Indian Economy
Declining Household Savings & Rising Liabilities
- 14 Jul 2025
- 11 min read
For Prelims: Inflation, Sukanya Samriddhi Scheme, Mahila Samman Savings Certificate, National Pension System (NPS), Paradox of Savings, FDI, Non-Performing Assets (NPAs), UPI, Jan Dhan, e-RUPI, Inflation-indexed Bonds, Atal Pension Yojana, Sovereign Gold Bonds.
For Mains: Current trend in household savings in India, Implications of low household savings rate and rising household debt, Strategies needed to maintain sustainable household savings & manage debt in India.
Why in News?
India’s household savings pattern is undergoing a significant transformation, raising concerns about long-term economic stability and domestic capital formation.
What is the Current Trend in Household Savings in India?
- Falling Gross Savings Rate: India’s gross domestic savings rate fell from 34.6% of GDP in 2011–12 to 29.7% in 2022–23, marking a four-decade low, while household net savings, which traditionally made up 60% of total savings, have also declined.
- Rising Household Debt: Household liabilities peaked at 6.4% of GDP (FY24), near the 2007 high (6.6%), driven by borrowing for consumption, housing, and education.
- Saving Pattern: Physical savings (gold, real estate) increased from 59.7% in 2019–20 to 71.5% in 2023–24, while financial savings declined from 40.3% to 28.5%.
- Within financial savings, bank deposits dropped from 58% (FY12) to 37% (FY23), while investments in equities, and mutual funds nearly doubled (Rs 1.02 lakh crore in FY21 to Rs 2.02 lakh crore in FY23).
- Urban vs. Rural Divide: Urban households increasingly invest in financial instruments (mutual funds, equities) due to better financial access, while rural households continue to prefer cash and physical assets, highlighting gaps in financial inclusion.
- Post-Pandemic & Inflationary Pressures: While Covid-19 initially boosted savings due to reduced spending, the trend reversed as the economy reopened, with high inflation eroding disposable incomes and low real interest rates making traditional savings like fixed deposits less attractive.
Household Savings and Household Debt
- About: Household savings refer to the portion of a household’s disposable income that is not spent on consumption but is set aside for future use, typically in the form of bank deposits, investments, insurance, or physical assets like gold or property.
- Types: Household (HH) savings in India comprise net financial savings (NFS) and physical savings.
- NFS is calculated by subtracting financial liabilities (annual borrowing) from gross financial savings (GFS), which includes currencies, deposits, insurance, provident and pension funds (P&PF), shares & debentures, small savings, and others.
- Physical savings mainly include residential real estate (about two-thirds) and machinery/equipment owned by HH-sector producers.
- Household Debt: It refers to all household debts (including those of non-profits serving households) that must be repaid with interest or principal to creditors by a set future date.
- Initiatives Related to Household Savings: Sukanya Samriddhi Scheme, Kisan Vikas Patra Scheme, Mahila Samman Savings Certificate, National Pension System (NPS) etc.
What are the Implications of Low Household Savings Rate and Rising Household Debt?
- Reduced Domestic Capital Formation: Reduced household savings, a key source for investment and capital formation, may slow GDP growth and increase dependence on foreign capital (FDI, external borrowing), heightening external vulnerabilities.
- Consumption-Driven Growth: Lower savings reflect higher consumption spending, which can boost short-term demand but reduce long-term investment capacity. It risks debt-fueled growth bubbles like the 2008 US subprime crisis.
- Pressure on Fiscal and Monetary Policy: A fall in private savings may compel the government to boost public savings through higher taxes or spending cuts, while the RBI faces a trade-off—low interest rates discourage savings, whereas high rates raise borrowing costs.
- Rising Household Debt Stress: Rising household debt, especially through unsecured loans, credit cards, and personal loans, increases the risk of loan defaults and potential debt traps if incomes don’t rise proportionally, leading to higher Non-Performing Assets (NPAs).
