Financialisation and Rising Household Debt
Sanjay Roy
INCREASED dependence on debt and depletion of savings by average Indian households has been recognised as the emerging trend in the past three years. According to a recent RBI report India’s household debt has been 42.9 per cent of GDP at current market prices. The Financial Stability Report also recognises that the number of borrowers increased in the recent past. Increased dependence on personal loans, credit cards, consumer durable loans and other personal loans are on the rise. Other reports also suggest that retail credit from non-banking financial institutions and private banks increased initially followed by public sector banks. In fact, the RBI report also suggests that loans for productive purposes have much lower share in household borrowings compared to that for consumption expenditure. There are clear signals of declining net financial savings during the post-pandemic period. Also notable is the fact that for super-prime borrowers or the rich, the major borrowing is to buy assets. In other words, the poor and middle class is largely borrowing to meet their consumption demand while the rich are increasingly borrowing to buy income generating assets particularly in the backdrop of uptick in the real estate market after a decade long slowdown in housing prices.
Financialisation of the economy is not a process limited to capital owners, it permeates household economy also and eventually makes consumption increasingly debt driven. A massive destruction of jobs during the pandemic led to depletion of savings and further to indebtedness for most of the working people. The recovery of the economy couldn’t create enough jobs or augment incomes of the common people rather the real incomes were eroded by successive episodes of inflation. In the backdrop of rising inequality, we experience two opposing trends. The rich with large amount of wealth and incomes are increasingly keen to park their wealth in assets for future returns as their marginal increase of goods and services for current consumption from the amassed wealth uses to be negligible. They are more interested to gain out of asset inflation. On the other hand, the poor and the working people while facing contraction in their purchasing power increasingly becomes dependent on borrowings to meet their non-discretionary expenses.
DECLINING NET FINANCIAL SAVINGS
Household savings in India currently accounts for 60.9 per cent of total savings in the economy which has come down from 68.2 per cent in 2011-12 according to National Statistical Office data. More importantly the share of household savings to GDP has come down from 23.6 per cent in 2011-12 to 18.4 per cent in 2022-23. In the pre pandemic period, the three-year average of household savings to GDP ratio was 20.7 per cent, indicating that households of India are more indebted currently compared to pre-pandemic period. It is also important to note that gross financial savings as a percentage of GDP remained stable throughout this period but the ratio of financial liabilities to gross financial savings increased from 31.1 in 2011-12 to 52.4 per cent in 2022-23. This primarily indicates the fact that the burden of financial liabilities increased for Indian households in the recent period which has pushed down net financial savings to GDP ratio significantly. In fact, the ratio has fallen from 7.4 per cent in 2011-12 to 5.3 per cent in 2022-23. This indicates that the households even if their gross savings continued to grow but the growth of financial liabilities grew much faster because of which indebtedness increases.
There has been increased dependence on retail credit particularly from NBFCs and private banks and later borrowings from public sector banks also increased. If we see the composition of borrowings according to the RBI Financial Stability Report, December 2024, the share of borrowings for consumption purpose accounts the largest share which kept on increasing. Borrowings for asset purpose particularly housing loan, vehicle loans and two-wheeler loans increased but the share declines in the recent period while borrowings for productive purposes account the lowest share in the distribution by the purpose of credit. Productive purposes include agricultural loans, business loans and educational loans. In case of subprime borrowers, the largest share of their borrowings goes to consumption purposes accounting 48 per cent, 26 per cent for the purpose of consumption and another 26 per cent for productive purposes. In case of super prime borrowers the biggest share of their borrowings that is 64 per cent is used to buy assets and only 5 per cent is used for productive purposes. As the prime and above category of borrowers account for the larger share of the total credit, much of the loans are being used for asset purchase. Relatively poor and middle class are increasingly dependent on credit financed purchase for consumption that increases their interest burden in the long run.
FINANCIALISATION AND INDEBTEDNESS
Financialisation of the economy implies a diffusion of finance in a way that productive sectors become increasingly driven by the goal of maximising shareholder returns, hence prioritise short term gains over long term investment. On the other hand, for consumers, it makes consumption demand increasingly dependent on debt. Debt financed consumption at least temporarily increases the demand and eases the demand constraint of the economy for the time being. Particularly higher access to debt through different financial instruments and technological innovations allow common people to access goods and services through easily available credit which were otherwise beyond their reach through disposable incomes at a particular point in time. Since this income class also shows higher propensity to consume, a shift in access to credit towards common people increases consumption demand in the economy. But this credit financed consumption ultimately increases interest and debt burden which creates a reverse flow of resources once again to the creditor class who are the rich. Rising indebtedness or increasing financial liabilities and depletion of savings finally leads to impoverishment of the poor and the middle class.
The obverse of this is the increased demand for credits from the rich to buy assets as they increasingly realise that higher returns can be ensured through asset inflation. More they invest on financial or physical assets the prices of those assets increase, enhancing the expectation of further rise in prices and hence higher demand for those assets eventually leading to a speculative bubble. Rising inequality in India therefore has a direct link to the financialisation process. The corporates invest more on financial assets to earn higher rates of profit. Resources shift from productive assets to speculative activities and long-term growth is increasingly compromised. Profits are increasingly delinked from employment and growth. More importantly, there has been a structural link between deregulation of capital flow with deregulation of the labour market. Increased freedom for capital comes along with increased unfreedom of labour because of which the share of profit earners increases in the GDP while that of wage earners suffers a steep decline during the regime of financialised capitalism. It is once again evident from the trends of declining net financial savings to GDP ratio that working people in India are in serious distress. Severe fall in incomes during the pandemic, declining real incomes due to successive episodes of inflation, lack of gainful employment has grossly eroded the purchasing power of the masses. Consumption levels could increase for some time based on access to retail credit, but accumulated debt and interest burden seem to be eroding their savings.
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