The global pandemic has created several difficulties with the extended series of lockdown and new norms of social distancing being in practice. During the past three months, India has seen a hike in unemployment, stunted income, limited availability of goods and services. All of these have had a deep psychological impact owing to the growing uncertainties. However, this situation has forced people to save and pause all unnecessary spending. The crisis has started to inculcate the habit of savings as a buffer to future ambiguities. As the lockdowns are lifted and there is no second wave of the virus, all paused spending could result in an economic boost in the third quarter, analysts hopes for such a recovery so as to revive all economic operations. But this spending pattern depends on the level of fear and trust held on by the people.
India’s consumers may not be able to stimulate economic growth through spending as they are highly speculative now. Although their savings are expected to help increase government borrowings. Rising savings during the extended lockdown might help in curbing India’s current account deficit as the cash inflow from abroad lessens. But before the pandemic arrived, India’s gross savings rate had dipped to a more than decade-low of 30.1% in 2019, down from 37.8% in 2008. Financial savings is expected to grow during the pandemic situation as households saturated with debt may not want to dip into savings further to fund discretionary consumption. And also, risk-averse banks and shadow lenders may not be eager to lend, keeping in mind how long the uncertainties can persist.
While the uncertainties still remain regarding the reopening of economies, job security, the trajectory of the virus, and a potential vaccine, government and central bank policies together will help in determining whether this money leaves bank accounts as quickly as it had arrived. However, the consumption which accounts for nearly 60% of the economy, has been the undisputed protector of India’s growth during previous stress periods, but this time it is unlikely to do so, says Prajul Bhandari, an economist. The reason partly being the banks and shadow lenders wary of a surge in bad loans is not extending credit, unlike the days that followed the global financial crisis in 2008.