Recent data from the Reserve Bank of India indicate that there has been a contraction in the household sector’s financial savings. On the other hand, the household sector’s net liabilities have gone up. The rate of growth of income has been slowing down. What do these developments imply regarding changes in the economic conditions of households in the country? The official response to the data has been to suggest that the decline in financial savings was compensated by a rise in physical savings, manifest in the rise of housing loans taken by households from commercial banks and housing finance companies. An argument has also been given that there was a release of pent-up demand for consumption spending after the pandemic that led to a fall in financial savings. But these explanations do not fully reveal the actual picture of household finances in the recent past. The net financial savings of the household sector has contracted by 19% in FY23. The compounded annual growth rate of the past four years is minus 2%. Non-mortgage borrowing of households has gone up by 99% in FY23 with the four-year CAGR turning out to be 24%. Finally, private final consumption expenditure plus net financial savings grew by 8.9% with a four-year CAGR of 3.2% in real terms. Taking investment growth to be 8.6% for FY23, real income growth (corrected for inflation) turns out to be 2.9% along with a per capita income growth of 1.8%. This would be the slowest growth in 40 years.

The data seen in the context of the trends of the last four years reveal that household savings have been overshadowed by the rise in liabilities. Declining household savings and rising cost of living have triggered a sharp rise in household debt. Much of this debt has been from non-banking financial companies. Unlike an investment in a capital asset (like a housing loan), the bulk of the borrowing is likely to be used for plugging the gap between income and consumption. Since FY12, real PFCE grew at 5.8% CAGR while household income grew at 4.8% CAGR for the same period. Hence the growth in consumption spending has exceeded the growth in household income. According to the data available for the past, this is the longest shortfall in the last 69 years. Hence, despite the RBI’s optimistic interpretation of the data, there are many causes for concern about the household sector’s economic health.