Why in the news? 

The sharp reduction in Household Net Financial Savings and the rise in Household Debt burden are a cause for concern for growth and economic stability.

What are the present reasons behind the Lower Financial savings?

• Increased borrowing or reduced gross financial savings are the primary drivers of lower net financial savings.
• Lower net financial savings due to increased borrowing for consumption or investment can stimulate aggregate demand and output.
• Higher interest rates can lead to increased interest payments by households, reducing their net financial savings.

Implication of Higher Debt Burden on the Indian Market: The rise in household debt burden has two concerns for the macroeconomy. 

• Debt Repayment and Financial Fragility: Household debt sustainability depends on the gap between the interest rate and income growth rate. 
  • Suppose households fail to meet their debt repayment commitments. In that case, it reduces the income of the financial sector and deteriorates their balance sheets, which in turn can have a cascading effect on the macroeconomy.
• Scheduled Commercial Banks Lending vs. Growth Rate of GNS: The weighted average lending rate registered a sharp rise in the last two years, particularly due to the tight monetary policy stance of the RBI and the sharp rise in the call money rate during this period.
• Impact on Consumption Demand: Reducing household wealth can lead to lower consumption expenditure as households may attempt to preserve their wealth by increasing their savings.

• Reduced Higher household debt: Higher household debt can also reduce consumption expenditure in at least two ways.
  • If higher household leverage is perceived as an indicator of higher default risk, then it may induce banks to indulge in credit rationing and reduce credit disbursement. The consequent reduction in credit disbursement can adversely affect consumption.
  • Higher debt can reduce consumption expenditure by increasing the interest burden, not to mention the effect of higher interest rates on consumption expenditure.
• Low household Financial wealth: Recent trends in the Indian economy indicate a decline in household financial wealth relative to GDP, alongside an increase in household leverage (debt to net worth ratio). 
  • The financial wealth/net worth of the household is the difference between the stock of financial assets and liabilities.

Macroeconomic Implication:

• Implications of the Procyclical Leverage: Given that both the flow indicator of liabilities to disposable income and the debt to net worth show an increasing trend, where households are vulnerable.
• Fall in the Household Savings: The policy mantra of higher interest rates to counter inflation by reducing macroeconomic output and employment can leave households with an increasing level of debt in their balance sheets and potentially push the households into a debt trap.
  • The implications of high-interest rates on debt burden can hurt the consumption of the households and consequently aggregate demand.

Suggestive measures:

• Promote sustainable borrowing: Policymakers need to address the growing vulnerabilities of households by implementing measures to promote sustainable borrowing practices and reduce reliance on debt.
• Prioritizes production and employment: Additionally, the policies aimed at fostering a more balanced economy that prioritizes production and employment alongside financial activities may be necessary to ensure long-term economic stability and growth.

Conclusion: The change in the composition of the asset side of the household balance sheet towards financial assets indicates some degree of financialization of the economy which moves from a production-based economy to a monetary or financial exchange-based economy making the 5 trillion dollar economy both jobless and fragile. 

Mains PYQ:

Q The public expenditure management is a challenge to the Government of India in the context of budgetmaking during the post-liberalization period. Clarify it.(UPSC IAS/2019)

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