India boasts of a youth-heavy population and this has been projected as one of the key factors that would contribute to economic growth. The young generation of today lives in the present and they spend more on experiences than material goods, even neglecting savings.
The declining trend in household savings
The recent data released by the Ministry of Statistics and Programme Implementation (MOSPI) shows that there has been a significant fall in net financial savings of households by over ₹9 lakh crore between 2020-21 and 2022-23.
When this is broken further, the net financial savings of households was down to 5 year low of ₹14.2 lakh crore in 2022-23 from ₹17.1 lakh crore in 2021-22. This had reached a high of ₹23.3 lakh crore in 2020-21 and the previous low was at ₹13.1 lakh crore in 2017-18. But the trend has been unfortunately on a decline since 20-21.
Household savings, which account for more than 60% of total savings, are split between financial and physical savings and net financial savings are estimated as the difference between gross savings and household borrowings/liabilities.
Flow of savings into real assets
In 2022-23 savings in physical assets were at ₹34.8 lakh crore, while in gold and silver ornaments these were at ₹63,397 crore – highest since 2011-12 when these were at ₹33,635 crore. This resulted in lower financial savings. The pandemic years which almost had halted real estate activity completely , resumed in full swing in 22-23 when people went for desperate home buying that led to huge amounts of household savings getting channelized to real estate. Gold has been witnessing good price appreciation since 2022 which saw savings flocking towards it to capitalise the value appreciation.
People generally have recency bias when it comes to investments which also saw them shifting gears to the momentum seen in real estate market and gold price movement. This approach to real estate in particular is the repetition of their behaviour till 2014 when significant part of the savings was routed to real estate to benefit from the boom, ignoring the importance of financial investments and the liquidity they provide.
This bias blocked a significant amount of their savings in real estate for about 8 years from 2014 to 2022 when the real estate prices hardly moved. Liquidation of properties bought close to the peak of 2014 had to be mostly done at a loss post that.
Investors have to learn from their past mistakes and not get carried away by recent performances of physical assets like real estate and gold ignoring the importance of asset allocation prioritising liquidity.
The lockdown and surge in financial investments
The high financial savings in 2020-21 can be attributed to the lock down imposed due to the pandemic when avenues of expenditure were limited. Hotels, holiday shops and textiles were mostly closed which left people with more savings. In FY 2021-22 also due to the second phase of Covid-19 financial savings remained high, though lower than 20-21 as lockdown was getting relaxed and consumption opened up.
These 2 years when people were mostly confined to their homes, understandably witnessed huge surge in opening of demat accounts when the number of demat accounts zoomed from 40 million in March 2020 to 100 million in August 2022 and inflow in mutual funds also rose as the higher savings they were left with were routed into these avenues.
Irresistible stress spending post FY22
While many debuted into stock investing and mutual funds during the pandemic years, the following years saw unprecedented holidaying, dining and other entertainment activities as people were restlessly waiting to quench their urge to venture out which was totally restricted for more than 2 years. This also led to overspending leaving no surplus in the hands which led to many of the demat accounts getting dormant and SIPs getting discontinued.
The leaking savings bucket and the ways to control
Lack of basic discipline in savings and imprudent investing in real estate: Here is the list of a few other reasons for excess spending and low savings.
Income – Expenditure = Savings which is the best way to ensure strict
Savings discipline is not followed by most. So very often uncontrolled expenditure dips into the savings bucket leaving low or no money left for savings.
Indians have a very emotional approach to home buying and sometimes go overboard on the homebuying budget leading into very high EMI payments impacting savings habits. Given that the residential rental yield is less than 3% in most Indian cities, home actually doesn’t make financial sense, yet the sentimental and emotional compulsion forces people to fall prey to home buying. The mammoth cost of buying a house also absorbs significant part of one’s earnings into the illiquid asset the growth of which can be realised only when selling which rarely happens.
Given that the returns from rental yield plus capital gains from residential real estate is only about 10%, the money if instead gets directed into high yielding liquid investments like equities and equity mutual funds the growth will be higher and the value appreciation happens on a regular basis which can be also be realised quickly on any given day. Such growth oriented investments motivate the savings habit better and also create more wealth.
Tenure of most home loans is 20 years which would mean a huge ransom close to the principal amount or more being paid as interest . Home loan borrowers very often ignore the advantage of part payment of the loan amount or topping- up the loan premiums which would significantly reduce the interest outgo.
Increasing healthcare and higher education expenses: Health expenses are a double whammy with poor health condition of people and higher health costs, coupled with medical inflation growth at mid-teens. Despite this the health insurance penetration has been painfully low and people land up exhausting their savings and even borrowing to meet medical expenses. Health insurance policies can protect from these expenses at just a fraction of the expense paid as premium.
The necessity of creating a contingency fund to meet unforeseen expenses is generally ignored and the approach of most is to face it when it comes. This leads to borrowing for unanticipated expenses by means of high-cost personal loans which also is a savings spoiler.
There is excessive/obsessive spending practised when it comes to higher education and it has become a fancy to opt for foreign education, very often to feed societal opinions. The cost of education not only abroad but even in the country is getting very expensive which absorbs most or all of the savings and also pushes us to borrow through educational loans. The EMI commitment towards these loans also makes the scope of savings bleak.
Online shopping of millennials and easy loans: The youth, who are the dominant part of the population, prioritise experiences to savings and so give importance to lifestyle upgrades spending more on gadgets, electronics, vehicles, holidays and lavish spending on facelift of homes. This makes savings their last priority
The ease of purchasing from the convenience of the home through the e-commerce portals also makes spending seamless and these portals temp and boost the purchasing habit, thereby leading to more than adequate spends. The luring through offers of these portals also prompt unnecessary burning of money squeezing savings.
On top of all these, online lending, particularly with the evolution of P2P lending has made borrowing extremely effortless which in a way has also been encouraging the spending habits of the youth particularly, pushing savings to the back as they know even if they run out of money, these portals will lend them in no time. What the youth needs to bear in mind is the high rate at which these portals lend and so the huge interest outgo they may have to incur. They live-in today not realising by doing that they may not be able to “love tomorrow” as they may not have adequate savings for the future.
In conclusion, if these causes of savings leakage can be arrested by controlled expenditure and reckless borrowing by following the measures given here to mitigate, then there can be spurt in savings by every household which should reflect in the nation’s savings numbers positively. That said, while savings is important it’s only work half-done unless it is invested wisely.
V.Krishna Dassan, Director, Dhanavruksha Financial Services Pvt. Ltd.
