Contrary to popular belief, household leverage is not only at low levels in India but has also been stagnant over the last few years.
If you thought that household leverage is at high levels in India and is also fast increasing, then think again. Contrary to popular belief, household leverage is not only at low levels in India but has also been stagnant over the last few years.
A research report by the Economic Research Department of the State Bank of India (SBI) states that it is true that India’s gross domestic savings rate climbed to a historic high level of 36.8% in FY08, and thereafter declined gradually to 30.0% in FY17. However, to concur that household leverage is going up because of a decline in household savings misses the sectoral savings divergence. “In fact, India’s household debt is low and stagnant over the last few years, hovering in the range of 9-10% of GDP,” it says.
It is, however, true that household debt, which was the originator of the global financial crisis in 2007, has been increasing significantly in developed countries. But it has been declining over the years in almost all developing countries, except China. In the US and Japan, household debt to GDP ratio is close to 80%, but interesting in most of the Asian economies, the debt to GDP ratio is less even than 20%, which further suggests that these countries are doing better when it comes to burdening their families with huge loans.
The problem with India’s household debt composition is of debt structure. For example, “non-institutional sources like landlord, professional money lender and friends and relatives still play an important role in financing household debt. As per the latest available data, in 2016 out of total debt to GDP ratio of 9.89%, non-institutional sources contributed 6.17% and the remaining 3.72% were financed by banks, co-operative banks and other financial institution,” says Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
Interestingly, in FY18, the household financial liabilities increased to 5.63% from 3.33%, suggesting in part opening of Jan-Dhan account in large scale, thus changing the financial behavior of household in India. “This will clearly mean a decline in household debt from non-institutional sources in the coming years. The other good news is that during 2018 the increase in real household debt is muted and almost stagnant that was earlier rising. In 2018 (till Jun), the average real debt was Rs 8,479, almost the same as the level of 2017 (Rs 8,471) of 3.3%. This would mean better financial stability after all,” says Ghosh.