“It is not the strongest of the species that survives, nor the most intelligent, but the one most adaptable to change”. Charles Darwin
India has long been considered a high-saving economy, largely due to its conservative households that prioritize financial security. Traditionally, a significant portion of household savings went into physical assets like gold and real estate, influenced by cultural norms, low financial literacy, and limited access to formal financial products. However, over the past decade, this trend has shifted significantly. India’s gross domestic savings rate fell from 34.6% of GDP in 2011–12 to 29.7% in 2022–23, the lowest level in four decades. Much of this decline has been driven by increased household consumption, sticky inflation, and the gradual shift of savings into financial instruments.
A Secular Decline in Household Financial Savings
Declining household savings in India have been extensively debated in the development discourse. A remarkable change has been the steep fall in household financial savings, which dropped from 11.5% of GDP in 2020–21 to just 5.1% in 2022–23, according to RBI data. This coincided with a sharp rise in household liabilities, primarily from borrowing for consumption, housing, and education.
Fisher Dynamics
‘Fisher Dynamics’ describes how the nominal interest rate tends to adjust in response to changes in expected inflation, focusing on how inflation and interest rates affect household debt. This includes the interaction between nominal interest rates, real interest rates, and inflation. With higher interest rates, borrowing becomes more expensive, which can reduce borrowing and encourage debt repayment. Fisher Dynamics also examines how inflation impacts the real value of debt; high inflation decreases the real value of debt, making it potentially easier for borrowers to manage. Conversely, rising interest rates may force households to cut spending or find additional income sources to meet debt obligations.
Monetary policy influences both interest rates and inflation, thus affecting Fisher Dynamics. Central banks often take Fisher Dynamics into account when setting interest rates and other monetary tools—an increase in interest rates can lower new borrowing but raise the costs of servicing existing debt. A study by the Centre for Economic Policy Research (CEPR), Paris (Fagereng, A, M Gulbrandsen, M Blomhoff Holm and G Natvik (2023), ‘Fisher Dynamics, Monetary Policy, and Household Indebtedness’, CEPR Discussion Paper No. 18214. CEPR Press, Paris & London), found that this situation can lead to declining debt-to-income ratios, particularly if changes in nominal debt outweigh the effects of interest income and expenses.
Shifting Paradigms
Transforming economic landscape necessitated a recourse to riskier investment avenues like equities and mutual funds. This transforming asset mix from physical savings in gold and real estate to an increasing tilt toward financial assets potentially hampers domestic capital formation and overall economic growth, and, therefore, needs a tweaked policy response. Simultaneously, the share of household savings in bank deposits shrank significantly, from 58% in FY12 to 37% in FY23, thereby raising the cost of deposits and also causing an asset-liability mismatch to a limited degree. The growing preference for consumption, paired with low or even negative real interest rates on fixed deposits, contributed to this trend.
Cataclysmic Changes- Not A Case of “Islands in the Stream” (Ernest Hemingway)
While the share of financial savings in total savings declined from 40.3% in 2019-20 to 28.5% in 2023-24, the share of physical savings increased from 59.7% to 71.5% during this period. Deposits, which made up 58% of savings in FY12, shrank to 37% in FY23. The proportion of household savings held in provident and pension funds more than doubled from 10% in FY12 to 23% in FY24.
Urban households generally have higher financial literacy and better access to banking, resulting in increased savings through financial instruments. Rural households, however, still mainly rely on cash and physical assets. Factors such as gender, income level, and educational background significantly influence saving behaviors. Household savings declined due to India’s shift toward a consumption-driven economic growth, the erosion of disposable incomes caused by persistent inflation, increased borrowing and consumer credit, low or even negative real interest rates (adjusted for inflation) on fixed deposits and savings accounts, and the surge in real estate and stock markets after the pandemic.
Interestingly, even as overall savings decreased, investments in financial markets surged. Equity has become a preferred asset class, especially among younger, urban investors. Monthly contributions to SIP (Systematic Investment Plans) skyrocketed from ₹3,122 crore in April 2016 to ₹26,632 crore in April 2025—an 8.5-fold increase. This shift reflects the rise of a more financially engaged middle class, supported by digitization, financial inclusion initiatives, and easier access to investment platforms.
Household investments in equities and mutual funds nearly doubled from Rs. 1.02 trillion to Rs. 2.02 trillion between FY21 and FY23. While wealth creation is positive, concerns arise for low-income households during this equity boom, as they are more vulnerable to financial shocks and the risk-reward trade-off. Nobel Laureate Paul Samuelson’s caution rings true here: “Investing should be more like watching paint dry or watching grass grow.” An element of froth and “irrational exuberance” in equities should not overshadow the importance of patience and prudence in wealth building.
