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Lower PFCE and Lower Household Financial Savings indicate any longer term problem for India's GDP growth?

 The combination of lower PFCE(Private Final Consumption Expenditure) growth and lower household financial savings as per RBI Monthly Bulletin(Aug 23) are problems for future GDP growth of India.

PFCE, or Private Final Consumption Expenditure, is the spending of households on goods and services. It is one of the most important components of GDP, and it accounts for a large share of economic activity.

Household financial savings are the savings of households in financial assets such as bank deposits, stocks, and bonds. These savings are used by businesses to invest in new projects and create jobs, which ultimately determine GDP growth.

Lower PFCE growth and lower household financial savings can lead to lower GDP growth in a number of ways.

  • Lower PFCE growth means that households are spending less money on goods and services. This can lead to a decrease in demand for products and services, which can hurt businesses and lead to job losses.
  • Lower household financial savings means that businesses have less access to capital to invest in new projects and create jobs. This can lead to a slowdown in economic growth.

In addition, lower household financial savings can make it more difficult for households to withstand economic shocks such as job losses or medical emergencies. This can lead to a decrease in consumer spending, which can further hurt businesses and lead to a slowdown in economic growth.

(Courtesy:Press Note of MOSPI,GOI dt 31.8.23)

"The net financial saving of the household sector – the most important source of funds for the two deficit sectors, namely, the general government sector and the non-financial corporations – moderated to 5.1% of GDP in FY23 from 11.5% in FY21 and 7.6% from FY20 (pre-pandemic). It has been said that it fell to 50 year low, however this is completely misleading as household savings must be looked into as a sum total of physical and financial savings. To start with, the sharp rise in financial liabilities on hindsight may reflect drawdown in precautionary saving during pandemic. However, a deeper look at the data reveals otherwise. Consider the following. Financial liabilities jumped Rs 8.2 trillion since pandemic, outpacing the increase in gross financial savings at Rs 6.7 trillion, thus explaining the fall in household net financial saving by Rs 1.5 trillion / 2.5% of GDP. On the asset side of households, there was an increase of Rs 4.1 trillion in insurance and provident and pension funds" (SBI Ecowrap Sep 23)This explains why Indian Households apparent Financial Savings is low when low interest rates during Pandemic offered a rare opportunity for the households to lock in for long term housing loans at fixed rates.

However,the Indian government is also taking steps to address the problems of lower PFCE growth and lower household financial savings. For example, the government is cutting taxes and increasing government spending on social welfare programs to support consumer spending. The government is also encouraging households to save more money by providing tax breaks and other incentives.

However, it is important to note that these measures will take time to have an impact. In the meantime, the Indian economy is likely to experience some moderation in growth due to the combination of lower PFCE growth and lower household financial savings.

What can be done to address the problems of lower PFCE growth and lower household financial savings? Is there any link with higher than normal unemployment data ?

Here are some things that can be done to address the problems of lower PFCE growth and lower household financial savings in India:

  • Support consumer spending: The government can support consumer spending by cutting taxes, increasing government spending on social welfare programs, and making it easier for people to get loans.
  • Encourage household financial savings: The government can encourage household financial savings by providing tax breaks, other incentives, and financial education programs.
  • Reduce inflation: High inflation can erode household savings and make it difficult for people to afford essential goods and services. The government can reduce inflation by taking steps to control the money supply and reduce the cost of living.
  • Create more jobs: When people have jobs and a steady income, they are more likely to save money and spend money on goods and services. The government can create jobs by investing in infrastructure, supporting small businesses, and promoting economic growth.

By addressing the problems of lower PFCE growth and lower household financial savings, the Indian government can support economic growth and create a better future for all Indians.

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