Household finances in distress — worsening

Domestic household finances are progressively worsening despite high GDP growth. A Motilal Oswal Financial Services analysis says household debt reached a “new high” of 40% of GDP in Q3 of FY24 – up from 38% of GDP in FY23, and higher than 39.1% in the pandemic FY21. Whether this is sustainable or not is for the RBI to decipher in its next (biannual) Financial Stability Report (FSR) of June 2024. Its last FSR of December 2023 had considered household debts of 37.6% of GDP and found it to be sustainable in different scenarios (both in debt service ratio or DSR of 8.5% and “a sharp decline in gross disposable income due to an unanticipated income shock”).

There are other reasons to worry too.

Household savings at 47-year low

The latest GDP data, first revised estimate (RE1) for FY23, released along with the second advance estimates (AE2) for FY24, throws up more disturbing facts.

For clarity, the AE2 revised GDP growth for FY24 upward from 7.3% (in AE1) to 7.6% but lowered that of FY23 from 7.2% to 7%. The RE1 for FY23 (RE1 for FY24 would come in 2025) shows household finances worsened on all three counts:

(i) gross household savings fell from 20.1% of the GDP in FY22 to 18.4% in FY23 and

(ii) net household financial savings also fell from 7.3% of the GDP to 5.3% but

(iii) household financial liabilities jumped from 3.81% of the GDP to 5.8%.

These are the long-term trends, not aberrations. Here is what the RE1 data says about 12 fiscals of FY12-FY23:

• (a) gross household savings fell from 23.6% of the GDP to 18.4% and

• (b) net household financial savings fell from 7.4% to 5.3% but

• (c) household financial liabilities jumped from 3.3% to 5.8% during this period.

The last three fiscals of FY21-23 saw progressive worsening on all three fronts – unlike oscillations seen in previous fiscals. This further confirms K-shaped growth in pre-pandemic as well as post-pandemic recovery phases.

Recall how the FinMin reacted when the RBI released household data in September 2023 which showed net financial assets of households dropped sharply to 47-year low 5.1% of the GDP in FY23 (which was later revised to 5.3% and yet remains 47-year low)? The last time net household assets went this low was 5.1% in 1975-76 (4.7%) and 5.2% in 1977-78.

The FinMin dismissed this nearly half-century dip by explaining that it was due to double-digit growth in personal loans for housing and vehicles: “The household sector is not in distress, clearly. They are buying vehicles and homes on mortgages.” But this is not as simple as it may sound.

Recall the RBI’s repeated warnings about “unsecured” personal loans in the past several months which forced it to raise capital to risk-weighted asset ratio (CRAR) for both banks and NBFCs in November 2023 to 125% (back to 2019 level). Finance Minister Nirmala Sitharaman supported this move, stating: “Enthusiasm is good but sometimes it becomes a bit too far for people to digest. So as a measure of caution the RBI has also alerted small finance banks and NBFCs to be careful that they don't go too far, too soon and face any downside risks later.” The Motilal Oswal report says the rise of household debt is due to “unsecured personal loans” which are growing “at the fastest pace” (followed by secured debt, agricultural loans and business loan).

Inversion in bank credit and sale of houses, vehicles

Fortune India has repeatedly pointed out that bank credits inverted in FY20 – personal loans for consumption are not only driving bank credit growth but also overtook credit outflow to ‘large industry’ and ‘services’ in FY20 and ‘industry’ in FY21.

This trend continued in FY23 and does so in FY24 (up to February 2024 for which data is available).

In FY23, personal loans were 31% of non-food credit. In FY24 (up to February 2024), it went up to 33%. Distress loans, personal loans through mortgage of gold which began to drive personal loans after the pandemic hit and spiked to 2.5% of personal loans in FY21 – from 1.1% in FY19 – has moderated but is still high at 1.9% in FY24.

To sum up, one-third of bank credits are going to consumption expenditure. True, housing and vehicles are the two biggest components of personal loans but this is one part of the story. There are others.

Housing loans constituted 51.1% of personal loans in FY19 (since when the RBI gives a new series of data on bank credit). It fell to 47.6% in FY23 and saw an uptick to 50.9% in FY24 (up to February 2024). As for vehicle loans, it constituted 12.4% of personal loans in FY19 which fell to 12% in FY23 and further to 11% in FY24.

Here is yet another inversion.

Sale of luxury houses (over ₹1 crore) overtook affordable houses (below ₹50 lakh) in Q2 of FY24 and that of high-end SUVs and luxury cars overtook affordable passenger cars (PCs) in FY22. These are indications of skyrocketing inequalities (K-shaped growth) in which average Indian household is not in sync with the high GDP growth, which is seemingly benefiting those at the very top – a growth pattern which is not sustainable in the long tun.

