Intuitively, if we go back to the early stages of the lockdown, what comes to mind? Financial difficulties, job losses, small business closures, people getting amortization, etc.
Now, how would you feel if I told you that people’s financial savings increased in April-June 2020?
Consider the data compiled by the Reserve Bank of India. In April-June 2020, household financial savings ₹8.16 trillion. For a perspective on how big it is, in April-June 2019, household financial savings ₹2.02 trillion; In July-September 2019 ₹4.85 trillion and over the next two quarters ₹4.2 trillion and ₹5.14 trillion respectively.
Percentage of GDP (GDP), It looks even heavier. This is up from 21% of GDP in April-June 2020 (lockdown quarter) to 4% of GDP in April-June 2019. It was 9.8%, 8.1% and 9.8% respectively in the following three quarters. In the quarter after April-June 2020, do you expect savings to increase as things gradually open up and people are getting their livelihoods back?
In July-September 2020, housing savings ₹4.92 lakh crore, or 10.4% of GDP. The data quoted here are from the latest issue of the RBI Bulletin; We do not have data for October-December 2020.
Now, rationality. Household savings also fell by 24% in April-June 2020, up from 21% in GDP.
However, in absolute terms, ₹Four times more than 8.16 trillion ₹2.02 trillion in April-June 2019. It has to do with the human response to emergencies. When things seem vague, you never know how bad it will be. Discretionary cost reduced; One reason is the closure of outlets. While a section of the population is losing jobs, opting for a temporary ban on loans — now that we know it is not the entire population — is saving those who have access to means more than spending.
To take a step back from the aforementioned data, home financial savings is a minus flow of net financial liabilities of financial assets. In April-June 2020, the flow of financial assets ₹Much more than 7.38 trillion ₹3.83 trillion in April-June 2019, but less than that ₹2020 January-March 7.86 trillion, which is a normal quarter. The big difference is the flow of financial responsibilities. In April-June 2020, it was negative ₹0.78 trillion more than positive ₹1.81 trillion and positive in April-June 2019 ₹2.72 trillion in January-March 2020. That is, people paid their obligations in April-June 2020, but usually they add to it. At a time when people are choosing a temporary ban on loans, meeting financial obligations is a confusing issue. But we are talking about hard data.
In July-September 2020 things were normalized. The flow of financial assets increased ₹7.47 trillion, but an influx of financial liabilities ₹2.55 trillion, which means people are added to financial responsibilities. Home loan to GDP ratio increased to 37.1 per cent in July-September 2020. It was 35.4 per cent in April-June 2020. Preliminary indications are that the household financial savings rate will decline further in October-December 2020 with the intensity of consumption and economic activity. . A similar trend was observed during the global financial crisis in 2008-09, when the GDP growth rate was 1.7% and moderated as the economy grew.
What do we learn from all this? When we face a crisis, say, a risk or lack of food, our body releases an emergency response force to deal with the situation. At the time of the pandemic-induced financial crisis, more and more people wanted to save. A basic principle of financial planning is that you have an emergency fund equal to six months’ expenses. People generally follow the principle of income – expenses = savings / investments. Ideally, it should be income – savings / investments = expenses. As long as you are adequately protected, you do not have to come forward with an emergency response if necessary. RBI data covers the entire population (India) as well as urban or semi-urban centers (India). To that extent, good people need to plan financially for emergencies.
Joydeep Sen is a corporate trainer (debt markets) and author.