A stalled growth engine

Household debt-fuelled growth is not sustainable

The question of whether private consumption demand, particularly from households, can fuel India’s post-pandemic growth revival is a fraught one. In the latest data of gross domestic product, pertaining to the three months between April and June 2021, private final consumption expenditure appeared stable as it continued to account for over 55 per cent of growth — it was 55.1 per cent of real gross domestic product in the second quarter of 2021 as compared to 55.4 per cent in the equivalent quarter of the previous year. The data from the Reserve Bank of India (RBI) suggest that consumer durable loans as well as those for vehicles were higher in July 2021 over both June 2021 as well as July 2020.

Yet a longer-term perspective of private consumption demand is a little more disquieting. The All India Debt and Investment Survey (AIDIS) was recently released by the National Sample Survey Office, and it reveals that households have been building up a debt burden. The average debt of rural households increased between 2012 and 2018. It grew by 84 per cent to almost Rs 60,000, and for urban households the equivalent increase was 42 per cent off a higher base, ending at over Rs 1.20 lakh. Debt, however, grew fastest for the urban self-employed in a period that included the twin shocks to the informal sector of demonetisation and the introduction of goods and services tax. Economists at the State Bank of India project that it has further doubled in the three years since the AIDIS data was collected in 2018, given the exigencies of the pandemic and the need to borrow to supplement sharply falling income in several areas. The debt-to-assets ratio has also deteriorated sharply between 2012 and 2018, indicating a greater fragility to the household balance sheet.
 

Since the downturn in private investment in the 2011-12 period, it is clear that private consumption had become the main driver of the India story. Yet this consumption was essentially insecure, driven by the build-up of household debt. But even in this period, the growth rate of private consumption expenditure was slower than what it was between 2004-05 and 2011-12, and losing momentum throughout that period. Since then, there have been additional blows to this engine of growth. For one, the crisis in non-banking financial companies closed one major conduit for credit to households. The RBI’s consumer confidence surveys, meanwhile, indicated that perceptions of urban current income went into a decline from 2011-12 onwards. Growth momentum, which depends upon households diminishing savings and running up debt, is inherently unsustainable. It appears likely that the pandemic has pushed India to the moment of truth where this household debt-fuelled growth can no longer move forward. Research suggests that scarring from the pandemic will have affected those at the lower levels of the income distribution much more than those at the top, reducing the overall demand stimulus since it is that section that consumes more of its income. Without expectations from consumer demand, there is unlikely to be a revival in private investment either.

The government should revisit its broader growth strategy in the context of these revelations about private consumption, household savings, and debt. It is clear that new engines of growth will have to be found. These will have to come from either government spending or external demand. But the former is also constrained by the fiscal condition. Thus, integration into trade and new trading agreements take on even more urgency as policy priorities.