Articles: 1.

3 – Impact of Covid on savings in India

A serious economic repercussion of COVID has been forced
consumer savings due to physical lockdowns. According to the
Reserve Bank of India (RBI), household net financial savings (NFS)
stood at 21.4% of GDP in 1QFY21 and 10.4% of GDP in 2QFY21,
compared with 7–8% of GDP in the pre-COVID period.

Indians are worried about their finances, as per one economic

parameter, at least.

Since the onset of the Covid-19 pandemic in India, households in the

country have been saving more than they did before, reflecting a
sense of conservation in anticipation of rainy days. These savings
have gone up despite the fact that job losses and pay cuts have been
on the rise.

Indian households’ savings—including cash, bank deposits, and

investments—remained higher than 13% of GDP (pdf) for the most
part of fiscal 2021, as compared to around 11% in fiscal 2019 and
fiscal 2020, each. During April-June 2020, the number had risen to as
much as 23% as India was under one of the strictest lockdowns in the
world and most people were locked indoors.

Do Indians have enough savings to tackle

the second wave?

The Covid-19 second wave continues to take a toll on lives and

livelihoods in India. Millions of Indians now have to battle the
pandemic with depleted savings. Economists explain that Indians are
not entering the pandemic’s second wave with a savings cushion.
According to the Reserve Bank of India bulletin for March, household
financial savings stood at 10.4 per cent of GDP in the July to
September period of FY 21—down by half from 21 per cent in Q1
(April-June) of FY 21. Economists estimate that the rate could have
slid further to 8 per cent in December.

Depleted savings reflect the pain of millions of Indians in urban and

rural India, of job losses, tepid growth and loss of income. India’s
savings growth lags behind the US, UK and Japan. This decline also
indicates that the recovery from the second wave will not be driven
by pent-up demand, as compared to last year when demand picked
up in the unlock phase thanks to an extended festive season.

A fall in household savings indicates that less funds are available for
the rest of the economic system to borrow or invest. Analyses also
indicate that a fall in household savings is a sign of a sharp fall in
physical assets such as land, valuables. A fall in physical assets
indicates its liquidation to meet the essential needs of the household
such as food, health and education. It also shows that there is less
disposable income—real income is low and is falling.

India witnessed a surge in precautionary savings last year at the

onset of the pandemic. Typically, the propensity to save is higher
during a slowdown and greater income uncertainty.

While the savings rate is showing a decline, currency in circulation is

at a decadal high, says RBI data. For 2020-21, it was 14.6 per cent of
GDP (it was 12.2 per cent in 2011-12). Economists suggest that this is
indicative of people keeping cash for medical emergencies.

The relationship between savings, investment and economic growth

has puzzled economists, writes Ramesh Jingili in an RBI paper on
'Causal Relationship between Savings, Investment and Economic
Growth for India What does the Relation Imply?'
According to this, the economy can save only as much as its income.
The economy may reduce consumption expenditure in relation to a
given level of income and consequently increase its propensity to
save. In India, the savings rate has steadily increased over time from
an extremely low base of 9 per cent in 1950-51 to 37.7 per cent in
2007-08 to 30.5% in FY18.
The first wave did not dent the rural economy. However, this time
India faces a double whammy of depleting savings in urban and rural
India. Last year, when the migrant labor went home, they went back
with some savings. That, coupled with robust construction activity
and good farm output meant that rural India held a sliver of hope for
the rural economy. This time, with few jobs, rising Covid cases and
depleted savings, the situation looks grim even in the rural areas.

1. Discuss the impact of Covid-19 on savings and economy as a

whole.
2. Why the first wave did not dent the rural economy?
Household financial savings amid Covid-
19 pandemic cloud
Household financial savings moderated in the third quarter (Q3) of 2020-
21 (FY21) for the second consecutive quarter, driven by a significant
weakening in household financial assets, which more than offset the
moderation in household financial liabilities.

Preliminary estimates released by the Reserve Bank of India (RBI)

showed that household financial savings were at 8.2 per cent of gross
domestic product (GDP) in the Q3FY21.

The financial savings were recorded at 10.4 per cent in the second
quarter (Q2), and stood at a healthy 21 per cent in the first quarter (Q1)
of FY21, which was the quarter that bore the brunt of the pandemic-led
lockdown.

In the nine months taken together, the financial savings pattern does not
look so bad, as Q1 showed a healthy growth in financial savings,
observe economists.

According to the RBI data, a household’s net financial savings to GDP

ratio rose to at least a 20-year high of 12.5 per cent during the first nine
months (9M) of FY21. The ratio was 8 per cent in 2019-20 (FY20) and at
a two-decade low of 7.1 per cent in 2018-19. The

previous high was 12.1 per cent in 2009-10.

The rise in the ratio was largely due to a sharp jump in a household's
gross financial savings last fiscal year.

According to the RBI data, household gross financial savings were up

45.4 per cent year-on-year (YoY) during the April-December 2020 period
to Rs 21.78 trillion, from Rs 14.98 trillion a year ago. In the same period,
household liabilities were up 8.6 per cent to Rs 4.26 trillion, from Rs 3.92
trillion in 9MFY20.

A slower growth in household liabilities led to a sharp jump in household

net savings or assets last fiscal year.

Household net savings were up 58.4 per cent YoY in 9MFY21 to Rs

17.52 trillion - up from Rs 11.06 trillion a year ago.
The quarterly fall, however, may mean that during the pandemic period,
people’s earnings were hit, and at the same time, they pared their
liabilities actively to stay nimble-footed in an emergency.

It is interesting to note that at the end of Q3, the currency with the public
also grew sharply at 22.7 per cent.

The ratio of household (bank) deposits to GDP declined to 3 per cent in

Q3, from 7.7 per cent in the previous quarter.
“The dip in household financial savings reflects a significant draw-down
on deposits, as households faced balance-sheet stress during the
lockdowns. However, there is also a composition shift happening within
the household financial savings basket, with more funds being saved in
the retirement corpus. This trend is visible from the last two years,”

In 9MFY21, however, the rise in household financial savings was largely

absorbed by bank deposits, life insurance policies, mutual funds (MFs),
equity markets, and currency holdings.

According to the RBI data, bank deposits were up 62.5 per cent YoY,
while household investment in MFs and equity were up 49 per cent YoY
in 9MFY21. In comparison, life insurance funds were up 36.4 per cent,
while currency holdings were up 158 per cent in 9MFY21.

Analysts say the jump in household financial savings and their

deployment in MFs and equity markets could partly explain the
continued bullishness in equity markets. At the same time, a surge in
bank deposits may explain the softness in interest rate on bank deposits.

1. What are household financial savings? Discuss the impact of

covid 19 pandemic on the pattern of household financial
savings in India.