Roadmap for Answer Writing

1. Introduction

• Define the concept of the savings rate.
  • Fact: “The savings rate measures the share of gross disposable income that is not used in final consumption expenditure.”

2. Impact of Savings Rate on the Economy

• Long-term Effects:
  • Explain how high savings rate leads to higher capital accumulation, providing more funds for investment in infrastructure, technology, and businesses.
  • Link higher savings rate to economic growth and its impact on income and living standards.
  • Resilience to economic downturns: Savings act as a cushion against economic shocks by ensuring access to funds during crises.
  • Reduces dependence on external borrowings: High savings reduce reliance on foreign debt.
  • Fact: “Higher savings rate results in higher economic growth, increased income, and better living standards.”
• Short-term Effects:
  • Explain how a rise in savings reduces consumption expenditure and might lead to reduced demand, causing short-term economic slowdown.
  • Fact: “An increase in savings rate will lead to reduced consumption expenditure, thereby slowing down economic growth in the short term.”

3. Factors Contributing to Decline in India’s Savings Rate

• Increase in Debt Levels:
  • Due to rising consumption, particularly among the younger population, household debt levels have increased, leading to lower savings.
  • Fact: “Credit card spends hit a record high in May 2023.”
• Falling or Stagnant Income Levels:
  • Many households have experienced stagnant or falling incomes, especially the poorest segments of the population.
  • Fact: “Between 2015-16 and 2020-21, the annual income of the poorest 20% households in India dropped by 53%.”
• High Inflation:
  • Inflation erodes real wages, making it harder for households to save.
  • Fact: “There has been no significant growth in real wages over the past few years.”
• Migration of High Net-Worth Individuals (HNIs):
  • The outflow of HNIs taking their savings abroad contributes to the decline in domestic savings.
  • Fact: “Around 30,000 to 35,000 HNIs have left India in the last 5 years.”
• Shift to Physical Savings:
  • Low interest rates have prompted a shift from financial savings to physical assets like real estate.
  • Fact: “There has been a double-digit growth in loans for housing since May 2021.”

4. Conclusion

• Highlight the need to restore the savings-investment-growth cycle.
• Suggest measures to boost savings, such as policies to address inflation, income inequality, and enhance financial literacy.

Key Facts for Use in Answer

1. Savings Rate: The savings rate represents the share of gross disposable income not spent on consumption.
2. Economic Growth and Savings: Higher savings lead to more investment, fostering long-term economic growth.
3. Short-Term vs Long-Term Impact: Increased savings can reduce consumption and slow down short-term economic growth but benefits the economy in the long run.
4. Factors for Decline in Savings:
   • Increase in Debt Levels: Rising household debt due to increased consumption (e.g., high credit card usage).
   • Falling Income Levels: Income disparity with the poorest 20% seeing a 53% drop in income between 2015-16 and 2020-21.
   • High Inflation: Persistent inflation limiting wage growth.
   • HNIs Moving Abroad: 30,000-35,000 HNIs have moved out of India, taking savings with them.
   • Shift to Physical Savings: Low interest rates prompting investment in real estate over financial savings.

By addressing the economic impacts and analyzing the reasons behind the decline in savings, this roadmap provides a structured approach to answer the question.