Aditi Desai, University of Mumbai
India’s economic growth narrative is being challenged by a hidden vulnerability: the alarming rise of household debt fueled by runaway credit card defaults, threatening to force millions into a debt trap. The numbers are stark, a 56% increase in household borrowings in under three years, and a worrying rise in credit card delinquencies. This isn’t just a statistical anomaly, but rather a crisis in the making.
India has witnessed a significant surge in household debt over recent years, a trend with profound implications for the nation’s economic health and the financial well-being of its citizens as household borrowings rose from ₹77 trillion in June 2021 to ₹120 trillion by March 2024, which when adjusted to inflation equates to approximately ₹101.7 trillion marking a real increase of about 32% in less than three years. This rise translates to household debt constituting approximately 42.9% of the Gross Domestic Product (GDP) by June 2024, up from 38.5% in June 2021. While a debt-to-GDP ratio of 43% might seem moderate compared to global standards, as illustrated in the chart below, the Reserve Bank of India (RBI) has highlighted that, when adjusted for per capita income, India’s household debt is comparatively high relative to other emerging markets. Nations such as Poland, Mexico, and South Africa, despite having higher per capita incomes, exhibit lower household debt levels.
Household Borrowings and Household Debt as a Share of GDP (Source : RBI)
A significant contributor to the rising household debt is the rise of credit card usage. Data from TransUnion CIBIL indicates that credit card defaults increased to 1.8% in June 2024 from 1.6% in March 2023. Although this percentage rise appears modest, the absolute figures are alarming. Outstanding credit card debt rose from ₹87,686 crore in March 2019 to ₹2,70,000 crore in June 2024 equivalent to ₹2,29,000 crore reflecting a real compound annual growth rate of approximately 17% after adjusting for average annual inflation of 6% indicating that more individuals are relying on credit cards, potentially beyond their repayment capacities.
The average balance per credit card rose to Rs.32,233 by June 2024 from Rs.28,919 in June 2023, indicating increased spending or dependence on credit. Delinquency rates have also climbed, with defaults exceeding 360 days rising from 1.3% to 1.7%. Credit card issuers typically charge interest rates of 3.75% or more monthly on unpaid balances, equating to an annualized rate of 45%. Failure to make timely payments incurs additional penalties, compounding the debt burden on households.
Several factors contribute to the heightened reliance on credit cards. The rise of e-commerce platforms and digital finance solutions has made credit more accessible with attractive Buy Now, Pay Later (BNPL) schemes and EMI(Equated Monthly Installment) based purchases enticing especially younger consumers to spend beyond their immediate means. While these platforms can provide quick access to credit in times of need, they are effectively high-cost loans. Although they may appear to promote financial inclusion, the interest rates and hidden fees often trap consumers in debt, making them more financially vulnerable. Economic pressures, including inflation and stagnant wage growth, have further reduced purchasing power, pushing many to rely on credit cards to cover daily expenses, thereby increasing financial insecurity rather than alleviating it.
Recent data indicates that nearly a billion people in India currently lack the financial means to afford discretionary goods or services, limiting their spending capacity to essential needs. On the other hand, an additional 300 million people, classified as “emerging” or “aspirant” consumers, have only recently started spending on non-essential goods. This shift is largely driven by the growing convenience of digital payments, which make purchases more accessible, as well as an increasing reliance on credit, which has allowed them to spend beyond their immediate means despite limited financial security.
Moreover, rather than expanding, India’s consumer class is “deepening,” with existing middle-class consumers facing greater financial strain, as wages have remained stagnant despite slower growth in the overall number of middle-class households. According to a report by Marcellus Investment Managers, the middle 50% of India’s tax-paying population has seen its income stagnate in absolute terms over the past decade translating to real income halving when adjusted for inflation. This dependency indicates that credit cards are not merely tools for luxury spending but have become essential for meeting basic needs. Additionally, despite growing awareness of credit scores, there remains a lack of comprehensive understanding regarding credit management among many consumers. This gap can lead to overspending and inadequate planning for repayments, exacerbating debt levels.
Understanding where households allocate their spending provides insight into the rising debt levels. Data from the Household Consumption Expenditure Survey reveals that a significant portion of household spending is directed towards non-food items. In 2023-24, non-food items accounted for about 53% of monthly per capita expenditure (MPCE) in rural areas and 60% in urban areas. Major components include conveyance, clothing, bedding, footwear, miscellaneous goods, entertainment, and durable goods. In urban regions, rent including house rent, garage rent, and hotel accommodation charges constitutes about 7% of non-food expenditure. Within the food basket, beverages, refreshments, and processed foods have the largest expenditure share in both rural and urban households reflecting shifting consumer preferences.
As of March 2024, housing loans comprised 30% of total household debt. While investing in housing can be viewed as a form of long-term security, the immediate financial strain of mortgages contributes significantly to household indebtedness. Additionally, there has been a notable increase in loans taken to finance consumption, with their share rising by five percentage points. This trend suggests a growing propensity to incur debt for immediate consumption needs rather than asset creation.
The intertwining of rising household debt and evolving expenditure patterns presents several challenges. High debt levels, especially unsecured ones like credit card debt, make households susceptible to financial shocks, such as medical emergencies or job losses. While increased consumption can drive economic growth, excessive reliance on debt-financed spending may lead to financial instability, both at the household and macroeconomic levels.
The Reserve Bank of India has recognized these challenges, repeatedly warning that net financial savings among Indian households are nearing a 50-year low. It has taken steps to increase risk weights on unsecured consumer credit to encourage prudent lending. However, continuous monitoring and adaptive policies are essential to prevent potential debt crises.
In conclusion, while credit expansion and increased consumption reflect a growing economy, unchecked household debt accumulation can pose long-term risks. Addressing these challenges through a combination of regulatory oversight, financial education, and responsible lending practices is essential to ensure sustainable financial well-being for Indian households.