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?”
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.