On Wednesday, the Reserve Bank of India released data on household savings for the third quarter of 2020-’21. This covered the October-December 2020 period, which means the data captured the aftermath of first Covid-19 wave in India and the economic disruptions that containment measures such as lockdowns caused.

The numbers are disappointing with a sharp dip in the net financial assets of households. Not only does this point to the economic hit the Indian middle class has taken but it is also bad news for India’s post-Covid economic recovery, given that it might mean reduced spending as well as a lower corpus available for investment.

Net financial assets have dropped

The RBI tracks both household assets and liabilities. Assets include items such as bank deposits, provident funds and mutual funds investments, among others. Liabilities, on the other hand, are loans that a household has taken.

Net assets therefore are total assets minus liabilities. Note that “household” here refers also to unregistered businesses whose assets and liabilities are not counted as part of private corporate data.

From the first quarter of 2020-’21 (April-June) to the third quarter (October-December), net financial assets dropped from 21% of India’s gross domestic product to just 8.2% after two consecutive quarters of decline. Total assets also dropped: from 19% of GDP to 12.7%.

Moving to mutual funds

Bank deposits went from 2.9% of GDP in the first quarter to 7.7% and then back to 3%. The initial spike was partly due to the lockdown which cut discretionary spending.

The RBI has also reported a large number of fixed deposits being broken from January to March, indicating a high level of financial distress among the Indian middle class.

However, there was a significant rise in investments in mutual funds, which went up from 0.3% of the GDP in the second quarter of 2020-’21 to 1.2% in the third quarter.

Notably, the mutual fund figure for the third quarter is significantly higher than the averages for 2019-’20 (0.2%) and 2018-’19 (0.3%) reflecting increased flows into the stock market driven both by good market performance as well as poor interest rates in traditional saving instruments such as fixed deposits.

Loans fell in the third quarter

Total loans fell from 5.4% of GDP in the second quarter of 2020-’21 to 4.6% in the third quarter. Since loans are often drivers of economic activity, this is bad news.

This comes as the flow of loans in the first quarter was negative pointing to the complete cessation of economic activity during the national lockdown.

Poor savings will hurt the economy

Savings are critical not only for individual households but also the economy as a whole since they provide capital for investment. India has traditionally had a high rate of saving significantly above developed countries like the United States and comparable to developing economies such as Brazil and South Africa.

Moreover, the lion’s share of India’s savings are due to households (with the corporate sector and the public sector being the other minor contributors). In 2017, out of a total savings of 30% of the GDP, 17.2% was due to households.

While still high at a global level, household savings have taken a hit of late. A 2019 National Institute of Public Finance and Policy paper blames this on the “ twin shocks of demonetisation and GST” with respect to micro, small and medium enterprises (remember, “households” here include unregistered small businesses).

To add to these is now, of course, the Covid shock. Although India was not hit significantly hard during the first wave, an unplanned lockdown ensured that India was the world’s performing major economy in 2020-’21.

“Households are running down saving buffers to support consumption and a desire to rebuild saving could hold back spending even as the economy reopens,” warned credit rating agency S&P Global Ratings on Thursday.

The middle class is hit

India’s middle class benefited significantly post the 1991 liberal reforms.

However, Covid-19 has hit it hard. Apart from their assets dropping as seen in the RBI data for the third quarter, the class itself seems to have shrunk. Research firm Pew reported in March that the Indian middle had shrunk by as much as a third. Moreover, research from the Centre for the Monitoring of the Indian Economy has reported that middle class incomes were the most badly hit of any class due to the first wave.