One of the structural issues constraining India’s economy from growing its real GDP at a high rate is the weak financial position of the household sector (defined as including individuals and unincorporated enterprises, i.e., every entity in the economy except the government and the corporate sector).
I have explained in earlier articles how personal disposable income (PDI) has weakened in the past decade , though private final consumption expenditure (PFCE) continued to grow at a faster pace (vis-à-vis PDI growth).
During the past decade (FY15-FY24E), nominal PDI growth averaged 10 per cent, while PFCE growth averaged 10.8 per cent. This is in contrast to the 14.4 per cent average growth in PDI in the previous decade (FY05-FY14) vs. an average growth of 14.2 per cent in PFCE. Because of this, household savings have fallen and leverage has increased rapidly in the past decade.
The former has declined from 20.3 per cent of GDP in FY14 to 18.5 per cent of GDP in FY24E (with close to 26-year low of 18.1 per cent of GDP in FY23) and debt has risen to 41 per cent of GDP from 26 per cent a decade ago.
Savings, debt quality
The quality of household savings and debt has also deteriorated, as net financial savings (NFS) have fallen faster than physical savings, while consumption-based unsecured loans have grown much faster than investment-oriented secured (i.e., housing) and business loans within the household debt.
NFS was at a 47-year low of 5.0 per cent of GDP in FY23, before rising marginally to 5.3 per cent in FY24, while my estimates suggest that the share of unsecured personal loans has increased from 13 per cent of total HH loans in FY19 to 19 per cent in FY24. All these facts present the most concerning structural constraints to 8 per cent+ real GDP growth in India on a sustainable basis.
There are two related forward-looking questions now. First, how has the situation moved in FY25? Second, what will count as a turnaround in the household’s financial position?
Although there is no official data yet available on household finances for the first half of FY25, it is obvious that a higher PDI growth, rebuilding of household savings (especially NFS), and moderation in unsecured loans would confirm an improvement in the financial position of households.
Based on various information and data available on the RBI and other websites, one can gain a clear understanding of the household financial position in 1HFY25.
My calculations suggest that household financial savings have picked up strongly in 1HFY25, with a likelihood that income growth has also improved. At the same time, the growth in unsecured loans moderated in 1HFY25, though it continues to grow at a much faster pace than other components and the overall HH debt growth.
Household NFS is derived as a function of gross financial savings (GFS) and household liabilities. GFS comprises six components – currency, deposits (bank and non-bank), insurance, pension & provident funds (P&PFs), investments (in shares & debentures), and small savings.
Details suggest that HH deposits – which account for more than a third of GFS – totalled 3.9 per cent of GDP in 1HFY25, the same as in 1HFY24.
Similarly, P&PFs were unchanged at 2.4 per cent of GDP, insurance savings picked up slightly to 2.4 per cent of GDP (from 2.2 per cent of GDP in 1HFY24) and small savings fell slightly to 1.4 per cent of GDP (from 1.5 per cent in 1HFY24).
However, currency holdings fell by only 0.1 per cent of GDP in 1HFY25 vs. a fall of 0.5 per cent of GDP in 1HFY24 (due to the withdrawal of ₹2,000 denomination banknotes last year), while investments more than doubled to 2 per cent of GDP in 1HFY25.
Consequently, GFS increased to 12 per cent of GDP in 1HFY25, better than 10.6 per cent of GDP in the corresponding period a year ago.
Positive signs
Simultaneously, combining data on scheduled commercial banks (SCBs), non-banking finance companies (NBFCs), and housing financial companies (HFCs) from the RBI, my calculations suggest that household financial liabilities were 4.7 per cent of GDP in 1HFY25 vs 6.9 per cent of GDP in 1HFY24.
Therefore, HHNFS almost doubled to 7.3 per cent of GDP in 1HFY25, compared to around 3.7 per cent of GDP each in the first half of the past two years. Accordingly, HH debt is estimated to have risen further to 43.5 per cent of GDP in 1HFY25, compared to 31-32 per cent of GDP a decade ago.
My estimates suggest that HH debt growth has moderated to a nine-quarter low of 15.8 per cent YoY in Q2FY25.
Further, secured loans (vehicles, consumer durables, gold, loans against fixed deposits [FDs], and loans against shares, bonds [SBs], etc.) grew faster than unsecured loans (all others) for the first time in 11 quarters in Q2FY25.
The growth in unsecured personal loans moderated to 20 per cent YoY in 2QFY25 (from 31 per cent in 3QFY24) and they now account for 19.7 per cent of household debt in 1HFY25 vs. 13 per cent in FY19.
Thus, the RBI’s actions to restrict very high growth in unsecured loans seem to be working. This must have had some adverse impact on consumers’ spending power as well.
However, the story is still unfolding, and thus, it is necessary to keep a close eye on these developments.
Overall, the household financial position seems to be turning the corner in 1HFY25. Household savings have recovered, and debt is growing at a slower pace. With PFCE growing faster in 1HFY25 (vs.1HFY24), PDI growth may have likely picked up. These are encouraging signs.
Nevertheless, the policymakers cannot find too much solace; these trends have to continue for at least a few more quarters.
One way for the government to support these trends is to focus policies on boosting household income, rather than consumption.
The writer is Senior Group Vice President - Institutional Research - Economist, Motilal Oswal Financial Services Ltd. Views expressed are personal