Household debt in manageable range

Mumbai: Despite the recent increase in financial liabilities, household debt in India is much lower than in other emerging market economies ( ) and, therefore, the risk of defaults due to greater exposure of higher mortgage payments and floating rate interest is limited in India, according to the Reserve Bank of India’s (RBI) financial stability report.

“The current level of household debt in India does not pose systemic concern,” the report observes. Gross household financial savings, which had surged to 15.4 per cent of GDP in 2020 21 (pandemic peak year), supported by large precautionary savings, fell to 11.1 per cent in 2021 22 and further to 10.9 per cent in 2022 23, reverting to its pre pandemic trend (viz., an average of 11.0 per cent during 2011 12 to 2019 20), the report states.

In terms of absolute levels, gross household financial savings expanded by 13.9 per cent year on year during 2022 23.Household net financial savings (HNFS), however, fell sharply to 5.1 per cent of GDP in 2022 23 from 11.5 per cent in 2020 21, well below its long run annual average of 7.0 7.5 per cent.

The fall in HNFS was driven by a rapid rise in financial liabilities from 3.8 per cent of GDP in 2021 22 to 5.8 per cent in 2022 23 even as financial assets moderated only marginally to 10.9 per cent in 2022 23 from 11.1 per cent in 2021 22, according to the RBI report. The increase in financial liabilities was driven by a steep rise in borrowings from financial institutions, with a large part in physical assets creation (mortgages and vehicles).

Thus, the overall savings of households may still hold steady with a compositional shift in favour of physical savings.This would directly add to gross capital formation, supporting an upturn in the private investment cycle and, eventually, the prospects for growth, the report points out..