Households’ debt surged to new high
Context:
India’s household debt levels reached an unprecedented high of 40% of GDP by December 2023, while net financial savings dropped to a historic low of around 5% of GDP.
Relevance:
GS-03 (Economy)
Facts for Prelims:
- Debt Service Ratio (DSR): It is a measure the money that goes into repaying debts. It oversees the portion of income used to repay loans and interest.
- A lower DSR means more money left for other things after handling the debts.
Key Highlights:
Source: The Hindu
- The Reserve Bank of India reported that households’ net financial savings plummeted to 5.1% of GDP in 2022-23, marking a 47-year low, sparking debate and criticism.
- Despite revised estimates slightly raising household net financial savings to 5.3% of GDP for 2022-23, this remains the lowest level in 47 years, reflecting weaker financial resilience compared to previous years.
- The data also revealed a substantial increase in household debt levels, rising to 38% of GDP in 2022-23, the second-highest recorded since 2020-21.
- Unsecured personal loans have been identified as the fastest-growing component within household debt, followed by secured debt, agricultural loans, and business loans, contributing to the overall rise in household indebtedness.
Household debt:
- It is the total liabilities of households (including non-profit institutions serving households) that require payments of interest or principal by households to the creditors at a fixed dates in the future.
- In India, it includes consumer durables, home loans, and personal loans for purposes such as education and medical expenses.
Affects of Household debt:
- Short-Term Impact: Increasing household debt can initially stimulate economic growth and employment by driving consumption and investment, thereby boosting aggregate demand and output.
- Long-Term Ramifications: However, sustained high levels of household debt pose risks to the economy, leading to repayment difficulties, reduced consumption, and increased financial stress and default risks, particularly if interest rates rise or incomes decline.
- Vulnerability to External Shocks and Inequality: Excessive household debt renders the economy vulnerable to external shocks and exacerbates inequality, especially when concentrated among low-income or informal sector workers with limited access to credit and social protection.
