Study reveals record high household debt as Indian spending surges

A recent report suggests that household debt in India reached a record high in the last quarter of the previous year. Economists Tanisha Ladha and Nikhil Gupta from Motilal Oswal Financial Services Ltd estimate that household debt amounted to 39.1% of the country's GDP during October-December, up from 36.7% a year earlier and surpassing the previous record high of 38.6% in the Jan-March period of 2021.

The increase in household debt was primarily driven by non-housing loans, which accounted for 72% of total household debt. This suggests that Indians might be borrowing more for consumer spending rather than investing in tangible assets. Non-housing debt saw a significant year-on-year growth of 18.3%, outpacing the 12.2% growth in housing loans. These trends are critical economic indicators reflecting shifting patterns in borrowing behaviour.

India's economy heavily relies on consumer spending, constituting about 60% of its GDP. However, the rapid expansion of unsecured loans in banks has raised concerns among regulators. To address this, the Reserve Bank of India implemented measures to make it more expensive for lenders to issue unsecured loans, as they pose a risk to financial stability if they turn into bad debt levels. These measures aim to maintain the balance between facilitating consumer spending and ensuring financial stability.

The surge in household debt comes at a time when domestic financial savings are declining. The authors of the report caution that while housing debt remains relatively low compared to other economies, non-mortgage household debt in India is comparable to countries like Japan and Australia. And it is higher than in several other major nations. It raises concerns about the country's overall savings rate and its implications for long-term financial stability.

High levels of non-mortgage debt could strain banks' balance sheets if borrowers default on their loans, ultimately affecting the economy's overall productivity. Therefore, it's essential for policymakers to monitor and address the rising household debt to ensure the stability of India's financial system and economy.