Lower PFCE and Lower Household Financial Savings indicate any longer term problem for India's GDP growth?

 The combination of lower PFCE(Private Final Consumption Expenditure) growth and lower household financial savings as per RBI Monthly Bulletin(Aug 23) are problems for future GDP growth of India.

PFCE, or Private Final Consumption Expenditure, is the spending of households on goods and services. It is one of the most important components of GDP, and it accounts for a large share of economic activity.

Household financial savings are the savings of households in financial assets such as bank deposits, stocks, and bonds. These savings are used by businesses to invest in new projects and create jobs, which ultimately determine GDP growth.

Lower PFCE growth and lower household financial savings can lead to lower GDP growth in a number of ways.

• Lower PFCE growth means that households are spending less money on goods and services. This can lead to a decrease in demand for products and services, which can hurt businesses and lead to job losses.
• Lower household financial savings means that businesses have less access to capital to invest in new projects and create jobs. This can lead to a slowdown in economic growth.

In addition, lower household financial savings can make it more difficult for households to withstand economic shocks such as job losses or medical emergencies. This can lead to a decrease in consumer spending, which can further hurt businesses and lead to a slowdown in economic growth.

(Courtesy:Press Note of MOSPI,GOI dt 31.8.23)

"The net financial saving of the household sector – the most important source of funds for the two deficit sectors, namely, the general government sector and the non-financial corporations – moderated to 5.1% of GDP in FY23 from 11.5% in FY21 and 7.6% from FY20 (pre-pandemic). It has been said that it fell to 50 year low, however this is completely misleading as household savings must be looked into as a sum total of physical and financial savings. To start with, the sharp rise in financial liabilities on hindsight may reflect drawdown in precautionary saving during pandemic. However, a deeper look at the data reveals otherwise. Consider the following. Financial liabilities jumped Rs 8.2 trillion since pandemic, outpacing the increase in gross financial savings at Rs 6.7 trillion, thus explaining the fall in household net financial saving by Rs 1.5 trillion / 2.5% of GDP. On the asset side of households, there was an increase of Rs 4.1 trillion in insurance and provident and pension funds" (SBI Ecowrap Sep 23)This explains why Indian Households apparent Financial Savings is low when low interest rates during Pandemic offered a rare opportunity for the households to lock in for long term housing loans at fixed rates.

However,the Indian government is also taking steps to address the problems of lower PFCE growth and lower household financial savings. For example, the government is cutting taxes and increasing government spending on social welfare programs to support consumer spending. The government is also encouraging households to save more money by providing tax breaks and other incentives.

However, it is important to note that these measures will take time to have an impact. In the meantime, the Indian economy is likely to experience some moderation in growth due to the combination of lower PFCE growth and lower household financial savings.

What can be done to address the problems of lower PFCE growth and lower household financial savings? Is there any link with higher than normal unemployment data ?

Here are some things that can be done to address the problems of lower PFCE growth and lower household financial savings in India:

• Support consumer spending: The government can support consumer spending by cutting taxes, increasing government spending on social welfare programs, and making it easier for people to get loans.
• Encourage household financial savings: The government can encourage household financial savings by providing tax breaks, other incentives, and financial education programs.
• Reduce inflation: High inflation can erode household savings and make it difficult for people to afford essential goods and services. The government can reduce inflation by taking steps to control the money supply and reduce the cost of living.
• Create more jobs: When people have jobs and a steady income, they are more likely to save money and spend money on goods and services. The government can create jobs by investing in infrastructure, supporting small businesses, and promoting economic growth.

By addressing the problems of lower PFCE growth and lower household financial savings, the Indian government can support economic growth and create a better future for all Indians.

India's House hold savings is still robust if you consider Physical/Housing assets savings also

 India's household financial and physical assets savings as per RBI have declined in recent years.

• Household financial savings: Household financial savings in India declined to 5.1% of GDP in 2022-23, the lowest since 1976-77. This was down from 7.2% in 2021-22.
• Household physical assets savings: Household physical assets savings, on the other hand, have increased in recent years. They rose to 11.8% of GDP in 2021-22, up from 10.7% in 2020-21.

The decline in household financial savings is attributed to a number of factors, including:

• Rising inflation: Inflation has been rising in India in recent months after Covid, which has eroded the purchasing power of households. This has led to households spending more on essential items, leaving them with less money to save. This should have pushed up PFCE as a percentage of GDP but only a tad more than the long term trend
• Increase in debt: Household debt has also been increasing in recent years. This has put a strain on household finances, making it difficult for households to save.
• Change in investment patterns: Households are increasingly investing in physical assets, such as gold and real estate, instead of financial assets. This is because physical assets are seen as a hedge against inflation.
• The decrease in net financial savings of households has resulted in a tandem increase in household savings in gross  physical assets. In fact, savings in physical assets which accounted for more than two-thirds of household savings at the beginning of last decade had declined to 48% in FY21. However, the trend is again moving upwards and the share of physical assets is expected to reach approx 70% level in FY23,  with the decline in share of financial assets. This, as things stand may be due to the fact that the total household savings (both financial +physical) for FY23 would still surpass the FY22 levels despite the decline in financial savings as household savings in  physical assets has jumped Rs 6.5 trillion in FY22 over FY21 and as per existing datapoints, it is expected to move further by upto Rs 5 trillion in FY23 .Therefore this will be more than the increase in household indebtedness. All this clearly shows that the shift from financial savings to physical savings might have also been triggered by a low interest rate regime  during the pandemic.   

The increase in household physical assets savings is attributed to a number of factors, including:

• Rural savings: Rural households are more likely to save in physical assets than urban households. This is because rural households have less access to financial markets.
• Investment in gold: Gold is a popular investment option in India, especially among rural households. Gold is seen as a safe and secure investment, and it can also be used as collateral to raise loans.
• Investment in real estate: Real estate is another popular investment option in India. Real estate prices have been rising in recent years, which has made it a profitable investment.

The decline in household financial savings is a concern for the Indian economy if taken in isolation.But Household savings must be looked at as Financial savings +Physical assets for assessing the health of Household savings.

The government is taking a number of steps to encourage household financial savings, such as:

• Raising interest rates: The Reserve Bank of India has raised interest rates in recent months to combat inflation. This will make financial savings more attractive.
• Promoting financial literacy: The government is also promoting financial literacy among households. This will help households make informed investment decisions.
• Launching new financial products: The government is also launching new financial products, such as the Pradhan Mantri Jan Dhan Yojana, to make financial services more accessible to households.

It remains to be seen whether these measures will be effective in reversing the decline in household financial savings in the years to come