Rising household debt in India and its economic impact

Source: The post Rising household debt in India and its economic impact has been created, based on the article “What’s in a (disease’s) name?” published in “The Hindu” on 12th March 2025. Rising household debt in India and its economic impact

UPSC Syllabus Topic: GS Paper3-Indian economy – Mobilisation of resource

Context: The article discusses the rise in household debt in India, which has increased to 42.9% of GDP. More borrowing is for consumption, not asset creation. Lower-income households rely on unsecured loans, increasing financial stress. This may weaken economic growth and policy effectiveness.

For detailed information on Status of household savings in India: On the fall in household savings read this article here

What is the Current Status of Household Debt in India?

1. Household debt has increased from 36.6% of GDP in June 2021 to 42.9% in June 2024.

Though lower than in most emerging markets, this rise is a concern.

2. Household assets have declined from 110.4% of GDP in June 2021 to 108.3% in March 2024.
3. More borrowing is used for consumption rather than asset creation, indicating weaker financial health.

Is the borrowing pattern healthy?

1. RBI data shows that borrowing is rising due to an increase in borrowers, not because of higher individual debt levels.
2. Two-thirds of household debt belongs to prime or super-prime borrowers, which suggests overall credit quality is improving.
3. Super-prime borrowers use most of their loans (64%) for asset creation, while sub-prime borrowers use nearly half of their loans for consumption.
4. Since September 2023, credit growth has slowed, leading to a reduction in sub-prime borrowing.

Why is borrowing for consumption a concern?

1. More loans are being taken for daily expenses, not assets like houses or vehicles.
2. Lower-income households (earning less than ₹5 lakh) mostly take unsecured loans, such as credit card debt.
3. Super-prime borrowers use 64% of loans for assets, while sub-prime borrowers use nearly half for consumption.
4. Delinquencies in personal and credit card loans have risen in September 2024 compared to September 2023.
5. Many borrowers have multiple loans, increasing financial risk.

How does this impact economic growth?

1. Lower-income households spend a large share of their income, boosting demand in the economy.
2. If they take on more debt, they must repay loans instead of spending, reducing economic growth.
3. The income multiplier weakens, meaning economic output grows less for the same investment.
4. Macroeconomic policies like tax cuts may not work well if many households are repaying debt instead of spending.

What are the long-term risks?

1. Rising unsecured loans increase financial stress, especially for lower-income groups.
2. If borrowers default on small loans, their bigger loans (like housing loans) also become non-performing.
3. Financial innovations like easy credit access may worsen debt problems, leading to instability.
4. Even though prime borrowers dominate the loan market, policymakers must monitor risks from rising consumption loans.

Question for practice:

Examine the impact of rising household debt in India on economic growth and financial stability.