A recent report by the Reserve Bank of India indicates that the household sector’s net indebtedness in India has been rising. Between 2019-20 and 2024-25, household assets grew by 48%. However, during the same period, household liabilities grew by a much larger 102%. The stock of household debt was only 26% of the gross domestic product in 2015. At the end of 2024, the figure had risen to 42%. The bulk of this rising debt — 55% of it — is in the form of non-housing retail credit such as outstandings on credit cards, automobile loans, gold loans and personal loans. Home loans, which are considered productive since they help build an asset for the household, constituted only 29%. The ease of doing business in the credit market has made borrowing options much wider for households. Often, households may have to borrow to make ends meet; but on most occasions, they need to borrow to maintain a higher standard of living than what is warranted by their current levels of incomes.

This level of debt is not alarming; yet, there are causes of concern. Rising debt erodes the asset base of households. If households continue to indulge in debt to spur consumption, especially aspirational consumption, there will be a lower stock of assets left during the non-working age of a typical household to draw income from. This is not too scary a situation if the social safety net in the nation is comprehensive and well-funded. For instance, in economies like Australia or Canada, household debt is above 100% of the GDP. However, these economies have much better safety nets than those available for households in the Indian economy. Another adverse implication of such a trend of rising indebtedness of households is that to the extent it drives consumption and not productive investments, the stability of India’s long-term macroeconomic growth would be undermined. This trend is not easy to stem and reverse in today’s world of mass consumerism driven by enormous pressures on households to consume. Similarly, financial lending institutions, including banks, are under pressure to disburse more loans in an effort to grow their asset books and show impressive quarterly results. In such a situation, the government needs to make the social safety net stronger and more inclusive. Simultaneously, the regulators of the financial system need to ensure that the relative cost of personal loans is higher than housing loans for the typical household. This trend is an early warning signal that needs to be addressed decisively.