India’s gross savings and investments edge higher in FY22 despite inflation, says SBI Research report

• India’s gross savings rose to 30.2% of GDP in FY22 from 28.8% in FY21, and it is expected to have crossed 31% in FY23.
  
• According to the report, India’s gross capital formation (GCF) rose from 10.7% in FY21 to 11.8% in FY22.
  
• Household savings rose sharply in FY21, but have since moderated.
  
• The Indian government’s focus on boosting capital expenditure has resulted in a domino effect on the private sector’s investments, the report added.
  

India’s gross savings and investments are edging higher despite elevated inflation eating into the savings of households, according to a report by SBI Research.

A rise in savings in physical assets has managed to balance out the dip in household savings – caused by inflation and as families returned to spending on essentials and non-essentials post the pandemic – resulting in a boost to India’s overall gross savings.

According to the SBI Research report, India’s gross savings rose to 30.2% of GDP (gross domestic product) in FY22 from 28.8% in FY21, and it is expected to have crossed 31% in FY23.

While this points to an increasingly positive trend in savings, data from the National Statistics Office shows that it is still below the pre-pandemic levels – India’s gross savings as a percentage of GDP stood at 31.7% in FY19.

Inflation eating into household savings – pandemic boost wearing off

The pandemic period saw a significant boost in India’s household savings between FY20 and FY21 – according to data from the Reserve Bank of India, the net financial savings of households rose from 8.1% in FY20 to 12% in FY21. This number has moderated since then. And, the outlook is not too rosy either – according to a report by Motilal Oswal, net financial savings of households is estimated to have witnessed a broad-based decline.

“Our calculations suggest that household net financial savings (NFS) plunged to a three-decade low of about 4% of GDP in H1 FY23, from 7.3% of GDP in FY22 and Covid-led 12% of GDP in FY21. Within financial savings, the decline was broad-based,” said a report by Motilal Oswal.

Higher prices of essential goods and services have eaten into the savings of Indian households. In the first ten months of 2022-23, the headline retail inflation came in at an average of 6.79% – significantly higher than RBI’s upper limit of 6%.

However, the SBI report says that savings in physical assets have improved notably – rising from 10.7% in FY21 to 11.8% in FY22 – and this was after the pandemic boost started wearing off.

Focus on capital expenditure aiding investments

The Indian government’s focus on capital expenditure has given a boost to not just the government’s addition of fresh capacity, but also to the private sector’s investments in capital assets.

According to the report, India’s gross capital formation (GCF) rose from 10.7% in FY21 to 11.8% in FY22. The positive impact of higher capex by the government was also visible in private sector investments, which rose from 10% to 10.8% during this period.

To recall, the Indian government’s capex outlay has risen consistently since FY19, going from ₹3.1 lakh crore in FY19 to ₹10 lakh crore in FY24.

The overall efficiency of capital, as measured by the Incremental Capital Output Ratio (ICOR), has improved more than two times, from 7.5 in FY12 to 3.5 in FY22. A decline in ICOR implies an improvement in efficiency of capital.

“The talk on ICOR becomes relevant and shows that the economy is on a sound footing. It is also now clear that potential growth of the Indian economy (a global phenomenon) is now lower than earlier. From that point of view, future GDP growth rates even at 7% could still mean a decent number by any standards,” said the SBI Research report.

The Indian economy is expected to grow in the range of 6% to 6.8%, while the International Monetary Fund’s World Economic Outlook states that the global economic growth is expected to slow down to 2.9% in 2023 and 3.1% in 2024, lower than the historical average of 3.8%.

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