Savings slowdown: The budget for 2026-27 does little to address a major financial problem

These headline trends, however, mask a couple of fragilities that could undermine the current illusion of stability. The first is sub-optimal nominal growth, which has printed below target. But, more importantly, widening fault-lines in household savings, including in the broader universe of gross savings in the economy, are a serious source of concern.

It is, therefore, both puzzling and distressing that finance minister Nirmala Sitharaman did not use the Union budget platform to address this growing structural deficit in the economy.

Savings are not only pivotal for financial and economic stability but are also a crucial building block for economic growth. Let us examine two key data points from the 2026-27 Union Budget that have the potential to act as growth stimulants.

The first is the government’s net borrowing programme estimate of ₹11.7 trillion, an increase of only 3.5% over the revised estimate for 2025-26. The borrowing programme helps fund the government’s development expenditure over a large number of programmes.

The second is the ₹12.2 trillion capital expenditure outlay, an 11.5% increase over the 2025-26 revised estimate. The government’s capital expenditure ‘crowds in’ private-sector investment, thereby providing a leg-up to employment and economic growth. The government will need to depend on the economy’s savings to finance a substantial part of its vast development bill.

As stated earlier, the slowing nominal growth rate is already a source of worry because most big-ticket revenue sources— both tax and non-tax—have clocked in below the 2025-26 budget estimates. In addition, the slowing household savings growth rate creates structural friction in the economy that is likely to take a while to reverse. The budget was probably the ideal platform to provide some tax incentives to reverse this structural slowdown.

The banking sector has been demanding that interest income on deposits be treated like capital gains. While the merits of that specific suggestion can be debated separately, shrinking bank deposits have bumped against rising demand for credit, forcing banks to slow down credit disbursal in some cases, or to depend on non-deposit funding sources, which has hurt margins. Aggregate deposits have grown 8.5% since April, while bank credit in the same period has gone up by 10.4%.

The share of deposits in the household savings basket has dropped from 58% in 2011-12 to 35% in 2024-25. Part of the slack is being taken up by both direct equity and mutual fund investments.

The Economic Survey’s explanation that rising equity investments demonstrate an “evolving" risk preference among households, however, rings slightly atonal. This is because it does not consider a saver’s interest rate preferences: current bank deposit rates offer negative returns after accounting for inflation and taxes. Bankers, therefore, feel that parity in tax treatment might divert some of the flows back to bank deposits.

Ram Singh, a member of the monetary policy committee at the Reserve Bank of India, had expressed anxiety over moderation in the household savings rate at the panel’s September-October meeting. Curiously, though, while admitting that interest rates do influence household savings behaviour, he also advocated that the “likely adverse impact on bank deposits and moderation in household savings should not be the reason for not going for a further rate cut."

The survey’s desire that the next step of household portfolio evolution include bond-market investments might bang up against the same wall. There were pre-budget demands that the government allow the issuance of tax-free bonds for a limited period—either directly from the government or from highly-rated public sector units—to allow long-gestation infrastructure projects to access patient household savings.

This is also because insurance companies or pension funds are unable to fill the gap between demand for long-term funds and their supply. However, the budget neither heeded that demand nor announced any alternative steps to smoothen the wrinkle.

There is another source of anxiety: the household sector’s liabilities, or borrowings, have doubled from 3% of gross national disposable income in 2014-15 to 6.1% in 2023-24. In the face of uneven real income growth, this indicates households have been financing consumption through credit and not through current income or savings. Hopefully, the budget proposals will generate enough additional jobs to moderate this worrisome data-point.

The author is a senior journalist and author of ‘Slip, Stitch and Stumble: The Untold Story of India’s Financial Sector Reforms’ @rajrishisinghal