Increase in Household Debt
Household debt in India has risen gradually, from 36.6% of GDP in June 2021 to 41% in March 2024, and further to 42.9% in June 2024.
This increase in debt is a concern, even though it remains lower than other emerging economies.
A major shift is seen as debt is being used more for consumption rather than asset creation.
Healthy Borrowing vs. Consumption Loans
The RBI highlights that most of the borrowing is now from prime borrowers, with a decrease in sub-prime borrowers.
While borrowing by high-rated (super-prime) borrowers is for asset creation, many lower-income households are borrowing for consumption, leading to higher debt for non-asset purposes.
Personal loans and credit card debt are increasing among lower-income households, showing financial stress.
Impact on Lower-Income Households
A significant portion of loans for lower-income groups is used for consumption, like credit card debt, without creating assets.
This leads to greater financial stress, as defaults on smaller loans can affect larger loans like housing.
Rising consumer debt in this group can limit their spending, reducing the income multiplier and potentially slowing overall economic growth.
Macroeconomic Concerns
If the increase in consumption loans continues, it may weaken the multiplier effect in the economy.
Lower-income households, burdened with debt, might cut back on spending, leading to lower economic growth despite higher investment.
The RBI's focus on prime borrowers is positive, but the rise in consumption loans and unsecured debts suggests potential economic fragility.
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