28

Aug

Banks in Crisis As Savings Dip And Prices Spur Up

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Prof Shivaji Sarkar

New Delhi | Wednesday | 28 August 2024

India's banking sector is facing a severe deposit crisis which reflects deeper issues affecting various areas of the economy, including manufacturing, the automobile industry, and fast-moving consumer goods (FMCG). The crisis highlights a broader slowdown that is impacting both individual livelihoods and industries across the nation.

One of the most striking indicators of this slowdown is the decline in sales growth in the FMCG sector. According to NielsenIQ, sales during the first two months of the June quarter saw a slump in both value and volume compared to the previous year. This drop is an early sign that demand has yet to recover. Additionally, exports of 30 key commodities, including rice, gems, jewelry, and marine products, have either stagnated or declined, with total exports standing at a grim $31.83 billion.

International Monetary Fund (IMF) Deputy Managing Director Gita Gopinath, during a visit to India, pointed out that while the country is experiencing 7 percent growth, it is not generating enough jobs, a crucial element in reviving the market. Inflation rates, varying across states from 5.9 percent in Bihar to 5.1 percent in Assam, pose a challenge to the Reserve Bank of India (RBI). Rising food inflation has reduced the amount of disposable income people have for other necessities, creating a ripple effect that hampers spending and slows down the broader economy.

 

Article at a Glance
India's banking sector is facing a deposit crisis, which is a symptom of a larger economic slowdown. The crisis is affecting various sectors, including manufacturing, automobiles, and fast-moving consumer goods (FMCG).
The slowdown has resulted in a severe sales crunch, with unsold car stockpiles worth Rs 73,000 crore. Exports of 30 commodities have also declined steadily. The International Monetary Fund (IMF) has flagged the situation, highlighting the need for job creation to resuscitate the market.
Household savings have hit a three-year low, and inflation is a major concern. The Reserve Bank of India (RBI) has rejected calls to exclude food from inflation targets. The government needs to take drastic measures to address the situation, including reversing policies that have led to the crisis and focusing on pro-people policies to stimulate growth.

 

The RBI's July Economic Review shows that public confidence in the general economic situation has worsened, along with sentiments about current employment and income. This aligns with the findings of the RBI’s Consumer Confidence Survey from July 2024, which reveals declining optimism among households about economic conditions. Adding to these concerns is the sharp decline in household savings, which has been a critical driver of India's growth story. In 2022-23, household savings fell to just 14.16 percent, a significant drop over three years.

The automobile sector is also struggling. One of the reasons for the decline in car sales is the government's policy requiring 10-year-old cars to be scrapped. Rather than benefiting car manufacturers, this policy has backfired. The second-hand car market has shrunk, which in turn is reducing new car sales. Many average citizens are finding it hard to purchase new cars because they cannot offset the cost of their old vehicles. Meanwhile, inflation and continuous price hikes have made new cars prohibitively expensive.

As of June 14, 2024, deposits in banks had decreased by ₹3.5 lakh crore year-to-date, a 1.6 percent drop compared to the previous year, according to RBI data. While deposits did show a 10 percent increase by July 26, non-food credit rose by 13.7 percent, highlighting that deposit growth remains a challenge for both the banking sector and the broader economy. The fall in deposits is directly tied to squeezed incomes, reduced purchasing power, and the overall demand slowdown.

The automobile industry is also grappling with a massive stockpile of unsold vehicles. According to the Federation of Automobile Dealers Associations (FADA), over 7 lakh passenger vehicles worth approximately Rs 73,000 crore are sitting unsold at dealerships across the country. This has led automakers like Maruti Suzuki to announce plans to scale back production. Even luxury car manufacturer Honda has cut capacity, and some of its dealers have sold their shops to competitors. The auto loan growth has declined by 15 percent, further impacting the industry.

The situation is dire enough that it could lead to layoffs in the automobile sector, which would only exacerbate the slowdown. The industry is already showing signs of distress, as reflected in the Purchasing Managers' Index (PMI), which fell to a three-month low of 60.5 in August, down from 60.7 in July.

Government data shows that household savings in India have declined by Rs 9 lakh crore over the past three years, reaching Rs 14.16 lakh crore in 2022-23. Nearly half of all households report a decline in earnings and savings, citing rising costs for basic necessities like food, education, rent, and transportation. Many families are now dipping into their savings or taking loans just to make ends meet, according to a survey by Local Circles.

Finance Minister Nirmala Sitharaman has expressed concern over the falling bank deposits and has urged banks to improve their operations. Her remarks signal that the financial structure of the country is in need of immediate correction. The policies that have led to this situation, including the junking of cars and high taxation, need to be reevaluated. India must pivot away from policies that prioritize infrastructure projects and excessive tolls at the expense of the public.

As the country moves forward, drastic changes in policy are necessary to ensure sustainable growth. Prioritizing the well-being of the people, controlling inflation, and fostering household savings are essential steps to secure a brighter economic future for India.

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