A report from a notable financial services firm has revealed that India’s household debt had surged to an all-time high of 40% of the gross domestic product in December 2023. The household sector’s financial savings were also at a low of 5% of GDP in December 2023. A high growth rate would depend on domestic capital formation, which, in turn, would depend on the economy’s savings and investments. The household sector is important in this context since it contributes about 70% of gross domestic savings to the economy. India’s savings as a fraction of GDP is unchanged at 30.2% over FY2022 and FY2023. China, on the other hand, has clocked a savings rate of over 40%. India’s investment rate was 32.2% in FY2022. Obviously, India’s growth rate will climb if the savings rate can be pushed up. The prevailing consumption-led growth can lead to a constraint when current capacities are hit. Pushing investment now would ensure that capacity constraints would be less severe going forward. The household sector having a low financial savings rate implies that there is a strong preference for physical over financial assets. This, in turn, might reflect an inadequate penetration of financial institutions, or a trust deficit that individuals have towards financial institutions. For an economy to have efficient financial intermediation, financial assets must be the major form of savings that can be mobilised quickly across different sectors.

The government has indicated that the low financial savings of households bear indication of the fact that they are taking more loans from banks and financial institutions to buy real estate. Hence, the high level of household debt includes a part of domestic investments. Although this assertion might be true to some extent, banking sector data reveal that there has been a noticeable growth of personal loans in recent times which does not reflect capital formation. Indeed, the Reserve Bank of India has indicated that caution must be exercised in allowing an unrestricted growth in such loans. It is more likely that the data in the report are suggestive of a high-consumption sector that lives beyond its current income. Competition among banks, along with new forms of fintech, allows for a quick and steady disbursement of loans that, from the macroeconomic point of view, are unproductive. This point has to be noted by the RBI as well as the finance ministry if the claims of becoming a much larger economy are not to end up as hot air.