World Thrift Day: Global savings surge in pandemic

A vast majority of Indians were clearly eating into their meagre savings bank accounts in order to eke out a living during the pandemic and the RBI says that the ratio of household (bank) deposits to GDP declined to 3 pc in Q3, from 7.7 pc in the previous quarter (Photo/Flickr)

The United States, the country that invented credit cards and is famous for practically everyone living off credit and out-of-pocket, has seen a record jump in its personal savings rate during the pandemic, which raced ahead to 13.7 pc in 2020 from 7.6 pc in the preceding year.

Not only is the jump an incredible 80 pc growth in just one year, but it is also the highest personal savings rate ever seen in the US history. Though this is one of the sharpest jumps in the world in both percentage and absolute jump, since it involves the largest economy in the world and translates into net personal savings in the US reach USD 2.055 trillion, just short of the size of the entire Indian economy, it also is a solid infusion of over USD 900 billion of cash, mainly lying with the banks, who in turn have happily deployed it in the booming stock markets, sending them to their record highs, month after month.

What is true for the US also broadly applies to most other developed economies as well. Europe is also awash with levels of cash in the system rarely seen since the turn of the end of the World War II and the effects of so much cash can be seen in its stock markets as well. The European Commission estimates that personal household savings jumped from 12.5 pc of net household income in the last quarter of 2019 to almost 17.5 pc at the end of the first quarter of 2020, the period when most of the European Union was already reeling under the pandemic and had been locked down.

The reasons behind the jump in savings in the developed nations are pretty much the same. With the first waves of the pandemic ravaging the countries and governments imposing harsh lockdowns, there was a great deal of uncertainty over jobs as many jobs, especially those in the gig economy as well as retail or small and medium enterprises either disappeared or were threatened in the face of lockdowns.

This incertitude led to a dramatic fall in consumer spending which fell to its historic lows and stayed there for most of the year 2020 as wave after wave of the Covid-19 pandemic swept across the globe.

But, the spike in savings did not come only due to consumers holding their purses tightly. In fact, a larger part of the credit can be claimed by the US and EU governments which opened up their own purses, in an unprecedented manner to allow the vulnerable households deal with the financial stress that the pandemic brought with it.

For instance, a study by the Federal Reserve Bank in Kansas, United States shows that large fiscal transfers, including stimulus checks and unemployment benefits, which boosted incomes at a time when much of the economy was closed, were a key factor in the jump in household savings.

The United States governments, under both Presidents, Donald Trump and his successor Joe Biden, were quick to provide direct cash support to every US citizen very early on in the pandemic. For instance, stimulus checks of USD 1,200 per person were part of the Coronavirus Aid, Relief, and Economic Security Act, known as CARES, that was signed into law in March 2020. A second relief package in December, 2020 included stimulus checks of up to USD 600 a person. CARES also included an extra USD 600 a month in unemployment benefits between April and July, 2020.

These transfers allowed many households, primarily ones that lost jobs or income, to meet basic necessities. On the other hand, for households fortunate enough to remain employed, the transfers may have facilitated a desire to build a savings buffer.

Pandemic-propelled penury in developing countries

While the rich economies and some of the developing ones, where the governments were quick in opening up the tap of direct financial aid to every household, saw a sharp growth in household savings, the story is just the opposite in most other countries where the savings rates have plunged to their historic lows as most households were forced to eat into their meagre savings, just to be able to survive the onslaught of the pandemic.

This drop was mainly due to poor and delayed response by many governments in terms of providing financial assistance to the vulnerable households as many governments simply did not provide adequate cash support or dithered over it for too long.

Consider India, for example. As the Narendra Modi government fumbled from one grave error to another, having begun with one of most stringent and longest lockdowns which was also the worst planned and implemented and that led to hundreds of millions of migrant workers stranded thousands of km away from their homes. Not only did the government fail to provide them adequate notice of a lockdown to enable them to either go back to their villages or even plan properly if they chose to stay on in the cities in hope of returning to work after the ‘short 3-week-long’ lockdown which Modi said with full gusto would be enough to beat back the virus.

The three weeks eventually turned into three months, which saw over 250 million Indians fall back into poverty, erasing the progress made in the previous decade which the United Nations had acknowledged as the biggest reduction in poverty achieved by any country in the world.

The Modi government also bungled in its assistance programme, with no clear plans in place and even worse implementation of the few confused poverty-alleviation programmes. First, the government behaved in a particularly parsimonious manner, just at the time when the society needed an unprecedented generosity from the government, as had been seen and done in almost every country in the world to stave off the pandemic’s worst economic effects.

The Modi government’s much-touted and hyped financial aid packages were accounting jugglery at best and inhumane at the worst as hundreds of millions of Indians were forced to even cut their already meagre food rations in order to survive the economic nightmare unleashed by the government’s bungling.

The disastrous impact of this on Indian society and economy and especially the hundreds of millions of its poor households are still trickling in, one at a time. Earlier this year, the Reserve Bank of India finally acknowledged that household financial savings had fallen in the third quarter of fiscal year 2021, meaning October-December 2020. The savings had crashed to 8.2 pc of the Indian GDP, from a slightly more respectable 10.4 pc in the preceding quarter. A vast majority of Indians were clearly eating into their meagre savings bank accounts in order to eke out a living during the pandemic and the RBI says that the ratio of household (bank) deposits to GDP declined to 3 pc in Q3, from 7.7 pc in the previous quarter.

Meanwhile, the household debt to GDP ratio has been increasing steadily since end-March 2019, the RBI observed. This is largely because the Indian economy was already in a severe slowdown mode well before it was shattered and crashed to its worst ever performance of a decline of 8.5 pc in the year of the pandemic. The RBI says that household debt as a ratio of the GDP stood at 37.9 pc at the end of December 2020, from 37.1 pc barely three months earlier.

This clearly indicates the amount of stress that households were under due to far lower income due to the lockdown.

“The dip in household financial savings reflects a significant draw-down on deposits, as households faced balance-sheet stress during the lockdowns,” wrote Soumya Kanti Ghosh, chief economist of State Bank of India group.

It is not just the poor countries that have seen their savings evaporate and debts soar, but this impact has also been felt by many of the poorer households even in the rich nations. For instance, the United Kingdom doled out a very GBP 186 billion financial aid package early on in the pandemic, translating into GBP 3100 per household, it was the highest cash infusion into the economy in over 60 years. However, despite this early and rather generous assistance, the UK saw that debt had increased and/or household savings declined for at least 40 pc of its lowest income families. This, despite the fact that the total household savings were up by a record GBP 150 billion in the year. Experts say that this and other data indicate that even in rich nations inequality has seen a dramatic jump.

Though inequality has risen in most countries, in few if any, will it match the severity of inequality is at a record high as Modi’s crony capitalism has led to a multi-fold growth in the wealth of the top industrialists in the country, notably Gautam Adani, who leapfrogged many Chinese and other billionaires to become Asia’s second richest person earlier in 2021, all thanks to generous bonanza of rent-seeking businesses showered on him by the Modi government.

As the global economies recover, it is time for all countries, but few more so than India, to focus on helping the deprived and the marginalised, who have borne the brunt of the pandemic across all parameters. It is time for governments, including Narendra Modi government, to stop showering benefices on a few capitalists and focus their efforts to help the billions whose future hangs in balance even as some jobs return.