RBI’s monthly bulletin released earlier this week published data on flows of household financial assets and liabilities. The data shows that net financial asset flows –— it measures assets and liabilities incurred over a year rather than their total stock — of households saw a sharp fall as a share of GDP in 2022-23. A large reason behind the fall in this number during 2021-22 and 2022-23 is on account of first, forced savings during the pandemic, and later, pent-up demand with restoration of economic normalcy. However, the 2022-23 number is much lower than what this share has historically been. Is there a larger macroeconomic message in these numbers? A two-part series published in this paper has shown that the latest numbers cannot be used to argue that there is a crisis at hand for Indian households or financial institutions that have lent to them. The series also shows that India’s growth boom in the 2000s also saw a growth in ratio of household debt to GDP.
If India’s relatively rich households are indeed borrowing more and saving less — one will have to wait for a few years to decide whether the 2022-23 number is an aberration — then it is likely to generate tailwinds for consumption demand in the short- to medium- term. Anecdotal reports of a boom in premium housing, passenger cars and even high end contact intensive service markets support such a prognosis. This is good rather than bad news for the economy as a whole. To be sure, it is worth asking another question in the wake of the latest RBI data. Is a section of India’s population, especially among the young formal sector workers, now spending beyond its means — perhaps at the cost of saving for retirement rather than running the risk of not being able to repay their debt — under the influence of what is called “demonstration effect” in economics? Anecdotal evidence, once again, supports such an argument. While such a behaviour can support consumption driven growth in the short- to medium- term, it may create a crisis in the long-term when this cohort retires without enough in retirement funds.
It is important to note that fiscal policy, through decisions such as the new tax regime which increases disposable incomes if investment related exemptions are not claimed, is nudging younger workers to consume more. This could have played a role in the fall in net financial asset flows as well.
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