The conundrum of financial distress and rising household savings amid covid
Intuitively, if we go back to the initial phase of containment, what comes to mind? Financial difficulties, job losses, closing of small businesses, people benefiting from a moratorium on loans, etc.
Now what will it sound like if I tell you that people’s financial savings increased in April-June 2020?
Let’s look at the data compiled by the Reserve Bank of India. In April-June 2020, household financial savings were ??8.16 trillion. To get an idea of its magnitude, in April-June 2019, household financial savings were ??$ 2.02 trillion; in July-September 2019, it was ??4.85 trillion and over the next two quarters it was ??4.2 trillion and ??5.14 trillion, respectively.
As a percentage of gross domestic product (GDP), it looks bigger. It was 21% of GDP in April-June 2020 (the containment quarter) against 4% of GDP in April-June 2019. Over the following three quarters, it was respectively 9.8%, 8.1% and 9.8%. In the following quarter April-June 2020, would you expect savings to increase, as things gradually opened up and people recovered their livelihoods?
In July-September 2020, household savings were ??4.92 lakh crore, or 10.4% of GDP. The data mentioned here comes from the latest issue of the RBI bulletin; we have no data for October-December 2020.
Now for the rationale. Household saving as a percentage of GDP rising to 21% in April-June 2020 is also linked to the fact that GDP fell by 24% in this quarter.
However, in absolute terms, ??8.16 trillion was about four times as high as ??2.02 trillion in April-June 2019. It has to do with the human response to an emergency. When things look bleak, it’s unclear how much worse it can get. Discretionary spending has been reduced; the closing of the points of sale was one of the reasons. While part of the population lost their jobs and opted for the moratorium on loans – we now know with hindsight that it was not the entire population – people with access to the means saved rather than spent .
To dig a little deeper into the aforementioned data, household financial savings are the net of financial asset flows minus financial liability flows. In April-June 2020, flows of financial assets to ??7.38 trillion was much higher than ??3.83 trillion from April-June 2019, but less than ??7.86 trillion from January-March 2020, which was a near-normal quarter. The big difference was the flow of financial liabilities. In April-June 2020, it was a ??0.78 trillion more than a positive ??1.81 billion in April-June 2019 and a positive balance sheet ??2.72 trillion in January-March 2020. That is, people paid off their debts in April-June 2020, when they usually add to it. In a phase where people were opting for a moratorium on loans, paying off financial debts is an enigma. But we are talking about hard data.
Things normalized in July-September 2020. Financial asset flows increased to ??7.47 trillion, but the flow of financial liabilities has been ??2.550 billion people, that is, people added to financial liabilities. The ratio of household debt to GDP fell to 37.1% in July-September 2020 from 35.4% in April-June 2020. Preliminary indications suggest that the household financial savings rate may have fallen further in October-December 2020, with the intensification of consumption and economic activity. A similar trend was observed during the global financial crisis of 2008-09 when, as a percentage of GDP, the household financial savings rate increased by 1.7%, and subsequently moderated with the recovery. economy.
What do we learn from all of this? When we are faced with a crisis, such as an accident or a lack of food, our bodies release emergency response energies to enable us to deal with the situation. In a phase of financial distress induced by the pandemic, a majority of people preferred to save. A rule of thumb in financial planning is that you have an emergency fund that’s equivalent to, say, six months of expenses. People generally follow the principle of Income – Expenses = Savings / Investments. Ideally, it should be Income – Savings / Investment = Expenses. As long as you are sufficiently protected, you do not need to intervene in an emergency if necessary. RBI data covers the entire population (Bharat) and not just urban or semi-urban centers (India). To that extent, better-off people should financially plan for emergencies.
Joydeep Sen is a corporate trainer (debt markets) and author.
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