Despite the recent increase in financial liabilities, household debt in India is much lower than in other emerging market economies (EMEs) and, therefore, the risk of defaults due to greater exposure to higher mortgage payments and floating interest rates is limited in India, according to to the financial stability report of the Reserve Bank of India (RBI).
“The current level of household debt in India does not pose a systemic concern,” the report observes.
Gross household financial savings, which grew to 15.4 percent of GDP in 2020-21 (pandemic peak year), supported by large precautionary savings, fell to 11.1 percent in 2021-22 and further to 10.9 percent in 2022 -23, returning to its pre-pandemic trend (ie, an average of 11.0 percent during 2011-12 to 2019-20), the report states.
In absolute terms, gross household financial savings increased by 13.9 per cent per annum during 2022-23.
Household net financial savings (HNFS), however, fell sharply to 5.1 percent of GDP in 2022-23 from 11.5 percent in 2020-21, well below its long-term annual average of 7.0-7.5 percent.
The fall in HNFS was caused by a rapid increase in financial liabilities from 3.8 percent of GDP in 2021-22 to 5.8 percent in 2022-23 even as financial assets moderated only marginally to 10.9 percent in 2022-23 from 11.1 percent. in 2021-22, according to the RBI report.
The increase in financial liabilities was driven by a steep increase in loans from financial institutions, with a large part in the creation of physical assets (mortgages and vehicles).
Thus, the total savings of households can still hold steady with a compositional change in favor of physical savings.
This would directly add to gross capital formation, supporting growth in the private investment cycle and, eventually, the prospects for growth, the report notes.
Moreover, recent data shows that HNFS rose to 7.0 percent of GDP in Q4: 2022-23 from 4.0 percent of GDP in the previous quarter, indicating a normalization of HNFS to the pre-pandemic long-term trend.
Household debt moderated to 37.6 percent of GDP in March 2023 from its peak level of 39.2 percent in March 2021, the report added.