The Reserve Bank of India (RBI) in its latest data has showed that the year-long pandemic left households more indebted, which has sharply jumped to 37.1 per cent of GDP in Q2 of FY21, while their savings rate plunged to a low 10.4 per cent. The household savings plunged as the pandemic has led to tens of millions losing jobs and almost all forced to take deep pay-cuts, forcing them to borrow more or dip into their savings to meet expenses.
This has the share of households in the overall credit market jumping to 51.5 per cent in Q2, up by 130 bps year-on-year. In a counter-seasonal manner, the pandemic-induced spike in the household financial savings rate in Q1 of FY21, when it had touched an unprecedented 21 per cent of GDP, has plunged to 10.4 per cent in Q2. However, it mentioned this was still higher than 9.8 per cent registered in Q2 of FY20. It stated normally when the economy stalls or contract, household savings go up and when the economy recovers it falls as people become more confident of spending. The savings jumped to an unprecedented 21 per cent in Q1, when GDP contracted by a record 23.9 per cent, and when contraction moderated to 7.5 per cent in Q2, household savings plunged to 10.4 per cent.
The inverse relation between the household savings rate and GDP growth may sound counter-intuitive, but studies have shown that households tend to save more during the economic slowdown and greater income uncertainty. A similar trend was also observed during the global financial crisis in 2008-09 when household savings jumped by 170 bps as per cent to GDP in FY09 and moderated subsequently as the economy picked up.