J&K’s household savings are going down. What does this mean for the economy?

Srinagar, Nov 5: As household finanacial liabilities are rising, household savings in Jammu and Kashmir are, ostensibly, going down, and are now below the national average in 2023.

According to a 2021 study by the National Council of Applied Economic Research (NCAER), the household savings rate in Jammu and Kashmir was 4.3% of GDP in 2019-20. This is lower than the national average of 7.5% of GDP in the same year.

Data released by the Reserve Bank of India in September 2023 showed net household financial savings in the country dropped to 5.1% of the GDP in 2022-23, reckoned to be the lowest since 1976-77, from 7.2% in 2021-22.

While household savings rate has touched an all time low at the level level in more than 40 years in 2023, economic pundits and financial observers see J&K’s household savings plunge as a cause of worry.

RBI shows this household savings data as net financial assets- which is essentially gross financial assets (which include bank deposits, capital mkt investments, life insurance, PFs etc) minus gross financial liabilities (bank or NBFC loans etc).

One of the key contributors to this drop in savings has been the rise in household financial liabilities. In FY23, household financial liabilities surged to 5.8 percent of GDP, a significant increase from 3.8 percent in FY22, a worrying trend indicating increasing debt burden on households.

“Household savings are a major source of investment in an economy. When households save less, there is less money available for businesses to invest in new ventures like hotels, guest houses, commercial buildings, children’s education and other productive assets. In J&K’s context this means that people have to rely on their savings more to cover their living expenses”, said Abdul Majeed Khan, a former banker.

Talking about potential root causes, Sunil Sharma, a Munbai-based financial analyst told Ziraat Times that a major dip in household savings in J&K could indicate that households are generally able to make less money than what they require to meet their diverse spending needs.

However, the Finance Ministry has dismissed “critical voices” about household savings in the country falling to a multi-decade low, arguing that households are now adding lesser financial assets than in the past because they have started taking loans to buy real assets such as homes and vehicles which is “not a sign of distress but of confidence in their future employment and income prospects”.

And there is a macroeconomic dimension as well. “When households save less, the government may need to borrow more to finance its spending. This can increase the government’s debt burden and make it more difficult to repay its debt obligations in the future”, Mr Sunil added.

Economic experts also see lower household savings in J&K having a negative impact on the quality of life of households on the medium and long term.

“When households have few savings, they have less of a buffer to fall back on if they lose their jobs or experience other financial setbacks”, said Mehreen Khan, who is doing her PhD on J&K’s banking sector from Delhi University.

What could be other factors of lower rate of household savings in Jammu and Kashmir?

Experts attribute another reason for the low household savings rate in Jammu and Kashmir to high unemployment rate. According to the NCAER study, the unemployment rate in Jammu and Kashmir was 15.2% in 2019-20. This is much higher than the national unemployment rate of 7.8%. Rising inflation is seen as another major cause.

“If we look at the cost of living situation, say 5 or 10 years ago, we see a completely different situation today. With all sense of responsibility, I am telling you, my sales in 2023 so far have been the lowest in the last 15 years”, a leading home furnishing company of Srinagar told Ziraat Times.

Low spending patterns among households these days are seen in some big ticket expenditures among people in J&K, mainly Kashmir valley.

House builders say there are fewer buyers of houses in Srinagar and that supply is much more than demand. Those providing wedding services say that households are preferring low budget weddings now compared to the past.

Despite this situation, household savings rate can vary significantly across different income groups. For example, high-income households typically have a higher savings rate than low-income households. This is because high-income households have more disposable income to save.

Supporting its version about the issue, the Finance Ministry has cited the growth in personal loans from the Central bank, arguing that there has been “a steady double-digit growth in loans for housing since May 2021” indicating that financial liabilities have been incurred to buy real assets.

“Vehicle loans have been growing at double digits since April 2022 and more than 20% since September 2022. The household sector is not in distress, clearly. They are buying vehicles and homes on mortgages,” the Ministry averred.

“Overall household savings [current prices] — which includes financial, physical and jewellery — has grown at a CAGR [compounded annual growth rate] of 9.2% between 2013-14 and 2021-22 [8 years]. Nominal GDP has grown at a CAGR of 9.65% during the same period,” the Ministry highlighted.