Households to lift Indian economy from ”vice-like grip” of slowdown, pandemic

Pic courtesy: RBI

The household sector is the most sustainable and self-reliant source of financing for the Indian
economy, according to an RBI article.The role of the household sector, the RBI article says , ” is likely to become critical in the context of the policy effort gathering critical mass to lift the Indian economy from the vice-like grip of a slowdown and, more recently the life-threatening COVID-19 pandemic.

The article, published in the June edition of the RBI monthly bulletin,expected a spike in net financial assets of households in the first quarter of 2020-21 on account of a sharp drop in lockdown induced consumption. But then, ”lags in the pickup of economic activity may cause the financial surplus of households to taper off in subsequent quarters. With construction activity at a standstill, there is a possibility of a shift by households from physical to financial assets”, as per the well-researched RBI paper.

It observed that the households continue to rely heavily on the banking sector for borrowing and investing their surpluses, although the share of bank deposits in their financial assets has undergone a secular decline. ” A recent shift is visible in favour of financial assets in mutual funds and insurance. ‚ĶCOVID-19 related uncertainties, have resulted in an outflow from mutual funds and a flight to currency holdings”
According to RBI, the household sector contributes around 60 per cent of gross savings in the Indian economy and remains the major supplier of financial resources for gross investment.

Annual data on household saving published by the National Statistical Office (NSO) showed that financial saving of the household sector declined to 6.5 per cent of GDP in 2018-19 from 7.7 per cent in 2017-18 and 7.4 per cent in 2016-17

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