In a sign that may indicate increased financial strain on the populace, India’s household debt has surged to an unprecedented peak, representing 40% of the nation’s Gross Domestic Product (GDP) by December 2023. A recent analysis conducted by leading financial services institution Motilal Oswal reveals this alarming escalation, while concurrently, net financial savings have plummeted to an approximately 47-year low at around 5% of GDP.
These developments came in the wake of the Reserve Bank of India’s (RBI) assessment in September 2023, which estimated that households’ net financial savings had fallen to 5.1% of GDP for the fiscal year 2022-23. This number was the lowest recorded in nearly half a century, sparking vigorous debate and eliciting sharp rebuff from the Finance Ministry. The Ministry had countered the criticism, asserting that the trend of taking on loans to purchase tangible assets such as homes and vehicles denoted not a symptom of distress but a declaration of confidence in future job and income stability.
Further refinement of the GDP data by February revealed even more precise figures. The first revised estimates of national income for 2022-23 elevated the net financial savings slightly to 5.3% of GDP. Nevertheless, this is still the slimmest slice of the pie in 47 years and falls considerably short of the average 7.6% recorded from 2011-12 to 2019-20. Amid these revisions, household debt also saw an upward correction to 38% for 2022-23, a notch below the 39.1% witnessed during the economically tumultuous period of the pandemic in 2020-21.
“Our estimates indicate that household debt has ratcheted up to approximately 40% of GDP as we closed in on the end of 2023, marking a new zenith,” noted Motilal Oswal research analysts Nikhil Gupta and Tanisha Ladha. Data sourced from banks put an even finer point on the matter, signaling that the unsecured personal loans category was swelling at the most rapid rate within the household debt sphere. This increase was followed closely by secured debt, agricultural loans, and business loans.
The foundation of the disheartening 2022-23 net financial savings figures rests on a bedrock of subpar income growth, juxtaposed with hearty consumption and a rise in physical savings. The report posits that with income growth continuing its lackluster trend and net financial savings likely at its nadir, it is unsurprising to see a marked dip in both private consumption and household investment growth for 2023-24.
Reflecting on whether the downtick in net financial savings and reduced savings was an isolated occurrence for 2022-23, the analysts reflected skepticism. Instead, they project that households’ net financial savings remained relatively dormant at around 5% for the initial nine months of the fiscal year 2023-24. They anticipate that, for the full year, these savings might hover between 5% and 5.5% of GDP.
Over the first three quarters of the last year, there was a marginal uptick in households’ gross financial savings, inching up to 10.8% of GDP from 10.5%. However, financial obligations mirrored this increase, climbing to 5.8% from 5.5%. The borrowings of households had escalated to an imposing 5.8% of GDP in 2022-23, the second loftiest level in the post-independence epoch.
Even as households’ physical savings reached a ten-year apex in 2022-23, their aggregate savings drooped to an 18.4% of GDP, the lowest in six years. The broad strokes of India’s Gross Domestic Savings (GDS) nudged downwards to 30.2% of GDP. This was a downturn from the steadier range of 31-32% observed from 2013-14 through 2018-19. The report deemed the decline in net financial savings of households as a ‘dramatic’ event with potentially far-reaching implications for the overall economy.
