HH Fin savings fall: Appearances can deceive

29 Nov 2023 , 10:43 AM

Analysts of IIFL Securities argue against popular perception that fallen HH Fin savings (down from 11% to 5.1% of GDP in 13yrs) have hurt deposit growth and will hurt investments (as they have been largely financed by HH savings) and/or cause CAD to widen. Analysts of IIFL Securities argue that investments drive savings, and not vice versa, and policy response has to focus on investments. What will help is if the gap between NGDP growth and Borrowing Cost rises, incentivizing investments, as happened in the naughties. The chances of this are reasonably bright for India in the medium term. 

Investment drives savings, not vice versa: 

Of late, Indian consumption has indeed risen and savings fallen, but more due to investments falling. 70 year data shows that consumption growth is far less volatile than investments’ and when the latter accelerates, consumption as % of GDP falls, and savings % naturally rises. Barring episodes of crude spiking, CAD broadly stayed stable, averaging 2.4% of GDP. These trends have held, almost monotonically, for decades. Also, overall deposits are down from Covid high but at LT mean (68% of GDP). 

But ICOR has deteriorated and growth has worsened globally: 

Further, compared to other emerging economies, India’s savings and investment, each currently at around 30-31% of GDP, are respectable, though down over a 15 year period. In analysts of IIFL Securities 15 country sample including EMs and DMs, almost everywhere, growth has slowed down and ICOR worsened, a significant deterrent to investments globally. But India’s ICOR has been amongst the best in analysts of IIFL Securities sample over the past 2 decades. 

What can trigger investments? 

In India, consumption (and HH nonmortgage debt) has risen in past decade, but this is insufficient to spur demand and trigger investments. Further, a widely believed inflection point for GDP growth at around the $2,000 per capita GDP mark ($ 4,000 in PPP terms) is not evident from analysts of IIFL Securities 15 country sample except in the case of China. What can help is if the NGDP growth – Borrowing Cost (GBC) gap, currently 2-3ppt for India, rises. This gap was very high for most sample countries during the naughties boom. In India, low inflation, strong govt. revenues and tax buoyancy, policy friendliness (barring politics risk), inflows from JP Morgan bond index inclusion, all point to GBC gap expanding uniquely. Analysts of IIFL Securities remain optimistic over the medium term.