How will the financial choices of Indian households change in the years ahead, well after the COVID-19 shock dissipates? In livemint, Niranjan Rajadhyaksha expalins that income volatility amid the current turbulence may lead to a rise in precautionary savings, which can have immense implications on public policy choices right now.
"There is thus a strong likelihood that the income uncertainty people are experiencing right now will nudge Indian households to increase precautionary savings at least for the next few years. And this psychological switch may persist even after the Indian economy recovers momentum. The lack of a social security net—and the inadequacy of income support in the current crisis—makes a spike in precautionary savings even more likely in the country.
Why does this matter? Three possible macro effects of higher precautionary savings are worth highlighting. First, discretionary spending could come down as a proportion of income as households save more. Second, higher demand for safe assets such as bank deposits or government bonds could create space for fiscal expansion till private sector investment picks up. Third, higher savings could impact India’s current account balances with the rest of the world."
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