If the steep decline in the household savings rate -- which has fallen to 16.3 per cent from 23.6 per cent between fiscals 2012 and 2017 -- continues, it may pose a serious challenge to overall growth and the macroeconomic stability, warns a report.

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The decline was primarily due to the shocks from note-ban and GST implementation, said a report by India Ratings.

"The twin policy shock of demonetisation and GST although had economy-wide ramification, it was more pronounced in the case of the household sector. The household savings rates plummeted 153 bps in FY17, while (that) for private corporations fell only 12 bps while savings rate for the public sector increased 37 bps. But the overall impact was a 128 bps decline in the savings rate," India Ratings chief economist D K Pant said in the report.

Since the household sector is the largest contributor to savings, the overall savings rate declined to about 30 per cent in FY17, after remaining well above 32 per cent for many years, it said. In FY12, the rate was a robust 34.6 per cent.

Household savings include savings by households, not-for-profit institutions and quasi-corporates, and it is the largest contributor to the savings in the economy.

These savings, intermediated by banks and non-banking financial entities, are a major source of investment funding.

Despite an overall decline in savings rate, the household savings rate for public sector increased marginally to 1.6 per cent in FY17 from 1.5 per cent in FY12 and for corporations it fared better at 12.1 per cent from 9.5 per cent.

"Between fiscal 2012 and 2017, the household sector accounted 60.93 per cent of the economy's total savings, followed by private corporations at 35 per cent and the public sector at 4.07 per cent," the report said.

"However, the growth of household savings at 3.7 per cent was the lowest during this period among the three broad categories. Savings of private corporations grew 17.4 per cent, while that of public sector at 12.9 per cent during this period. As a result, household savings rate (gross household savings/gross domestic product) plunged to 16.3 per cent during FY12-FY17 from 23.6 per cent in FY12," Pant noted.

During the reporting period, the share of public sector and private corporations in investment as measured by gross capital formation rose, but the same for household sector declined.

This is significant as until FY14, the household sector was the largest contributor to the gross capital formation. Since then private corporations have emerged as the largest contributor.

Pant said in the report that declining share of household sector is visible even in the case of nominal gross value added (GVA), where its share declined to 43.2 per cent in FY17 from 45.5 per cent in FY12. He attributed this to the lower nominal GVA growth of the household sector compared to the private corporations and the overall economy.

In FY17, the household sector contributed 94.8 per cent to agriculture, 27.5 per cent to industrial and 34.4 per cent to services sectors' nominal GVA.

According to Pant, apart from other reasons, "tighter financial conditions (increasing median working capital days) have been one of the key reasons for the slowdown in the household sector's growth".

"Although, there is no regulatory bias against MSMEs for accessing credit, the size of their balance sheet and credit-worthiness has become an even bigger issue post 2008 global financial crisis," the report said.

Significantly, the share of resident households (personal loan) in non-food credit also declined to 18.2 per cent in FY12 from 23.7 per cent in FY08, but reached 25.9 per cent in the first quarter of this fiscal.

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Pant warned that if this trend continues, particularly against the backdrop of falling savings rate of the household sector, it has the potential to turn into a major challenge and growth disruptor in the medium-to-long term.