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India's Falling Household Savings: Causes and Concerns UPSC NOTE

 The Problem:

  • Household savings in India have fallen significantly, with net financial savings reaching a 40-year low.

  • This decline is despite a slight increase in physical savings (like gold).

Understanding Net Financial Savings:

  • It's the difference between a household's financial assets (savings) and borrowing.

  • Financial assets include bank deposits, investments, etc.

  • Borrowing includes loans from banks and other financial institutions.

Possible Reasons for Lower Savings:

  • Increased Consumption: People may be spending more and saving less, boosting short-term demand but potentially hindering long-term growth.

  • Higher Investment in Physical Assets: Savings may be used for investments in things like housing, stimulating the construction sector.

  • Rising Interest Payments: Higher interest rates could lead people to use savings to cover debt payments, reducing net savings.

What the Data Shows:

  • Consumption remained relatively stable, suggesting the first reason is unlikely.

  • Physical investment increased slightly, but not enough to explain the entire savings drop.

  • Household borrowing has risen sharply, suggesting higher interest payments may be a key factor.

Consequences of Rising Debt:

  • Debt Repayment & Financial Fragility: High debt burdens could make it difficult for people to repay loans, potentially causing financial problems in the future.

  • Reduced Consumption Demand: Debt payments and higher interest rates can leave people with less money to spend, impacting overall economic activity.

Recent Trends:

  • The gap between interest rates and income growth has narrowed, putting a strain on household finances.

  • The financial wealth-to-GDP ratio has declined, while debt-to-net-worth ratios have risen.

  • Private consumption expenditure growth has slowed down.

Macroeconomic Concerns:

  • Rising household debt and a shift towards financial assets could make the economy more fragile.

  • High-interest rates aimed at curbing inflation could exacerbate the debt burden and hinder growth.

  • The financialization of the economy (focus on financial markets over production) could lead to joblessness and instability.

The Authors' Viewpoint:

  • The current trends in household debt and asset composition pose a risk to long-term economic stability.

  • Policies need to address these issues to promote sustainable growth.



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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: India's Falling Household Savings: Causes and Concerns UPSC NOTE
India's Falling Household Savings: Causes and Concerns UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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