Could the Recession Revive the Savings Gene in China and India?
WHY YOU SHOULD CARE
If the world’s second- and fifth-largest economies cut down on spending, it could make the recovery of the global economy even harder.
By Pallabi Munsi
- A sharp increase in consumption — and a dip in savings — in China and India helped the world economy recover after 2008.
- That pattern could reverse, with consequences for everyone.
For 25-year-old Akshay Shah, a Mumbai-based legal manager at a multinational bank, the coronavirus pandemic and the resulting economic crisis have meant adjusting his personal finances. He wants to increase his investments, cut down his spending on meals and drinks, and save more.
Chirag Thakkar, a commissioning editor at a New Delhi–headquartered publisher, is similarly anxious. He doesn’t spend money on clothing, and when movie theaters reopen, he plans to avoid buying overpriced nachos and popcorn “for at least a year.” Instead, he is moving his investments from mutual funds to more liquid forms of money that he can access when necessary.
Shah and Thakkar are not alone.
Saving has been part of the DNA of two of the world’s oldest and largest societies — China and India — for centuries, in good measure because of the frequent crises such as famines, wars and social upheaval that they have endured. That frugality began to change in 2008, when both countries experienced a dramatic surge in consumer spending, making them among the most sought-after markets in the world.
That this shift coincided with the Great Recession helped resurrect the global economy. China’s gross savings rate, as a fraction of its gross domestic product, dropped from a peak of 52 percent in 2008 to 46 percent in 2018, while India’s fell from 37 percent in 2007 to 30 percent in 2018.
There will be a propensity to save right now.
Ananth Narayan, S.P. Jain Institute of Management and Research
Now, as the world enters another recession — one that International Monetary Fund expects will be far steeper than the 2008 crisis — China, India and the rest of the world are looking at a very different landscape. In 2008, China and India did not slip into a recession — their economic growth merely slowed. The United States, whose economy did contract, saw its savings rate go up, from 14 percent in 2009 to 20 percent in 2015, as a badly hit population tried to save more. This time, China and India are expected to see dramatic contractions in their economies, placing a young consumerist generation in the circumstances their ancestors once faced and setting the stage for a potential revival of the savings culture.
“There will be a propensity to save right now,” says Ananth Narayan, an associate professor of finance at Mumbai-based S.P. Jain Institute of Management and Research.
For China’s white-collar workers, “cherry freedom” — the ability to buy imported fruits such as cherries without a second thought — has become a buzzword over the past couple of years. That’s now a distant dream, with the Economist Intelligence Unit predicting urban joblessness may rise to 10 percent this year, compared to 3.6 percent in 2019.
But the tendency to save, Narayan says, could trigger a “vicious cycle.”
“Everybody is saving and therefore nobody’s consuming, and therefore [there are] no jobs, and therefore fewer earnings, and therefore less income, and therefore even more saving and so on,” he explains.
The only way out, Narayan says, is a fiscal push — by creating jobs and maintaining production. He cautions against cash payouts and modern equivalents of the Keynesian idea of asking people to “dig up holes and fill them up again.” That, he worries, could lead to the repeat of a scenario India faced between 2009 and 2013, when there was “too much money chasing too few goods.”
Devendra Pant, chief economist at market analytics firm India Ratings and Research, believes India won’t necessarily see a broad rise in savings. While those with higher incomes can afford to save more, “we can’t say the same about people who are at the bottom of the pyramid, which is a major chunk,” he says. Their low income levels mean they won’t have the ability to save much and will spend what they earn. “And that will revive demand,” he says.
Yet it’s the higher-earning segments of the Chinese and Indian markets that are particularly valuable to multinationals. And if the the world’s second- and fifth-largest economies save more, it could affect the global economy.
Narayan believes that China’s domestic consumption could pick up sooner than India’s, and that consumption could support global growth. Pant, meanwhile, is counting on travel restrictions opening up for both countries. “A large boost will come only when aspirational youngsters from these countries start outbound travel across the world,” he says.
But will young Chinese and Indians who are saving money by eschewing movie theater popcorn buy plane tickets to crisscross the world anytime soon? Or will the savings gene that generations have passed on kick in again? On that could hinge the speed of recovery of the global economy.
- Pallabi Munsi, OZY Author Contact Pallabi Munsi