- Social and Inequality Concerns: Lower savings weaken household emergency resilience and increase reliance on borrowing for essentials, leading to long-term financial instability, while declining provident/pension savings and a shift to market-linked investments raise the risk of retirement insecurity.
Paradox of Savings
- About: The Paradox of Savings (or Paradox of Thrift) is an economic theory that suggests while saving money is good for an individual, if everyone saves more simultaneously, it can hurt the overall economy.
- Key Idea: When households raise savings and cut spending, it reduces aggregate demand, leading to lower production, which prompts businesses to cut jobs and incomes.
- As a result, declining incomes may cause the economy’s overall savings to decrease rather than increase.
- E.g., In a recession, if people fear job losses and save more instead of spending, businesses earn less revenue → lay off workers → unemployment rises → incomes fall → savings shrink.
- Origins and Development of the Theory: The concept was notably popularized by John Maynard Keynes in his influential 1936 work, The General Theory of Employment, Interest, and Money.
- Keynesian economists argue that consumer spending drives economic growth, and savings are transformed into investments aimed at producing goods for these markets.
- However, if consumer demand is insufficient, it can lead to a decline in such investments, thereby hampering economic growth.
What Strategies can be Adopted to Maintain Sustainable Household Savings in India?
- Improve Financial Literacy & Awareness: Expand financial education programs (schools, SHGs, digital platforms) to teach saving habits, investment risks, and debt management, while promoting low-risk savings instruments (Sukanya Samriddhi, post-office schemes) among low-income households.
- Tax & Interest Rate Incentives: Increasing tax deductions for long-term savings, and introducing inflation-indexed bonds can incentivize secure investments, protecting purchasing power, and promoting financial stability.
- Strengthen Social Security Systems: Expand pension coverage (Atal Pension Yojana, NPS) for informal sector workers and offer subsidized retirement plans to reduce old-age dependency risks for low-income groups.
- Responsible Lending Regulations: Implement strict RBI norms on unsecured loans (credit cards, personal loans), including Debt-to-Income (DTI) ratio caps and transparent loan pricing, to prevent reckless borrowing and debt traps.
- Impose higher risk weights on luxury loans and promote good debt education, home loans) over bad debt (impulsive spending).
- Encourage Productive Investments: Introduce gold monetization schemes like Sovereign Gold Bonds to unlock idle assets, and implement affordable housing policies to curb real estate speculation.
- Offer tax incentives for long-term equity holdings (extend LTCG benefits), while regulating speculative trading.
Conclusion
India’s declining household savings and rising debt threaten economic stability. To ensure sustainability, policies must boost financial literacy, incentivize savings, regulate reckless lending, and expand social security. Balancing consumption-led growth with prudent savings and debt management is crucial for long-term resilience, inclusive development, and reducing vulnerabilities in an evolving financial landscape.
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Drishti Mains Questions: India’s declining household savings rate poses risks to long-term economic growth." Analyse the causes and suggest policy measures to revive sustainable savings. |
UPSC Civil Services Examination, Previous Year Question
Prelims
Q. In a given year in India, official poverty lines are higher in some States than in others because (2019)
(a) poverty rates vary from State to State
(b) price levels vary from State to State
(c) Gross State Product varies from State to State
(d) quality of public distribution varies from State to State
Ans: (b)
Q. As per the NSSO 70th Round “Situation Assessment Survey of Agricultural Households”, consider the following statements: (2018)
- Rajasthan has the highest percentage share of agricultural households among its rural households.
- Out of the total agricultural households in the country, a little over 60 percent belong to OBCs.
- In Kerala, a little over 60 percent of agricultural households reported to have received maximum income from sources other than agricultural activities.
Which of the statements given above is/are correct?
(a) 2 and 3 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Ans: (c)
Mains
Q. Among several factors for India’s potential growth, the savings rate is the most effective one. Do you agree? What are the other factors available for growth potential? (2017)
