A Ticking Time Bomb: Rising Consumer Debt Threatens India's Economic Future

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In the past decade, the Indian economy has shown remarkable growth and resilience. Even after the 2019 Covid crisis, the Indian economy was among the first to recover, boasting impressive growth and rising prosperity. However, beneath the surface, a worrying trend is gaining momentum: the rapid rise of consumer debt. With the sudden rise in popularity and availability of various debt and deferred payment options to consumers, debt has skyrocketed. The situation is not being helped by the rise in business offering easy EMI, BNPL and financing options to consumers. Such businesses includes financial institutions and fintech businesses and startups. This issue, if left unchecked, could pose a significant threat to the country's economic stability and long-term development.

The following graph shows the ratio of household credit from scheduled banks to GDP and its share in total credit. As is clear, the household credit from SCBs to GDP ratio, and the share of household credit in total credit of SCBs is on the rise.

It should be noted that this figure only considers credit from SCBs. In reality, household credit is likely to be much higher as other sources of credit like fintech businesses or informal credit sources are not included.

The Alarming Numbers

  1. Doubling Debt: According to data from the Reserve Bank of India (RBI), household debt in India has doubled in FY23, reaching a staggering ₹15.6 lakh crore. This represents a sharp increase from the previous year's figure of ₹7.8 lakh crore.
  2. Debt-to-Income Ratio: The debt-to-income ratio, which measures the amount of debt held by households relative to their income, has also jumped to 48.1%. While households saw their financial assets reduce to 5.1% of GDP from 7.2%, their liabilities relative to their income increased by 5.8% in FY23 as compared to 3.8% during FY22. This  indicates a growing reliance on borrowing to maintain current lifestyles.
  3. Unsecured Loan Surge: A worrying trend is the rise of unsecured loans, which have grown at a staggering 47% CAGR in recent years.  The slowdown brought by the Covid-19 pandemic has slowed this down in the past 3 years, but still this trend is concerning. This suggests that a significant portion of this debt is being used for non-essential spending, further increasing the risk of defaults.

Impact on Individuals and Households

The rising debt burden is having a significant impact on individuals and households across India:

  1. Financial Stress: High debt and reducing savings can become a disaster for individuals and households leading to significant financial stress which can further cause mental and health issues.
  2. Reduced Savings: With a large portion of income going towards debt and interest repayment, savings and investment are going to fall. This is will be detrimental both at individual and national level.
  3. Vulnerability to Shocks: Unexpected events like job loss or medical emergencies can quickly push debt-burdened households into financial instability, leading to defaults and further hardship.

The Wider Economic Fallout

The consequences of unchecked consumer debt can extend far beyond individual households, impacting the economy as a whole:

  1. Slower Growth: As individuals prioritize debt repayment over spending consumer demand weakens, leading to slower economic growth. In addition low savings and investment will also hinder economic growth. This can have a ripple effect on businesses, leading to job losses and further reduced investment.
  2. Financial Instability: High debt levels increase the risk of widespread defaults, potentially triggering a financial crisis. This can destabilize the banking system and erode confidence in the economy, leading to a vicious cycle of economic decline.
  3. Social Unrest: Growing financial stress and economic hardship can lead to social unrest and political instability. This can damage the country's image and deter foreign investment, further hindering economic progress.

Charting a Course for Sustainable Prosperity

Addressing the rising consumer debt issue requires immediate and multifaceted action:

  1. Financial Literacy: India is severely lacking in terms of financial literacy, with only 27% of the population being financially literate. It is necessary to implement comprehensive financial literacy programs to equip individuals with the knowledge and skills to manage their finances effectively, avoid over-borrowing, and making sound and informed financial decisions.
  2. Responsible Lending Practices: With the expansion of  the financial sector in India, and the rising availability of credit, it is becoming increasingly necessary to strengthen regulations on lending practices and introducing stricter creditworthiness checks in order to prevent sub-prime lending, individuals from falling into debt traps and ensure responsible lending practices.
  3. Promoting Savings and Investment: Encouraging a culture of savings and investment through attractive schemes and tax benefits can incentivize individuals to build wealth and secure their financial future.

Conclusion

Rising consumer debt poses a significant threat to India's economic future.Thus it is becoming increasingly necessary for the government to take proactive measures to address this issue and promote financial responsibility. This is the only way for our nation to ensure sustainable economic growth, improve financial well-being for the citizens, and build a more resilient and prosperous future for all.

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Location: India

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