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Last Updated : Dec 04, 2019 09:44 AM IST | Source:

Implications of India’s fourth Balance Sheet crisis

The latest nominal GDP growth of 6.1 percent is way lower than the prevailing lending rates and is a recipe for a debt trap at the household level

Moneycontrol Contributor @moneycontrolcom

Sachchidanand Shukla

Ever since growth touched a low of 5 percent in the June 2019 quarter, the spotlight has shifted on the stalling of the consumption engine – the mainstay of the India growth story so far.  The hopes of recovery remain hitched to a quick recovery in consumption through policy interventions. However, we find that India’s fourth Balance Sheet, i.e. the Household (HH) balance sheet, (after stress in the bank, corporate and non-banking financial sector balance sheets) is also now under duress.

Growth in nominal household disposable incomes stalled post FY12, averaging around 5 percentage points lower than the growth seen during FY06-12. Consumption decelerated too, but not at the same pace as incomes. The availability of finance induced a structural change in HH behaviour that has never been witnessed before in India’s history - HH consumption rose much faster than disposable incomes in every year since FY13. Households now consume a little over 80 percent of their disposable incomes as against less than 70 percent in FY11; this is also reflected in a decline in the savings rate.


By adding HH debt from banks, NBFCs and HFCs together, we estimate the HH debt at  around 31 percent of GDP (vs the oft-cited figure of around 12 percent). This places India closer to the Emerging Markets average HH debt to GDP ratio of 42 percent and much higher than the BRICS barring China (at 53 percent). This number would be higher if one includes non-institutional sources such as moneylenders etc in this computation.

Why is the HH balance sheet important?

Any shock that affects net worth (such as a financial shock or a shock to demand that weakens firm profits and household income and in turn net worth) will affect the volume of expenditures that borrowers ultimately desire to undertake and thereby aggregate demand.

Any financial shock leading to a fall in asset prices also tightens the collateral constraint, which in turn lowers production and spending and depresses asset prices farther. Similarly, shocks to the real sector can also impact asset prices.

Unique attributes of Indian HH

According to the Report of the Household Finance Committee, a large section of the wealth of Indian HH is in the form of physical assets (esp, gold and real estate). This is in contrast to the developed world, and especially unusual for younger HHs, and for HHs in the bottom 40 percent of the wealth distribution, i.e., those with the lowest amounts of gross assets.

The Report also highlighted that despite the high holdings of real estate, mortgage penetration is low at a younger age, and subsequently rises as households age. And unlike most developed countries, Indian households tend to borrow later in life and are  more likely to reach retirement age with an outstanding debt obligation which is a source of risk given that they are no longer earning income during these years.

India has a societal culture where HHs trade off by bequeathing wealth to future generations in lieu of post retirement support. However, the changing socio-economic backdrop exposes HHs to risks. These HHs also lack adequate penetration of pension accounts and insurance products.


Several important implications emerge from the above –

  • The latest nominal GDP print of 6.1 percent is way lower than the prevailing lending rates of around 9 percent. This is a recipe for a debt trap at the HH level and will also have implications for debt sustainability at the national level. The national debt to GDP ratio will begin to rise if this situation is not reversed.

  • Non-institutional debt is significant in the Indian context. High levels of unsecured debt can impose significant financial costs for HHs by way of long interest repayment cycles.

  • We are not trying to be alarmist here and just want to highlight the actual extent of HH indebtedness. It is about time that the RBI begins a regular assessment of HH balance sheets. If needed, at a later stage, these can also be stress-tested for hard asset cyclicality (especially real estate) as well as financial shocks. Importantly, urban HH Assets are typically not income earning (e.g. gold) and are illiquid (realty) in times of duress or a generalised slowdown.

  • Macro stress tests of HH balance sheets can provide valuable information on the potential losses that a financial system might experience under severe real/ financial shocks, thereby helping the RBI to assess the financial soundness of the system.

  • The study of HH balance sheets can also throw up implications for the mortgage industry, which has been the most stable structural growth island within the consumption pie. Rising HH Indebtedness and the NBFC liquidity shock can potentially alter the pace of growth in this sector.

  • Impaired HH balance sheets, if not repaired through timely interventions, will also have a bearing on India’s long-term potential growth.

  • Monetary easing is typically less powerful during periods of high HH debt. Under such circumstances, fiscal policy would be a better alternative. Endeavours to lower the incidence of tax, subsidy transfers and targeted rural spending could enable a faster consumption recovery.

(With contributions from Rahul Agrawal)

Sachchidanand Shukla is Chief Economist, M&M Group. Views are personal.

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First Published on Dec 4, 2019 09:44 am
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