Fostering financial resilience requires micro-savings initiatives, customized micro-savings products tailored to rural and urban needs, providing tax benefits or government-backed guarantees, and updating post office savings schemes along with initiatives like Kisan Vikas Patra (KVP) or Public Provident Fund (PPF). A comprehensive approach to household savings must address economic, behavioral, and structural issues, such as enhancing financial literacy, improving access to financial services, offering higher real returns on small savings schemes, inflation-indexed bonds, or incentivized savings accounts, controlling inflation, promoting social security and formal employment, establishing minimum wages, and providing social benefits to stabilize incomes and boost savings propensity.
Lexicon of Change – Structural Changes
The broader asset mix has changed discernibly:
- The share of financial savings in total household savings fell from 40.3% in FY20 to 28.5% in FY24.
- Meanwhile, physical savings—especially in real estate and gold—rose to 71.5%.
- The share of provident and pension fund investments increased significantly, from 10% in FY12 to 23% in FY24.
This suggests a growing awareness of long-term financial planning among some segments, even as others remain vulnerable.
The COVID Effect and a Recent Rebound
During the COVID-19 lockdowns, household savings spiked due to forced consumption cuts. But this was temporary. As economic activity resumed, liabilities grew and savings declined again. Encouragingly, there has been a rebound in net household financial savings, rising to 7.3% of GDP in the first half of FY25, up from 3.7% a year earlier. This was largely due to a drop in personal loans—from 6.9% to 4.7% of GDP—following the RBI’s tighter norms for unsecured lending, including personal loans, gold loans, and loans to NBFCs to maintain financial stability and protect both the banking sector and consumers from the risks stemming from high levels of unsecured debt. Still, overall household liabilities reached a 17-year high of 6.4% of GDP in FY24, just below the 2007 record of 6.6%, reflecting shifting consumption patterns, changing investment preferences, and growing comfort with higher-risk, higher-return financial assets.
Why Does This Matter -All that Glitters is not Gold?
A growing concern is that the increased shift toward equities and mutual funds—while positive for capital markets—might not suit all households, especially those with lower incomes. These households are more vulnerable to financial shocks and may lack the financial literacy to navigate volatile markets. Moreover, the decline in household savings, especially in safer financial instruments, could hurt domestic capital formation and long-term economic growth.
Winds of Change -Transformative Triggers
Several factors are at play:
- Rising consumption and stagnant disposable incomes, especially with inflation eating into purchasing power.
- A move toward a consumption-led growth model.
- Low real interest rates on traditional savings.
- Increased borrowing, often for aspirational spending.
- The post-pandemic boom in real estate and stock markets, drawing in new investors.
Savings behavior also varies widely by demographic variability. Urban households generally save more through financial instruments due to better access and financial awareness. In contrast, rural households continue to rely more on physical assets and cash. Income levels, education, and gender all influence these patterns.
Roadmap Ahead: Multi-Pronged Policy Response
Addressing this challenge requires a comprehensive approach, combining policy, technology, institutional reform, and behavioral change.
Policy Reforms
- Simplify tax structures on capital gains and savings instruments to encourage broader participation in formal markets.
- Strengthen regulation of financial products like mutual funds and digital lending to build trust.
- Expand retirement schemes, such as the National Pension System (NPS), with auto-enrollment and incentives for informal sector workers.
Technology and Fintech
- Support fintech innovation to offer user-friendly micro-savings tools, AI-based investment advice, and inclusive digital platforms.
- Explore blockchain and smart contracts to improve transparency in recurring deposits and peer-to-peer lending.
Institutional Support
- Develop a National Household Savings Strategy, with coordination across ministries and financial institutions.
- Tailor programs to address rural-specific challenges, such as seasonal incomes and low financial access.
Behavioral Interventions
- Use default options for savings (e.g., opt-out pension schemes) to nudge positive behavior.
- Leverage gamification in savings apps to make saving a more engaging habit, especially for younger users.
Grammar of Development: Time for a Long-Term Vision
India’s demographic dividend, rising incomes, and expanding digital reach create a unique chance to channel household savings into productive investments through a balanced approach involving financial literacy, access to a variety of savings options, promotion of digital savings platforms, social safety nets, and macroeconomic stability. However, structural and behavioral barriers must be addressed.
In the short term (2025–2027), efforts should focus on increasing financial literacy, improving access to appealing savings instruments, and tightening regulations around risky lending. By the medium term (2027–2030), digital savings platforms need to be expanded, offering diverse and inflation-protected investment choices. In the long term, the aim should be to develop an economy where households can save securely, invest wisely, and build wealth steadily, contributing to both individual financial resilience and national economic stability. Difficult but not undoable. Execution, as always, will be the key.
Note: This is a revised and expanded version of the lead article published by Hindu Business Line on July 7, 2025.
ABOUT THE AUTHOR
Dr. Manoranjan Sharma is Chief Economist, Infomerics, India. With a brilliant academic record, he has over 250 publications and six books. His views have been cited in the Associated Press, New York; Dow Jones, New York; International Herald Tribune, New York; Wall Street Journal, New York.