Rise in personal loan for consumption is not same as rise in bank credits for investment in production of goods and services – which directly boosts growth. This trend in credit outflow was first noticed during the pandemic when households and small businesses began mortgaging their family gold to raise loans (gold loan is personal loan) to overcome the economic crisis. But it was wrongly assumed that growth in bank credit was a sign of “green shoot” of GDP growth revival. Then the reality hit in November 2023 and “unsecured” personal loans began to trouble the RBI and FinMin.

Inequality at “highest historic level”

As for the K-shaped growth, the World Inequality Lab’s March 2024 report, “Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj” says both income and wealth inequalities reached “highest historical levels” in 2022-23, making India “more unequal than the British Raj” and “among the very highest in the world”. The income shares of the top 1% went up from 21.3% in 2014 to 22.6% in 2022; the wealth shares of the top 1% went up from 33.3% in 2014 to 40.1% in 2022 and 39.5% in 2023.

This study was dismissed by the finance ministry and other government economists for “flawed methodology”. But its authors Piketty et al have defended the robustness of their findings, pointed to the use of Indian official data – “national income accounts, wealth aggregates, tax tabulations, rich lists, and surveys on income, consumption and wealth” – and are willing to objectively engage with this reality (“vulgar inequalities”) with a clear warning: “Inequality denialism is, of course, not unique to India, as we have seen at close quarters in the US and elsewhere. Worryingly, however, this sort of complacency from policymakers and the elites will only exacerbate India’s already ballooning inequality crisis.”

There is yet another reason to worry about household finances.

Outlook for Households in FY25

It may be difficult to predict what will happen in FY25 but indicators are worrying.

For one, the RBI’s MPC report of April 2024 expects ‘real’ growth (GDP) in FY25 to moderate to 7%, from 7.6% in FY24 (AE2). The Budget of 2024 assumes ‘nominal’ GDP growth of 10.5% – which translates to 6% of ‘real’ growth, taking the RBI’s “projected” headline inflation (CPI) of 4.5%. The headline inflation (CPI) is different from the budget deflator but the RBI uses both GDP growth and CPI in the same breadth while making its projections/estimates.

Going by the Centre’s focus on controlling fiscal deficit, continued sluggish growth in private capex and weakening of household gross savings (47-year low of 5.3%), it is unlikely that FY25 growth would surpass that of FY24.

So, growth is unlikely to be higher in FY25 – which would, prima facie, mean further weakening of household finances.

For another, the RBI data shows a sharp upward spike in growth of personal loans in FY24 (up to February 2024) – up from 21% in FY23 to 26% in FY24. The average growth for the previous three fiscals (FY20-FY23) is 14.5% (using the RBI’s new series data) and for all the five fiscals 18.1%. This is far higher than the credit growth to industry (5.3%), services (14.1%) and non-food (10.8%) during this period.

Going forward

The first step to address the precarity of households is to collect appropriate and adequate data because of the following three reasons.

· 2022-23 household consumption expenditure survey (HCES/MPCE), released in February 2024, is partial (only value data, no volume data). It is silent on household’s assets, financial liabilities and total debt. The average per capita per day expenditure (with imputation, at 2011-12 prices) of ₹68.5 in rural ($0.8 at exchange rate of ₹83) and ₹118.1 ($1.4) in urban areas, Indian are hopelessly poor. Since India has no poverty line for 2022-23, it is difficult to estimate how many are poor. But using this data, using (“adjusting”) the Rangarajan and Subramanian estimates of poverty and taking into plausible current inflation, economist Ashoka Mody wrote “30-40% of all Indians are poor”.

· Last NSO report on household debt was “India Debt & Investment Survey (AIDIS), January-December 2019”, released in September 2021. It showed household debts grew faster than household assets both in rural and urban areas during 2013-2019 – assets growing by 58% and 19% in rural and urban areas, respectively, while debts grew by 84% and 42%. There is no update on it yet.

· A SBI research, released in September 2021, had shown the pandemic increased household debts sharply from ₹59,748 (2019) to ₹1.16 lakh in 2021 in rural areas and from ₹1.20 lakh to ₹2.33 lakh in urban areas. This was 95.6% and 94% rise in 2021 over 2019.

A caveat is in order here.

The Motilal Oswal report of April 2024 doesn’t reveal data sources for estimating household debts; the RBI merely mentions “BIS and RBI” as its sources in its FSR of December 2023. Here, ‘BIS’ stands for the Bank for International Settlements (BIS), which provides “total credit to households (core debt) as a percentage of GDP” for 40-odd countries and uses financial accounts, monetary surveys and its international banking statistics. It is, therefore, beyond anyone, except these three, to explain how they estimate household debts after 2019 (NSO’s AIDIS) – since no government data is available.