The conundrum of financial distress and rising household savings amid covid

Intuitively, if we go back to the initial phase of confinement, what comes to mind? Financial difficulties, job losses, small business closures, people on loan moratoriums, etc.

Now, how will it sound 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 extent, 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 seems more enormous. It was 21% of GDP in April-June 2020 (the lockdown quarter) compared to 4% of GDP in April-June 2019. Over the following three quarters, it was 9.8%, 8.1% and 9 .8%, respectively. In the quarter immediately following April-June 2020, would you expect savings to increase as things gradually opened up and people returned to their livelihoods?

Again, counterintuitive.

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 do not have data for October-December 2020.

Now, the rationale. Household savings as a percentage of GDP reaching 21% in April-June 2020 is also linked to the fact that GDP fell by 24% during this quarter.

However, in absolute terms, 8.16 trillion was about four times higher than 2.02 trillion in April-June 2019. It has to do with the human response to an emergency. When things look bleak, there’s no telling how much worse it can get. Discretionary spending has been reduced; the closure of outlets was one of the reasons. While part of the population lost their jobs and opted for a moratorium on loans – we now know, with hindsight, that it was not the whole population – those with access to means were saving rather than spending .

To dig a step deeper into the data mentioned earlier, household financial savings is the net flow of financial assets minus the flow of financial liabilities. In April-June 2020, flows of financial assets in 7.38 trillion was much higher than 3.83 trillion from April to June 2019, but less than 7.86 trillion from January to March 2020, which was a quarter close to normal. The big difference was the flow of financial liabilities. In April-June 2020 it was a negative 0.78 trillion on a positive 1.81 trillion in April-June 2019 and a positive result 2.72 trillion in January-March 2020. That is, people paid their debts in April-June 2020, when they usually add to it. At a time when people opted for a moratorium on loans, the repayment of financial debts is an enigma. But we are talking about hard data.

Things normalized in July-September 2020. The flow of financial assets increased to 7.47 trillion, but the flow of financial liabilities was 2.55 trillion ie people added to financial liabilities. The household debt-to-GDP ratio fell from 35.4% in April-June 2020 to 37.1% in July-September 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 2008-2009 when, as a percentage of GDP, the household financial savings rate increased by 1.7% and then moderated with the recovery of the economy. economy.

What do we learn from all this? When we are faced with a crisis, such as an accident or lack of food, our body releases emergency response energies to enable us to cope with the situation. In a phase of financial distress induced by the pandemic, a majority of people preferred to save. A basic principle of financial planning is that you have an emergency fund equivalent to, say, six months of expenses. People generally follow the Income – Expense = Savings/Investments principle. Ideally, it should be Income – Savings/Investments = Expenses. As long as you are adequately protected, you do not need to provide emergency response if needed. RBI data includes the entire population (Bharat) and not just urban or semi-urban centers (India). To this extent, better-off people should financially plan for emergencies.

Joydeep Sen is a business trainer (debt markets) and author.

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