Household Savings Decline Despite Equity Boom, Raising Concerns Over Long-Term Growth
"The government improved consumption but removed the savings habit without replacing it with an equivalent incentive," he said, pointing out that subscriptions and collections under traditional tax-saving schemes have fallen sharply.
Chennai: The rapid financialisation of household savings through mutual funds and equity markets has not translated into higher household financial savings, raising concerns over the sustainability of India's growth model. Changes in the new tax regime have unintentionally shifted household behaviour away from long-term savings and towards consumption, find experts.
Even as retail participation in equities and systematic investment plans (SIPs) has surged over the past decade, net household financial savings have declined from 7.9 per cent of Gross National Disposable Income (GNDI) in FY16 to 5.8 per cent in FY24.
According to Sachin Sawrikar, Managing Partner at Artha Bharat Investment Managers, the decline was largely due to the removal of Section 80C tax incentives for instruments such as the Public Provident Fund (PPF) and National Savings Certificate (NSC) under the new tax regime. While the new tax structure has simplified taxation and boosted consumption, it has also weakened the culture of compulsory savings that tax deductions once encouraged.
"The government improved consumption but removed the savings habit without replacing it with an equivalent incentive," he said, pointing out that subscriptions and collections under traditional tax-saving schemes have fallen sharply.
At the same time, household debt has increased significantly, with the household debt-to-GDP ratio rising from around 20 per cent to nearly 45 per cent over the past decade. Sawrikar said the economy is increasingly being driven by credit-fuelled consumption rather than income-led savings, a trend that deserves greater policy attention.
The changing savings pattern has also affected banks. Bank deposits have declined from nearly 50 per cent of GNDI to around 35 per cent as households increasingly allocate money to mutual funds and other market-linked investments. Banks, he said, will have to innovate through more attractive deposit products and improve operational efficiency as the era of abundant low-cost CASA deposits gradually changes.
Although SIP collections continue to touch record levels, Sawrikar cautioned that a large number of investors discontinue their SIPs after a short period. Sustained investing over many years, rather than headline subscription numbers, is what ultimately creates wealth.
He also stressed that India's aspiration to sustain 7-8 per cent GDP growth requires stronger domestic savings. The country's overall savings rate has fallen to around 30 per cent of GDP, below the level needed to finance long-term investment. Reduced mobilisation through PPF and similar schemes could force the government to borrow more from the market, potentially crowding out private investment.
Citing the US 401(k) retirement system as an example, Sawrikar argued that long-term savings instruments require meaningful tax incentives to encourage participation. While financialisation through equities is a positive structural shift, he warned that rebuilding the habit of long-term savings will become increasingly difficult if current trends continue. "Consumption can always be stimulated through policy," he said. "But if savings decline, replacing those lost savings becomes far more difficult."
