Hard-Up Households Face An Impending Crisis Of Debt

Context: The rising debt burden of Indian households’ points to a crisis in the near future.

Rising household debt

• Even though household debt in India has been on the rise since 2013, it has surged since mid-2020.
• As per Reserve bank of India: Indian household debt rose to 37.1% of gross domestic product (GDP) in second quarter of 2020.
  • Overall debt held by households was roughly valued at Rs.43.5 trillion as of March 2021.
  • Government and corporate debt levels also worsened. As India’s national debt hit almost 89.6% of GDP in 2020-21, government debt touched 70% of GDP and corporate debt at 47%.

Case Studies on micro-trends in borrowing patterns for households: Undertaken by Centre for New Economics Studies (CNES) in migrant-residential settlements located near Delhi, Lucknow, Surat and Pune.

• Borrowing to save: In Delhi’s Kapashera migrant area, households were borrowing to ‘save’ more for the future and not just to spend on essentials.
  • Recent data reported a rise in savings rate to 21% during the first quarter of 2020-21.
  • This acts as an exception to the ‘Permanent income hypothesis’:
    • This hypothesis maintains that economic agents may prefer to maintain their consumption levels during economic shocks if they have positive expectations of the future.
    • However, a loss of daily-wage employment, in an environment of growing uncertainty and anxiety, did motivate many low-income households to ‘save’ more by borrowing.
  • Change in basic motivation to borrow – Lifestyle upgrade to survival: Study conducted by Home Credit India reported that 46% respondents borrowed money primarily to run their households.
    • Earlier, the motivation to borrow was the purchase of consumer durables or cars, but during the pandemic, it has shifted to daily survival.
    • Most households borrowing to spend more money on medical expenses, which had increased from ?1,900 per month to ?4,700 per month (due to lack of public healthcare).
  • Most borrowings done through unorganised channels: Due to lack of income support provided by government and inaccessibility of institutional credit lines.
    • In Delhi’s Kapashera, more than 24% of all residents borrowed money from relatives and 35-40% from informal intra-community sources after pandemic struck.

Way forward: Creating better access to institutional credit, incorporating use of tech-based online financing options and channelling direct transfers from government coffers to low-income groups are some of the immediate measures needed.