Spike in household savings expected due to covid-19

Due to forced slowdown in COVID-related consumption household savings are expected to spike in Q1’20-21. This will come in handy to finance the economy’s recovery, an RBI research paper said as it is the Indian economy’s most reliable and self-reliant source of capital.

In this time of layoffs and the economy is absolute turmoil, this research comes as a beacon of hope.In India, as compared t other countries saving has been considered very important, especially by middle-class families.Due to our mindset and traditional values saving has always been preferred over spending . In fact consumerism came very late to India in comparison with other countries that achieved independence from colonial powers around the same time that we did.A lot can be attributed to the fact that the standard of living in our country had been stagnant for a very long period of time.

Only in the last decade or two, the standard of living of masses have some how increased, this can be mainly attributed to increase in the country’s overall literacy rate, for both men as well as women and also rapid infrastructural development that we have witnessed since the turn of the century.One of the many policies of this government that played a major role in this would be the 1990 Economic Policies, this particular policy has drastically changed the prevalent economic structure of the country.One of the important implementations of the policy was the opening up of the country’s economy and integrating ourselves with the world economy.This created a healthy competition in the economy which motivated Indian firms to increase the quality of their product to be at par international standards

A spike in households’ net financial assets is likely due to a sharp drop in lockdown-induced consumption in the first quarter of 2020–21. According to the paper written by Anupam Prakash, Anand Prakash Ekka, Kunal Priyadarshi, Chaitali Bhowmick and Ishu Thakur of the RBI Department of Economic and Policy Research, several studies show that households tend to save more during a slowdown and income uncertainty.

After the nationwide lock-down to combat the COVID-19 pandemic, economists forecast an ever worse contraction of the Indian economy during FY’21. The paper also warns that lags in the pickup of economic activity may cause households’ financial surplus in subsequent quarters to taper off. With construction activity at a standstill, households are likely to move from physical assets such as residential property to financial assets such as deposits, currency, and mutual funds, and are more useful in financing businesses and the growth of the economy. At Rs 15.6 lakh crore, India’s net financial savings rose to 7.7 per cent in FY’20 as of March 2020 from 7.2 per cent in FY’19.

For the Indian economy, the report notes, the household sector is the most sustainable and self-reliant source of finance. In the light of the policy initiative gathering critical mass to lift the Indian economy from the vice-like grip of a recession and, more recently, the life-threatening COVID-19 pandemic, it said, its position is likely to become crucial.

The Indian households hold financial assets or financial savings in currency, bank deposits, debt securities, mutual funds, insurance , pension funds and small savings. Currency and bank deposits accounted for 66 per cent of overall financial assets, led by pension companies and mutual funds contributing 30.2 per cent respectively. Such in-turns are strong sources of company financing.