Indian households are saving less than they have in half a century. According to the Reserve Bank of India, household net savings in 2022-23 accounted for only 5.1% of the GDP. This represents a significant decline from 8% of GDP in 2019-2020 and 11.5% in the year when the pandemic struck. Levels not seen since the oil crises of the 1970s. The burden of Indian debt is also increasing. Household financial debt has surged to 5.8% of GDP in the last fiscal year. The ratio was 3.8% in the previous year.

If a country does not save, it does not grow. It is becoming increasingly difficult to predict where India’s growth momentum will come from. While the IMF expects India to experience a growth rate of 6.1% in 2023, higher than most other major economies, this rosy figure hides significant structural problems that will weigh on the country’s future.

Because what the data suggests is that India’s numbers are not sustainable. Growth is driven by household consumption fueled by debt and public investments. Neither can form the basis of a long-term growth strategy for India.

During the prosperity years of the early 2000s, when India experienced almost as rapid growth as China, corporate investments fueled its expansion. This was supported by a decent savings rate and a government gradually reducing its primary deficit. The primary balance reflects the state’s budgetary situation, excluding the net interest expense on public debt.
When companies faced difficulties after 2008, excessive public spending took over. We went from a surplus of 1.1% of GDP before the crisis to a primary deficit of 2.5% of GDP. Naturally, this could not continue. For much of the 2010s, the government reduced its overall spending. At the same time, there was a consumption boom. More Indian households began buying luxury goods, and access to formal financing increased. This allowed the economy to keep going for a while. But post-pandemic inflation reduced real household incomes, and they started dipping into their savings. Household gross savings peaked at over 25% of GDP in 2010 and have significantly decreased. Today, households are borrowing more and more to finance their expenses. Meanwhile, private-sector investment has never truly recovered. China’s investment rate is 40%; India’s is between 28 and 30%, well below the peak rates of 34 to 36% reached in the 2000s.

This decline is almost entirely due to the collapse of private corporate investments. Attempts to reverse this decline have not succeeded: corporate investments have declined in the past two quarters. The government carries Most of the investment, and private companies are not shouldering their share of the burden. The total projects in the private sector approved by Indian banks and financial institutions, excluding government-led infrastructure, have only increased by 1.8% since the current government took office in 2014.

Meanwhile, households are simply getting into debt to maintain their consumption levels. The government takes whatever they manage to save to cover its growing deficit. And even in this case, the government lacks manoeuvring room. It needs to collect more taxes to justify its sizeable public investment programs.

If India wants to maintain its world-leading growth rates, private sector investment must return to the levels of the 2000s. The government must reassure private companies that it is safe to invest in India. The pro-business rhetoric of public officials has constantly been undermined by the politicization of tax collection and enforcement, more complex forms of taxation, and the expansion of ill-conceived regulations. High tariffs designed to boost domestic production have instead convinced local suppliers that they cannot participate in global value chains.