India’s savings rate, while not alarming, is not as strong as it should be, especially considering the country’s low foreign direct investment (FDI) inflows, according to a report by Blume Research.

The report stated that a closer look at savings trends reveals that the biggest concern lies in household financial savings, which have been declining sharply due to a surge in financial liabilities, primarily unsecured personal loans.

It said, “A high savings rate is necessary given low FDI rates. A deep dive into savings illustrates that the culprit is financial savings (as opposed to physical savings), and the reason is rise in financial liabilities, chiefly led by rising (unsecured) personal loans”.

The report highlighted that while India’s overall savings rate appears stable, household savings-the largest contributor-have been falling over the years. The data in the report pointed out that in FY00 (Year 2000), household savings accounted for 84 per cent of the total savings in the economy, but this share has now dropped to just 61 per cent in FY23.

A major reason for this decline mentioned by the report is the drop in household financial savings, which fell from 10.1 per cent of GDP in FY00 (Year 2000) to just 5 per cent in FY23.

At the same time, financial liabilities have risen sharply from 2 per cent to 5.8 per cent of GDP over the same period.

A significant portion of household debt is now non-housing debt, which is higher in India compared to many other economies.

The report added that this rise in debt is largely driven by a sharp increase in consumer loans. According to the report, the share of consumer loans in total credit has surged from 21 per cent in FY16 to 34 per cent in FY24. In contrast, the share of industry loans has declined from 42 per cent in FY16 to 34 per cent in FY24.

One of the key reasons behind this growing indebtedness is the rise of Small Ticket Personal Loans (STPL), which are mostly unsecured and easy to obtain. The report noted that non-banking financial companies (NBFCs), including fintech firms, have become the primary source of these loans, often disbursing them digitally. Unlike traditional banks, these lenders offer quick access to credit, making borrowing easier but also increasing household financial liabilities.

The findings raise concerns about the sustainability of India’s savings and debt levels. With a higher proportion of income going toward repaying loans, household savings could continue to shrink, potentially affecting long-term economic stability.