SBI Research: Household Financial Liabilities Nose-Dived In FY20 Reflecting Slowdown In Disposable Income, Likely To Gain Faster Pace In FY21?

SBI Research Report

The Reserve Bank of India Annual Report reaffirms our conviction that the current slowdown in growth will be long and protracted.

For the record, Net Household Financial Savings of the Household jumped by Rs 3.4 lakh crores in FY20, largely reflecting a significant meltdown in household financial liabilities in FY20 by 22% that had increased by 39% for the six-year period ended 2019.

While the decline in net financial liability is a welcome departure, on hindsight it portrays unwelcome trends in household saving behavior. For one thing in common, households were able to increase their liabilities/leverage significantly over the six-year period ended FY19 by as much as 1.9 times, with disposable income jumping by 2.3 times.

However, in FY20, disposable income has expanded by only 0.8 times, and liabilities have thus grown by only 1.1 times.

Furthermore, Households in FY20 have drawn down their exposure to Government by a sharp Rs 2 lakh crore and instead increased their exposure to Insurance and Retirement Corpus, perhaps as a precautionary motive and also as a proof that Households are now increasingly trying to “Keep up with Joneses” with income slowdown.

We believe Household Leverage may have further slowed down in FY21 with perhaps even a negative growth in disposable income. This may still not result in a decline in Net Household Financial Savings in FY21 as people have accumulated currency, deposits and even shares in large numbers.

But the bottom line is grim: consumer demand will be a non starter even in FY21 and continue to be pandemic proof through increased precautionary savings as pandemic continues to ravage through the economy.

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