Post-pandemic, households’ share in capital formation falls

The share of private sector savings used for financing capital formation rose to 37% in FY23 from 36.1% in FY21.

After the pandemic, the corporate sector, comprising both the private and public-sector companies, have acquired a lager share of India’s savings as households ceded their share, but they still reported a relatively lower increase in the financing of capital formation, according to official data.

Households’ (HH) savings inevitably saw a sharp increase during the pandemic thanks to risk-aversion, but the pace came down thereafter. While HH used savings and higher post-pandemic borrowings to finance capital formation in real estate, asset creation in the industry was aided by the corporate sector.

Of the gross savings of Rs 81 trillion in FY23, household savings account for almost 61%, down from 78% recorded in FY21, the year that bore the brunt of the pandemic. The share of private sector savings used for financing capital formation rose to 37% in FY23 from 36.1% in FY21.

The share of dis-saving by the government sector dropped sharply to 7.5% in FY23 as compared with 23% (fiscal largesse) in FY21, indicating the post-pandemic fiscal correction was pretty sharp.

Anitha Rangan, economist at Equirus Securities pointed out that HH savings having gone down is a function of increase in their leverage. The ratio of HH savings (net of liabilities) to GDP was 24.4% in FY19, which is now 24.2% (which is not sharply down). The comparison to FY21 would be an aberration because the year saw a large bump in bank deposits from HH during pandemic, due to risk aversion. So a comparison to FY19 would be better.”

HH financial liabilities was 5.8% of GDP in FY23, the highest since FY12, indicating that households are not merely saving, but they are also borrowing more. Rangan noted that when HH borrow, it creates an implicit saving somewhere else in the ecosystem – which is the lending segment. So as a fraction of GDP the financial corporation savings were 2.8% in FY23, the highest level since FY14. She added that private sector is indeed saving more, and this has been helped by corporate de-leveraging.

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Asked whether it is desired to have capital formation driven by the private sector, rather than households, Rangan said the India needed both to push capex. “Sectors where HH savings dominate are agriculture, road transport and real estate. Sectors where private sector dominate are manufacturing, construction, communication, air and water transport. In sectors like trade, hotels, and other services we see a good mix of both private and households,” she said. Government/public capex is dominant in railways, defense, electricity & utilities and construction. “In recent years, we have seen capex revival largely from government side and new age capex in services segment. However, sectors dominated by private sector alone like manufacturing, air and water transport have been lagging in terms of growth. Therefore, for strong broad-based recovery, savings from all sectors of the economy are necessary,” she added.

According to Madan Sabnavis, chief economist at Bank of Baroda, the fact that FY21 was an exceptional year owing to the pandemic is the reason why household savings increased sharply as people could not spend. That accounts for high ratio of household savings in financing investment.

“The ratio (HH net savings to GDP) for FY23 is admittedly lower. But this is because households have been borrowing more thus reducing their net savings. High leverage for buying homes and auto contributes to capital formation and is hence not that odd,” Sabnavis observed.

At the other end of the scale, corporate sector has been earning high profits in the last two years which explains (the rise in their) savings, he noted Corporates, both private and public-sector, have been borrowing less and using own funds for expansion, in turn increasing their share in financing of capital formation. “I don’t see anything amiss in this trend. Companies using own funds from retained profits/reserves is an effective way of utilising surpluses. Households are also contributing to capital formation when buying homes and automobiles,” Sabnavis said.