Financial Stocks and Flow of funds of the Indian Economy

Financial Stocks and Flow of Funds of the Indian Economy 2023-24

by Suraj S, Ishu Thakur, and Mousumi Priyadarshini

Abstract: The financial resource balance of the domestic economy improved by narrowing the deficit to 0.9 per cent of GDP in 2023-24 from 2.3 per cent in 2022-23. The strengthening of financial balance sheets of households, general government and non-financial corporations has driven the net financial wealth of domestic sectors to 28.6 per cent of GDP in 2023-24 from 24.8 per cent in 2022-23. The financial assets of the domestic economy expanded by 13.9 per cent, while liabilities grew by 12.7 per cent during the year. The government’s fiscal consolidation, coupled with improved corporate profitability and deleveraging, supported healthier financial net positions and rise in financial wealth.

I. Introduction

The flow of funds (FoF) refers to a comprehensive financial accounting framework to understand the fund flows across various institutional sectors of the economy. It provides consistent and homogenous information for analysing financial transactions and outstanding positions of financial assets and liabilities. The FoF accounts have evolved globally as a critical tool for assessing financial interconnectedness and potential vulnerabilities consistent with macroeconomic developments.

Following the System of National Accounts (SNA) 2008 framework and India’s G20 Data Gaps Initiative (DGI) commitments, the Reserve Bank of India’s financial accounts compilation framework, known as the Financial Stocks and Flow of funds (FSF), presents a detailed view of sectoral and instrument-wise stocks and flows.

The current FSF mirrored the macroeconomic developments of 2023-24, characterized by robust economic growth of 12.0 per cent at current prices and private final consumption expenditure (PFCE) growth of 9.7 per cent. Influencing factors included favorable inflation, the prospect of Indian bonds joining global indices, and domestic equity market capitalization crossing the US$ 4 trillion-mark. Overall capital flows remained robust, with net capital inflows outpacing the current account deficit (CAD).

The financial assets of the domestic economy expanded by 13.9 per cent in 2023-24, while liabilities grew by 12.7 per cent. The net financial wealth (NFW) of domestic sectors rose to 28.6 per cent of GDP, up from 24.8 per cent in 2022-23, signaling a broad-based strengthening of financial balance sheets.

II. Financial Flows: Sector and Instrument-wise

Reflecting the uptick in economic growth, financial assets of the domestic sectors grew by 13.9 per cent. Households (HH) and financial corporations (FCs) remained the dominant sectors, together accounting for around 73 per cent of total financial assets in 2023-24.

• FCs: Constituted 46.2 per cent of total financial assets and 41.9 per cent of total liabilities, reflecting higher resource mobilisation.
• NFCs: Assets and liabilities declined, reflecting slower expansion in business activity and continued deleveraging.
• General Government (GG): Progress in fiscal consolidation led to a marginal contraction of liabilities, with its share in total liabilities reducing to 18.0 per cent.
• Rest of the World (RoW): Assets and liabilities increased, indicating increasing openness on the external front.

Instrument preferences remained stable. Currency and deposits, along with loans and advances, continued to be the major instruments used for holding assets and liabilities. For FCs, loans and advances to households and private NFCs were the predominant assets, while currency and deposits were the major liabilities. Households preferred currency and deposits as assets, though the shares of insurance, pension, and equity investments have been gradually increasing.

III. Financial Resource Balance

The financial resource deficit of the domestic economy decreased to 0.9 per cent of GDP in 2023-24 from 2.3 per cent in 2022-23. This was driven by higher growth of financial assets over liabilities, supported by strengthening balance sheets of NFCs and improved net financial positions of the general government and households.

IV. Sectoral Financial Linkages

The mapping of sectoral flows offers a view of interlinkages and interconnectedness.

IV.1 Financial Corporations

• Central Bank (RBI): Growth in financial assets and liabilities increased to 11.1 per cent and 12.6 per cent, respectively. Loans and advances to financial institutions outside India increased by 59.9 per cent due to reverse repo transactions. Currency liability growth moderated to 3.9 per cent amidst increasing preference for digital payments.
• Other Depository Corporations (ODCs): Financial asset growth increased to 13.2 per cent. Scheduled Commercial Banks (SCBs) dominated the segment with an 87.1 per cent share. The loan-to-deposit ratio rose to 84.5 per cent, and holdings of central government securities grew by 13.8 per cent.
• Other Financial Corporations (OFCs): Assets grew by 19.7 per cent. Within this sector, the insurance sector accelerated by 17.4 per cent, and mutual funds witnessed a 35.5 per cent increase in assets and liabilities, with the AUM-to-GDP ratio reaching an all-time high of 17.7 per cent.

IV.2 Non-financial Corporations (NFCs)

Growth of financial assets moderated to 7.1 per cent, while liabilities fell by 6.7 per cent. PuNFCs (Public) became net lenders in 2023-24, showing improved liquidity and financial resilience supported by higher profits. PvNFCs (Private) ramped up borrowing for capacity expansion and inventory accumulation.

IV.3 General Government (GG)

The gross fiscal deficit of the Union Government fell to 5.5 per cent of GDP. The financial resource gap narrowed to 5.5 per cent of GDP from 6.0 per cent. Total GG debt reduced to 83.7 per cent of GDP from 84.5 per cent.

IV.4 Households (HH)

The financial surplus remained unchanged at 5.2 per cent of GDP. Assets grew to 11.4 per cent of GDP, while liabilities rose to 6.2 per cent, indicating higher borrowings from banks and NBFCs. The household debt-to-GDP ratio increased to 41.5 per cent, while net financial wealth increased to 87.8 per cent of GDP.

IV.5 Rest of the World (RoW)

India remained a net borrower. Flow of financial assets of RoW increased to 2.9 per cent of GDP, driven by higher equity investments in private corporate businesses. RoW liabilities increased to 2.2 per cent of GDP, primarily due to an increase in foreign investments by the RBI (foreign exchange reserve accretion).

V. Conclusion

The sectoral financial landscape in 2023-24 reflected balanced assets and liabilities expansion and improved financial health. FCs and households remained net lending sectors. The general government’s fiscal consolidation and improved corporate balance sheets contributed to healthier sectoral net positions and a rise in net financial wealth. Overall, the 2023-24 financial accounts highlight a robust and resilient financial balance sheet of domestic sectors supported by strong fundamentals and deepened financial intermediation.

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