Source: Live Mint (https://bit.ly/49njiH1)

The household sector plays a major role in the Indian economy by serving as a primary source of financial resources through savings, contributing a substantial 70% to the total gross domestic savings.

Household savings are broadly classified into two primary forms: financial and physical assets, with financial assets representing 56% and physical assets comprising 44% of the overall household savings, says global brokerage firm BofA Securities said in its recent report.

Physical savings: shining bright

As of FY22, household savings in financial assets stand at ₹28 trillion, twice the ₹14 trillion seen in FY12. On average, an Indian household holds 77% of its total assets in real estate, 7% in other durable goods, and 11% in gold.

Financial savings are still weak

Financial savings are computed on a net basis, where gross financial assets are adjusted for financial liabilities, primarily comprising loans obtained by households from banks and non-bank financial institutions.

In the last decade, the report indicates that the growth rate of financial liabilities, at 16.1% year-on-year, has exceeded that of gross financial assets, which averaged 10.8% year-on-year.

Per capita income and real interest: two main drivers of financial savings

Per capita income and the real interest rate are typically the two main drivers of financial savings.

“Empirical research suggests that rising per capita income was found to have a weak positive effect on savings rate, even though it correlates with private consumption growth remarkably well. This is understandable for a middle-income economy where the propensity to consume is relatively high. As for the real rate, studies indicate that a rise in the real interest rate increases the household saving rate in the short run.,”