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Context:

• Recent discussions in India have highlighted the decline in household savings, primarily driven by a significant reduction in net financial savings.
• This decline is evident in the household net financial savings to GDP ratio, which has reached a four-decade low.

ALL ABOUT HOUSEHOLD SAVINGS: https://www.iasgyan.in/daily-current-affairs/households-debt-and-savings-report

Trends in Household Savings

• Figure 1 illustrates the trends in household savings, physical savings, gold, and net financial savings.
• Despite a slight recovery in physical savings, there has been a sharp reduction in household net financial savings in the fiscal year 2022-23.

Interpreting Lower Financial Savings

• Net financial savings, calculated as the difference between gross financial savings and borrowing, reflect the extent to which household financial assets change over a period.
• Gross financial savings include bank deposits, currency, and financial investments.

Factors Affecting Household Net Financial Savings

1. Financing Additional Consumption Expenditure: Households may finance higher consumption expenditure by increasing borrowing or depleting gross financial savings, stimulating aggregate demand and output.
2. Financing Higher Tangible Investment: Similarly, households may finance higher tangible (physical) investment through increased borrowing or depletion of gross financial savings, stimulating aggregate demand and output through the investment channel.
3. Increased Interest Payment Burden: A rise in interest payments, due to factors such as higher interest rates, can lead households to meet the increased burden through borrowing or by depleting gross financial savings, resulting in a reduction in net financial savings.

Implication of Higher Debt Burden

• The rise in household debt burden raises concerns about debt repayment and financial fragility.
• Household debt sustainability depends on the difference between the interest rate and the income growth rate.
• If households fail to meet their debt repayment commitments, it can reduce the income of the financial sector and deteriorate their balance sheets.

Impact on Consumption Demand

• Higher household debt can reduce consumption expenditure in several ways.
• Firstly, if higher household leverage is perceived as an indicator of higher default risk, banks may reduce credit disbursement, affecting consumption.
• Secondly, higher debt can increase the interest burden, further reducing consumption expenditure.

Macroeconomic Implications

• The trends suggest that households are becoming increasingly vulnerable.
• The policy of higher interest rates to counter inflation can leave households with a rising level of debt, potentially pushing them into a debt trap.
• This, in turn, can have adverse effects on household consumption and aggregate demand.

Data and Statistics

• Household Net Financial Savings to GDP Ratio: Attained a four-decade low.
• Gross Financial Savings to GDP Ratio (2022-23): Declined by 3 percentage points (7.3% to 5.3%).
• Household Physical Investment to GDP Ratio (2022-23): Increased by only 0.3 percentage points (12.6% to 12.9%).
• Household Borrowing to Income Ratio (2022-23): Registered a sharp spike.

Conclusion

• The changing composition of household balance sheets towards financial assets indicates a broader shift towards financialization of the economy.
• This shift from a production-based economy to a monetary or financial exchange-based economy can make the economy both jobless and fragile, impacting economic growth and stability.

ALL ABOUT HOUSEHOLD SAVINGS: https://www.iasgyan.in/daily-current-affairs/households-debt-and-savings-report

PRACTICE QUESTION Q. Direct taxes play a crucial role in India's fiscal policy and economic development. Discuss the role of direct taxes in promoting economic equity and stability in a country.