India’s Household Debt Surged to New High by FY23

India’s Household Debt Surged to New High by FY23

Kakali Das

According to a new report, Indians are now borrowing more than ever, which is somewhat unusual given the cultural preference for savings and financial stability.

It raises the question: what’s driving this surge in borrowing among Indians, especially when the cultural norm leans heavily towards savings and financial security?

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Let’s delve into the figures. According to a report by financial services company, Motilal Oswal, India’s household debt has hit a record high, accounting for nearly 40% of the GDP. Concurrently, savings have dwindled to just 5% of the national GDP, marking the lowest level in 47 years.

To recap, Indians are increasingly resorting to loans while their savings are declining. The majority of this debt consists of unsecured personal loans, which are granted without any form of collateral or guarantee.

Following unsecured personal loans, secured loans, agricultural loans, and business loans are also contributing to this trend. However, do we know why this trend is happening?

The report highlights several factors such as weak income growth, a robust consumption market, and increasing investments in physical assets like gold and real estate. This prompts two key questions: 1) What’s the public response to these findings? 2) Is there cause for concern?

Reactions to the report are varied. The opposition is pointing fingers at the government, attributing the situation to low incomes and high inflation, which they argue are driving people to borrow and deplete their savings.

And, what does the government say? Regarding this report, the government has not provided a response yet. However, in the past, the finance ministry has dismissed similar claims, stating that people are acquiring loans to invest in assets such as cars and real estate, indicating confidence rather than distress.

Should reports like these cause concern? According to India’s central bank, the Reserve Bank of India (RBI), not necessarily. In January, the RBI issued a financial stability report stating that household debt does not pose systemic concerns. They also examined other countries’ situations. For example, in China, household debt is 63% of the GDP, in Thailand, it’s 91%, in Vietnam, it’s 61%, in Brazil, it’s 34%, and in the US, it’s around 64%. India’s ratio appears comparatively better in this context.

That being said, the increasing debt levels also shed light on the changing behaviour of the Indian consumer. They are no longer as conservative and are inclined to spend on things they enjoy. This trend was validated by a recent consumption survey, which found that urban Indians are consuming 146% more than they were in 2012, while rural Indians are consuming 164% more.

Indeed, it’s not just about the increased spending but also the shifting expenditure patterns. Previously, a significant portion of income went towards food expenses, but this is changing. Food now constitutes only 46% of rural consumption in India, falling below half. In urban areas, the proportion is even lower, with just 39% of consumption allocated to food.

If Indians are allocating less of their budget to food, where is the spending going? It’s increasingly directed towards durable goods such as gadgets and machines. These items accounted for only 2.6% of total consumption in 1999, but now they constitute almost 7%.

Certainly, there’s a noticeable shift occurring as Indians increasingly engage in the market and explore a wider array of products. Take vehicles, for example; in 2023, over 4.1 million vehicles were registered, marking an 8% increase from the previous year. Similarly, the number of credit cards in India has surged to around 94 million, with credit card spending witnessing a 28% increase last year.

The reasons behind this shift are open to interpretation. Critics may attribute it to financial strain, while the government may argue it reflects confidence. Likely, it’s a combination of both factors. The emerging India seems unafraid of debt, preferring to invest in durable goods and luxuries.

This confidence is likely fueled by the robust national economy. However, it’s crucial to support this spending habit with initiatives for job creation, economic growth, and fiscal discipline.

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