India's household savings slowed down in fiscal 2012-17; to adversely impact GDP growth: Rating agency

By Our Representative
India Ratings and Research (Ind-Ra), the top Indian subsidiary of the Fitch Group, a global leader in financial information services, believes if the declining trend of household saving continues, it may pose a "serious challenge to the gross domestic product (GDP) growth and macroeconomic stability."
Suggesting that its estimation is based on the premise that the household sector, comprising resident households, not-for-profit institutions and quasi corporates, is the largest contributor to the savings in the economy, Ind-Ra says, during financial years (FY) 2012-17, it accounted 60.93% of the economy’s total savings, as against private corporations' 35% and public sector's 4.07%.
"Quasi corporates including unregistered micro, small and medium enterprises do not prepare their accounts similar to private registered/listed corporates. Thus, the falling savings rate (gross savings/gross domestic product) of the sector does not augur well for the economy", Ind-Ra says.
According to the top rating agency, "The growth of household savings at 3.7% was the lowest during this period among the three broad categories", even as the savings of the private corporations "grew 17.4%, while that of the public sector increased 12.9% during FY12-FY17."
Based on this, Ind-Ra says, "Household savings rate (gross household savings/ GDP) plunged to 16.3% during FY12-FY17." Pointing out that in FY12 it was 23.6%, it notes, "Household savings intermediated by banks and other non-banking financial entities are a major source of investment funding for the Indian economy."
Giving more details, Ind-Ra says, the declining share of household sector is visible even in case of nominal gross value added (GVA), where its share declined to 43.2% in FY17, as against 45.5% in FY12 "because of lower nominal GVA growth of the household sector than that of the private corporations and the overall economy".
It adds, "In FY17, the household sector contributed 94.8% to agriculture, 27.5% to industrial and 34.4% to services sectors’ nominal GVA."
"Although the twin policy shock of demonetisation and Goods and Services Tax had economy-wide ramification, it was more pronounced in case of the household sector", pointing out that the savings rate of the household sector "plummeted" 153 basis points (bp) year on year (yoy) in FY17, while for private corporations fell 12bp yoy. However, savings rate for the public sector increased by 37bp."
Basis point or bp refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
The top rating agency further points out, "Even as micro, small and medium enterprises (MSME) category of the household sector finds it difficult to access credit, the credit to resident household has been rising at a much faster pace lately than the overall non-food credit."
Thus, it adds, "The share of resident households (personal loan) in non-food credit reached 25.9% in 1QFY19 (FY12: 18.2%). Resident households have emerged as a preferred choice for the banks post the deterioration in the asset quality of banks, owing to significant lending to corporates turning into non-performing assets (NPAs)."
Ind-Ra's warning comes even as it revised down its FY19 economic growth forecast to 7.2% from 7.4% earlier.