India’s rising household debt: Is there a silver lining?

It is a study in contrast of the debt levels of the Indian economy and its constituents namely – the corporate sector and household individuals.

In recent years, many Indian corporates have reduced their debt and are sitting on a comfortable leverage. A study on corporate leverage by a leading public sector bank covering over 6223 companies (excluding finance firms) shows that the aggregate debt equity ratio of corporates has fallen well below 1 compared to 1.09 during the Covid year. The deleverage move by the Corporates was well supported by the rise in profits in recent years which in turn encouraged many corporates to fund capex through internal accruals rather than resorting to debt. Similarly, the national sovereign debt level has also moderated to 57% of GDP in FY 25 compared to 63% in FY 21, thanks to robust tax collections. However, the sharp increase in the debt level of the domestic household segment remains a cause for concern. Recent RBI data shows that the total household debt has increased to 42% of GDP as of December 2024 compared to ~38% in 2022. In 2011, the debt level stood at 8%. Though the numbers are not comparable with 2011 due to limited financial access then, it provides a good insight into the rising indebtedness of individuals and the impact on their living standards.

Increasing indebtedness: Household debt to GDP (%)

The lack of disposable income among households owing to indebtedness limits consumption and adversely impact companies serving the domestic market. The importance of a buoyant domestic market to the economy needs no overemphasis as local consumption accounts for 65% of India’s GDP. The debt stress among households has come at a time when global slowdown and tariff headwinds are forcing Indian companies turn towards the home market for selling their wares.

A related trend that needs equally more attention is the sharp decline in Indian household savings, which has halved to 5% of GDP since 2000. For many generations, a high domestic savings rate helped the Indian economy remain resilient amidst global turmoil. The safety net seems to be receding fast. Household savings now account for only 60% of the total domestic savings compared to ~68% in 2011. The decline in domestic savings rates has put local banks in a tight spot with a slow pace in deposit growth. It has also thrown a spanner in the government’s borrowing program especially when foreign fund inflows are down to a trickle. The government’s domestic sovereign debt of Rs 30 trillion is up for maturity starting FY 26 till FY 30. A large part of the funds required for refinancing the maturing debt is expected to come from domestic savings.

Distribution of debt by borrower category and End use

Source: RBI, Transunion, CIBIL

It is worrisome to note from the above RBI data that most of the subprime borrowers took debt to meet their consumption needs rather than for any asset creation or productive purposes, which is further supported by the decline in household assets from 110% in June 2021 to 108% in March 2024. Consumer loans (mostly high-cost unsecured loans) in total credit increased to 34% in 2024 compared to 21% in 2016. The spike in Inflation and stagnant income left borrowers with no option but to default on interest payments. As a result, banks are saddled with bad debts. Personal loan defaults increased from 3.2% in Sept 2023 to 3.9% in Sept 2024; during the same period, credit card defaults rose from 1.8% to 2.4%.

Mass market staples, and firms serving the bottom of the pyramid, got hit in the last few years as is visible in their subdued earnings growth. The sluggish consumption partly explains the hesitation among certain corporates to commit fresh capex despite a rise in GDP and credit availability. The share of industrial loans in total credit declined to 34% in FY 2024 compared to 42% in FY 2016

It is not all doom and gloom either. The data also shows that the increase in borrowing is characterized by an increase in the number of borrowers. The probability of systemic risk in the banking sector is negligible as prime and super-prime borrowers account for over 66% of total borrowings and the proceeds were used for asset creation. This augurs well for the overall health of the economy and the banking sector. The divergent debt trend among various borrower categories lends credence to the theory of a K-shaped economic growth. Post-Covid, we also saw premiumization gathering momentum and a structural shift leading to deepening of the market rather than widening. Sample this – sales of two-wheelers remained sluggish, while sales of SUVs and passenger cars remained strong in the last few years

Though rise in debt among a certain category of borrowers has caused unease, India stands in a relatively better position compared to emerging economies like South Korea and Thailand whose non-mortgage debt of households to GDP remain well above 50%. It must be comforting to note that India’s total debt including sovereign, corporate and household as a percentage of GDP too remains relatively the lowest among all major global economies.

The cooling down of retail inflation rate to a five- year low of 3.34% in March 2025, and the recent interest rate cut, is expected to provide the much needed relief to subprime borrowers. Moderating inflation and the monetary policy stance shift towards growth raises a glimmer of hope for yet another rate cut. If yes, good days may be round the corner.