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Do Indians have enough savings to tackle the second wave?

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Do Indians have enough savings to tackle the second wave?
Millions of Indians face the Covid second wave with depleted savings, a sure indicator of shrinking incomes and fewer jobs
Shwweta Punj

The Covid-19 second wave continues to take a toll on lives and livelihoods in India. Millions of Indians now have to battle the pandemic with depleted savings. Economists explain that Indians are not entering the pandemic’s second wave with a savings cushion. According to the Reserve Bank of India bulletin for March, household financial savings stood at 10.4 per cent of GDP in the July to September period of FY 21—down by half from 21 per cent in Q1 (April-June) of FY 21. Economists estimate that the rate could have slid further to 8 per cent in December.

Depleted savings reflect the pain of millions of Indians in urban and rural India, of job losses, tepid growth and loss of income. India’s savings growth lags behind the US, UK and Japan. This decline also indicates that the recovery from the second wave will not be driven by pent-up demand, as compared to last year when demand picked up in the unlock phase thanks to an extended festive season.

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A fall in household savings indicates that less funds are available for the rest of the economic system to borrow or invest. Analyses also indicate that a fall in household savings is a sign of a sharp fall in physical assets such as land, valuables. A fall in physical assets indicates its liquidation to meet the essential needs of the household such as food, health and education. It also shows that there is less disposable income—real income is low and is falling.

But credit growth data showed an upticka Care Ratings report showed bank credit growth was 6.6 per cent in Q1 of 2021-22, marginally higher than the 6.4 per cent recorded last year. However, at this point, economists say it’s difficult to gauge what the borrowings are for—is it an effort to stay buoyant or to make purchases? India witnessed a surge in precautionary savings last year at the onset of the pandemic‘dash for cash’ was the mantra as Indians saved and savings in the June quarter of FY21 increased quite substantially. Typically, the propensity to save is higher during a slowdown and greater income uncertainty.

While the savings rate is showing a decline, currency in circulation is at a decadal high, says RBI data. For 2020-21, it was 14.6 per cent of GDP (it was 12.2 per cent in 2011-12). Economists suggest that this is indicative of people keeping cash for medical emergencies.

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The relationship between savings, investment and economic growth has puzzled economists, writes Ramesh Jangilli in a RBI paper on 'Causal Relationship between Savings, Investment and Economic Growth for India What does the Relation Imply?'

According to this, the economy can save only as much as its income. The economy may reduce consumption expenditure in relation to a given level of income and consequently increase its propensity to save. In India, the savings rate has steadily increased over timefrom an extremely low base of 9 per cent in 1950-51 to 37.7 per cent in 2007-08 to 30.5% in FY18.

The first wave did not dent the rural economy. However, this time India faces a double whammy of depleting savings in urban and rural India. Last year, when the migrant labour went home, they went back with some savings. That, coupled with robust construction activity and good farm output meant that rural India held a sliver of hope for the rural economy. This time, with few jobs, rising Covid cases and depleted savings, the situation looks grim even in the rural areas.

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