Physical savings (consisting mainly of real estate) had declined during the pandemic to 11.0% of GDP in FY21 from 12.4% in FY19. Subsequently, there has been a sharp rebound in physical savings to 13.2% of GDP in FY23. This shift is important for the capital expenditure cycle as households are the largest investors in the economy, accounting for over 40% of total Gross Fixed Capital Formation.
Household investment has increased to 12.9% of GDP in FY23, up from 10.7% in FY21 (the pandemic period). Other indicators also confirm a recovery in the real estate sector, with strong growth in mortgage lending by banks and a pick-up in stamp duty collections by state governments.
The rise in physical savings has been associated with a decline in financial savings after the pandemic. Household net financial savings had increased during the pandemic due to lockdowns to 11.7% of GDP in FY21, up from 7.9% in FY19. As things normalized and consumption recovered, financial savings declined to 5.3% of GDP in FY23, which was the lowest level in several years. Part of the reduction reflects the normalization of consumption and part is the preference for physical savings (real estate).
The way households allocate their financial savings is having an impact on markets. There has been debate about what factors are limiting the growth of bank deposits. One factor that is frequently raised is the investment of household savings in stock markets. Unfortunately, this argument does not hold up because money will flow back into the banking system in the form of corporate deposits. In fact, the data supports this claim: household ownership of bank deposits fell from 64.1% in FY2021 to 61.1% in FY2024.
Over the same period, the share of corporate deposits (financial and non-financial) increased to 23.5% in FY24 from 20.7% in FY21. Moreover, the share of household financial savings invested in stocks and bonds remained close to pre-pandemic levels at 7% in FY23.
The real factor limiting deposit growth is the slowdown in reserve money growth, which has slowed to 6.7 per cent in FY24 from 12.3 per cent in FY22. This is due to the moderation in the pace of growth of the RBI’s balance sheet.
The bond market is one area where changes in household savings patterns are having an impact. Within gross household savings, the share of deposits has normalised to pre-pandemic levels at 35% in FY23, up from the pandemic peak of 41%. The real change is the increased allocation to long-term savings (provident funds, pensions and insurance). The share has risen to 39% in FY23, up from 35% in FY21.
The impact of this is clearly visible in the bond market, where long-only investors are emerging as prominent investors in government securities. In fiscal 2024, long-only investors absorbed 45% of the net supply of central and state government bonds. Even though the supply of government securities has increased since the pandemic, the market has easily absorbed it. The increased demand for longer-term government securities has caused the yield curve to become flat.
The combination of a changing allocation of household financial savings towards longer-term savings instruments and the formalization of the economy is resulting in a greater prominence of long-term actors in the market. Assets under management of the National Pension System have increased ₹12.8 trillion as of July 2024, representing a 29% increase in the last year alone. About 54% of assets under management are invested in government securities (central and state government bonds) and 20% in the stock market.
Similarly, in the case of EPFO, whose investment corpus amounted to ₹21.4 trillion in FY23, a growth of 16.7% year-on-year. Around 56% of the investment corpus was allocated to government securities and 9% to ETFs. As of June 2024, the investment corpus is on track to grow at a rate of ₹24.9 trillion, so the impact will be felt in both fixed-income and equity markets.
There is a long way to go to formalize the economy given the large proportion of employment in the informal sector. International Labour Organization In 2023, the share of informal employment in India was 89%. If we only consider non-agricultural employment, the share is still a significant 81%. This combination of more financially aware households and rising formal sector employment will have a transformative impact on growth and markets in the long run.
—The author, Gaura Sen Gupta, is Chief Economist, IDFC FIRST Bank. The views expressed are personal.
Disclaimer:
The information contained in this post is for general information purposes only. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.
We respect the intellectual property rights of content creators. If you are the owner of any material featured on our website and have concerns about its use, please contact us. We are committed to addressing any copyright issues promptly and will remove any material within 2 days of receiving a request from the rightful owner.