Rising Household Debt Levels in India

Rising Household Debt Levels in India

Subject: Economy

Section: National Income

Current Status:

• India’s household debt levels have reached an all-time high of 40% of Gross Domestic Product (GDP) by December 2023.
• Net financial savings had likely dropped to their lowest level at around 5% of GDP during the same period.

Motilal Oswal Research:

• A research report from leading financial services firm Motilal Oswal highlighted these trends.
• Household Debt:
• Estimated at approximately 40% of GDP by December 2023, marking a new high.
• Breakdown:
• Unsecured Personal Loans: Growing at the fastest pace within household debt.
• Followed by Secured Debt, Agricultural Loans, and Business Loans.

Previous Estimates:

• In September 2023, the Reserve Bank of India (RBI) estimated net financial savings at 5.1% of GDP in 2022-23, a 47-year low.
• The Finance Ministry argued that the lower savings were due to households taking loans for real assets like homes and vehicles, seen as “confidence in future employment and income prospects.”

Revised Estimates:

• Net Financial Savings:
• Revised estimates for 2022-23 raised to 5.3% of GDP, still the lowest in 47 years.
• Weaker than the average of 7.6% of GDP recorded between 2011-12 and 2019-20.
• Household Debt:
• Scaled up to 38% of GDP in 2022-23, second only to the 39.1% of GDP recorded in 2020-21.

Factors Contributing:

• Reasons for Dismal Savings:
• Weak Income Growth
• Robust Consumption
• Growth in Physical Savings

Impact on Consumption and Investment:

• With income growth remaining weak and household net financial savings at 5% of GDP, private consumption and household investment growth have considerably weakened in 2023-24.

Analysis:

• Consistent Trends:
• The report suggests that falling net financial savings and lower savings in 2022-23 were not an exception but consistent.
• Estimates indicate households’ net financial savings were broadly unchanged at around 5% of GDP in the first nine months of 2023-24.
• Projections:
• For the full year, savings could end up between 5% and 5.5% of GDP.

Financial Trends:

• Gross Financial Savings:
• Rose slightly to 10.8% of GDP in the first nine months of last year, from 10.5% in the corresponding period of 2022-23.
• Financial Liabilities:
• Also rose to 5.8% of GDP from 5.5% of GDP during the same period.
• Annual Borrowings:
• Surged to 5.8% of GDP in 2022-23, the second-highest in the post-Independence period.