 trillion and in the two following quarters, it was 4.2 trillion and 5.14 trillion, respectively.
  • As a percentage of GDP, it was 21% of GDP in April-June 2020 (the lockdown quarter) against 4% of GDP in April-June 2019.

So, what happened to savings in the next quarter?

  • In the immediate quarter after April-June 2020, would you expect savings to move up, as things were opening up gradually?
  • Again, counter-intuitive.
  • In July-September 2020, household savings was 4.92 lakh crore, or 10.4% of GDP.

What explains such saving behaviour?

  • This has got to do with the human response to an emergency situation.
  • When things are looking bleak, one does not know how worse it can get.
  • Discretionary spending was cut down.
  • One section of the population was losing jobs and opting for moratorium on loans.
  • Now we know, in hindsight, that it was not the entire population—people with access to means were rather saving than spending.
  • Household financial savings is the net of flow of financial assets minus flow of financial liabilities.
  •  In April-June 2020, flow of financial assets at 7.38 trillion was much higher than 3.83 trillion of April-June 2019.
  • The big difference was the flow of financial liabilities.
  • In April-June 2020, it was a negative 0.78 trillion over a positive 1.81 trillion in April-June 2019.
  • That is, people paid off their liabilities in April-June 2020, whereas usually they add to it.
  • Things normalized in July-September 2020.
  • The flow of financial assets rose to 7.47 trillion, but the flow of financial liabilities was 2.55 trillion i.e., people added to financial liabilities.
  • The household debt to GDP ratio rose to 37.1% in July-September 2020 from 35.4% in April-June 2020.

What do we learn from all this?

  • In a pandemic-induced financial distress phase, a majority of the people preferred to save.
  • One basic tenet of financial planning is that you have an emergency fund equivalent to, say, six months of expenses.
  • People usually follow the principle of Income – Expenses = Savings/Investments.
  • Ideally, it should be Income – Savings/Investments = Expenses.

Consider the question “What explains the increased saving of Indian households during the quarter of lockdown? What lessons we can draw from this for reliance on the demand-led recovery from the pandemic?”

Conclusion

The data from the RBI attest to the well-established fact that people tend to save in emergencies. This also suggests that the demand-led recovery path during emergencies faces the risk of failure.

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments