The rising household debt in India, currently accounting for approximately 41% of the GDP, is becoming a significant concern for economists and financial analysts. Out of this, 11% constitutes housing loans provided by banks and housing finance companies, while the remaining debt is categorized as non-housing debt. According to economists from Motilal Oswal, India's household debt is comparable to that of Malaysia and Taiwan and higher than that of the US, Japan, and China.
Comparative Analysis and Financial Stability
The Reserve Bank of India (RBI), in its Financial Stability Report (FSR), highlights that while household debt in India is relatively low compared to other emerging markets, it is comparatively high when measured against GDP per capita. This trend calls for close monitoring from a financial stability perspective. Furthermore, the RBI's FSR indicates that household debt is expected to reach 52% of personal disposable income in 2023-24, up from 48% in 2022-23 and 40% in 2019-20.
Debt Service Ratio and Its Implications
The household debt service ratio (DSR), which measures the proportion of income used to repay loans, is among the lowest in the world, at 6.7%, according to the RBI. However, calculations by Gupta and Ladha, researchers from Motilal Oswal, suggest the DSR is actually around 11-12%, significantly higher than in other major economies. This discrepancy arises because the RBI assumes an average loan maturity of 12.7 years. In contrast, Gupta and Ladha estimate it to be 5.5 years, considering India's significant portion of short-term non-housing debt.
Impact on Household Income and Savings
A greater proportion of household income is now being directed towards loan repayment, reducing the disposable income available for other expenditures. This shift is contributing to a slowdown in private consumption despite substantial growth in retail lending by banks. Consequently, household financial savings have dropped to a 47-year low of 5.3% of GDP in 2022-23, with a slight improvement expected in 2023-24.
Misallocation of Bank Lending
A considerable amount of bank lending in India finances depreciating assets such as mobile phones, expensive cars, and daily consumption, or it is locked in non-productive assets like investment properties. As noted by G. Hari Babu, President of the National Real Estate Development Council, over 11 million flats purchased for investment remain unoccupied. This misallocation suggests that a significant portion of bank lending is not contributing to future income generation, highlighting a critical issue in the current lending landscape. It is important to note that while housing loans comprise a minority of the total loans, a larger portion is invested in depreciating assets like electronics and automobiles.
Real Estate Affordability and Lifestyle Spending
One of the underlying reasons for this spending shift is the unaffordability of properties for younger investors. Despite having disposable income, many younger individuals find buying a decent home in a good locality challenging. This affordability issue has led them to spend more on lifestyle products, which are easier to purchase and offer immediate gratification, even though they depreciate in value over time. Is it because properties are becoming too costly for them to buy? Or is it because today's younger generation does not see the value of investing early despite the information overload? Or could it be related to the Fear of Missing Out (FOMO) culture?
Need for a Shift in Investment Focus
Given the current trends, there is an urgent need for our generation to shift the investment focus from lifestyle depreciating assets to revenue-generating assets. This shift is crucial to survive any potential market corrections and ensure long-term financial stability. Investing in assets that generate income and appreciate over time will not only enhance individual financial security but also contribute to broader economic resilience.
Conclusion
The intricate dynamics of household debt in India reveal a need for careful monitoring and strategic adjustments to ensure financial stability and economic growth. While short-term fixes might present a rosy picture, the underlying issues require significant attention to prevent long-term financial distress. As Vivek Kaul aptly concludes, while superficial fixes may appear beneficial, the essential details must not be overlooked for sustainable financial health. The real estate sector, in particular, must address the affordability concerns to attract younger investors towards more sustainable and revenue-generating investments.
