Post pandemic, the share of the households in the capital formation in the Indian economy is falling. Household savings had increased increased significantly during the pandemic because of increased risk aversion of the citizens. The households post pandemic have used the savings and heavily borrowed to buy different classes of assets resulting in a fall in the household savings to 61% in financial year 2023 from 78% in financial year 2021. However, it should also be noted that the household financial liabilities in India had increased to 5.8% of the GDP which is highest since financial year 2012.
The fall in the share of the households in the capital formation is a cause of concern for any economy. For a developing economy like India with a share of more than 70% of the population below age of 25 years, it is even more worrisome. It would have a multifaceted impact on the overall well-being for the economy and the citizens.
The fall in the share of the households in the capital formation in Indian economy would lead to many problems like higher inequality in income as well as wealth, fall in consumption, slowdown in housing market, lower wealth accumulation and bad savings and financial health of the citizens in medium to long term which at present when inequality is at very high level in country.
For a country like India which is expected to have a very high proportion of the graying population by 2060, it would be very difficult for the state of India to provide a dignified life to the retired people!
The situation on this front must be improved and can be improved easily if corrective measures are taken now. This negative trend is in the initial stage in India and can be corrected by policy measures through tax benefits and other measures that encourage the citizens to increase their savings along with better incentives to homeowners etc.It has been a decade since the deduction limit under Section 80C of the Income Tax Act in India was increased from ₹1,00,000 to ₹1,50,000 in the Union Budget for the financial year 2014-15 by the then Finance Minister, Arun Jaitley, on July 10, 2014, which came into effect from April 1, 2015. Much has changed in the consumption and financial behaviors of the citizens in India since then where consumerism is taking center stage in the Indian economy pushed by huge advertisement and promotion.
It’s high time for the Government of India and Finance Minister Smt. Nirmala Sitharaman to bring some relief to taxpayers in form increased deduction limit for the tax savers by increasing the limits under 80C and other sections and subsections of Income Tax Act.
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