Understanding India’s Household Savings and Borrowing

Understanding India’s Household Savings and Borrowing


The current debate in the Indian economic landscape revolves around the significant drop in the household net financial savings to GDP ratio during the fiscal year 2022-23. This decline is attributed to a substantial increase in the borrowing to GDP ratio.

  • This article, critiques the Chief Economic Advisor (CEA) to the Government of India’s interpretation. The CEA suggests that the observed trend is merely a shift in household savings composition, with greater borrowing financing higher physical investments.
  • However, this article contends that such an interpretation overlooks broader economic trends and structural shifts within the Indian economy.

GS-03 (Economy)

Dimensions of the Article:

  • What is the Topic About?
  • About the Issue
  • Causes
  • Implications

What is the Topic About?

  • This article addresses the falling household net financial savings to GDP ratio in India during 2022-23 and scrutinizes the interpretation offered by the Chief Economic Advisor.
  • The focus is on understanding whether this trend indicates a simple shift in savings composition or reflects deeper structural changes within the economy.
  • It further explores the implications of rising household borrowing and higher debt-income ratios, alongside suggesting measures to mitigate associated economic challenges.

About the Issue

  1. The Debate on Household Savings Composition
    • The central issue is the significant decline in the household net financial savings to GDP ratio, which fell by 2.5 percentage points in 2022-23.
    • In contrast, the physical savings to GDP ratio increased by only 0.3 percentage points. Household borrowing to GDP ratio saw a substantial rise of 2 percentage points, far exceeding the increase in physical savings.
    • The gold savings to GDP ratio remained largely unchanged, resulting in an overall decrease in household savings to GDP ratio by 1.7 percentage points.
  1. Analyzing the CEA’s Interpretation
    • The CEA’s argument posits that households are borrowing more to invest in physical assets, thus merely shifting the composition of their savings. However, this interpretation does not align with the data, as the overall household savings to GDP ratio has declined.
    • This decline indicates that higher borrowing is not being fully offset by increased physical savings. Instead, it points to households incurring greater borrowing to manage higher interest payment obligations, which reflects increased financial distress.
  1. Discrepancies in Nominal Growth
    • The CEA’s analysis, based on absolute nominal values, shows an increase in the total nominal savings of households. However, this perspective does not address the core issue of the historic decline in the net financial savings to GDP ratio or the rising borrowing to GDP ratio.
    • The increase in nominal values simply reflects inflation and does not negate the financial burden of higher interest payments on households.


  1. Structural Shifts in Household Debt and Savings: The increase in household borrowing and the consequent higher debt-income ratio can be attributed to two main factors:
    • Higher Net Borrowing: Households have increased their net borrowing to finance both consumption and investment. This increased borrowing leads to a higher stock of debt relative to household income.
    • Exogenous Factors: Changes in interest rates and the nominal income growth rate significantly influence the debt-income ratio. Higher interest rates or slower nominal income growth exacerbate the debt burden on households.
  2. The Fisher Dynamics
    • Named after economist Irving Fisher, Fisher dynamics describe how rising interest rates and slower income growth can lead to increasing debt-income ratios.
    • In the Indian context, post-COVID economic conditions have seen such dynamics play out, with nominal income growth often lagging behind the weighted average lending rate (WALR). This mismatch has resulted in increased financial strain on households, as their interest payment burdens grow.


  1. Economic Consequences of Rising Debt Burdens: The rising debt-income ratio and higher interest payment burdens have significant macroeconomic implications:
    • Increased Financial Distress: Households face greater financial strain due to higher debt servicing costs. This situation can lead to reduced disposable income and lower consumption, impacting overall economic demand.
    • Macroeconomic Instability: Persistent gaps between income growth and lending rates can lead to sustained increases in household debt burdens. This trend could destabilize the broader economy if not addressed promptly.
  1. Comparative Analysis with Past Periods
    • Comparing the current period with previous episodes of high household borrowing (e.g., 2003-04 to 2007-08) reveals a stark contrast. During the earlier period, the average GNI growth rate outpaced the lending rate, enabling households to manage their debt more effectively.
    • However, from 2019-20 onwards, the average GNI growth rate has lagged behind the average lending rate, exacerbating the debt burden on households.

Suggested Measures

  • Stimulating Income Growth: Policies should focus on boosting household income growth to narrow the gap between income and interest rates. This approach could involve targeted fiscal policies, wage support programs, and measures to enhance employment opportunities.
  • Monetary Policy Adjustments: The Reserve Bank of India (RBI) could consider strategies to lower lending rates, thus reducing the interest burden on households. Coordinated monetary and fiscal policies could help achieve a balanced approach to managing inflation and supporting economic growth.
  • Debt Management and Financial Literacy: Programs aimed at improving financial literacy and responsible borrowing practices can help households manage their debt more effectively. Government and financial institutions can collaborate to provide education and support services to households.
  • Supporting Consumption: Measures to support household consumption, such as direct cash transfers or subsidies, can help maintain aggregate demand. These interventions can mitigate the impact of high debt burdens on household spending.
  • Monitoring and Regulation: Enhanced monitoring of household debt levels and stricter regulations on lending practices can prevent excessive borrowing and ensure sustainable debt management. The RBI and other regulatory bodies should ensure that lending practices do not contribute to unsustainable debt accumulation.
  • Promoting Savings: Initiatives to encourage household savings, such as tax incentives or attractive saving schemes, can help rebuild the net financial savings to GDP ratio. These measures can provide households with a buffer against economic uncertainties and reduce reliance on borrowing.