23 Jan 2026·Source: The Hindu

4 min

EconomyEDITORIAL

Household Debt: India's Fragile Stability Amidst Uneven Income Growth

Household debt rises as savings fall, masking economic risks in India.

Photo by Jakub Żerdzicki

Editorial Analysis

The author argues that India's growth story, while seemingly robust, is underwritten by households saving less and borrowing more, which creates a fragile economic foundation.

Main Arguments:

India's macroeconomic stability rests on a partial reading of aggregate data, which veils a deeper, more unsettling reality in household finances.
Households are increasingly using credit to close income and expense gaps rather than to finance asset creation, making them vulnerable to economic shocks.
Fiscal policy prioritizes investment and discipline, reallocating risk to households and necessitating a closer look at options to enable disposable income.

Counter Arguments:

The Financial Stability Report suggests that India’s household sector remains financially stable, with household debt at 41.3% of GDP as of March 2025, lower than many emerging market peers.
Gross household financial assets stood at 106.6% of GDP, indicating that liabilities have not surpassed assets, and households continue to be net holders of financial wealth.

Conclusion

Restoring balance in the household budgeting calculus is the key fiscal policy task prior to Budget 2026. Creating demand, more labor-intensive employment, and aligning fiscal outcomes towards these, while increasing average incomes, will eventually be affected by an economy where households gradually lose their ability to absorb shocks.

Policy Implications

The government should consider policies that increase disposable income for households, such as income support or countercyclical transfers, to reduce reliance on debt and ensure sustainable economic growth.

India's macroeconomic stability, while seemingly robust, masks a concerning trend: households are saving less and borrowing more to sustain consumption. A closer look at recent household finance data reveals that India’s growth is increasingly underwritten by households that are, on average, saving much less and borrowing more, while quietly absorbing economic risks that were once shared more broadly. According to the RBI’s Annual Report 2024–25, real income growth has been uneven, especially outside formal employment and high-productivity sectors. Overall consumption has held up well, leading households to borrow more to bridge the income-expense gap. This shift in credit function, from asset creation to income supplementation, raises concerns about household vulnerability to economic shocks. While household financial liabilities are at 41.3% of GDP as of March 2025, and gross financial assets stand at 106.6% of GDP, net financial savings have fluctuated drastically, indicating a growing fragility beneath the stable aggregate. A comprehensive fiscal and policy configuration that systematically transfers risk from the State to households is the cause of the increase in household borrowing. The Union Budget 2026 will be framed understandably as a continuation of macroeconomic stability achieved through fiscal discipline and investment-led growth. However, stability that depends on households taking out loans to maintain demand is not self-sustaining and merits a closer look at options which can enable disposable income for households.

Key Facts

Household debt (March 2025): 41.3% of GDP

Household financial assets: 106.6% of GDP

Consumption accounts for: Close to 60% of GDP

UPSC Exam Angles

GS Paper III: Indian Economy - Issues relating to planning, mobilization of resources, growth, development and employment.

Link to Financial Inclusion and Sustainable Development Goals

Potential question types: Analytical questions on the impact of household debt on economic stability

Visual Insights

More Information

Background

The trend of household debt in India has roots in the liberalization era of the 1990s. Prior to this, access to credit was limited, and savings rates were generally high due to a culture of thrift and limited investment options. The introduction of financial sector reforms, coupled with rising incomes, led to increased access to credit, particularly for consumer durables and housing.

The rise of the middle class and their aspirations for a better lifestyle further fueled this demand. Government policies promoting homeownership and financial inclusion also played a role. However, the focus on formal sector employment and high-productivity sectors has created disparities, leaving a significant portion of the population vulnerable to economic shocks and dependent on borrowing to sustain consumption.

Latest Developments

In recent years, the COVID-19 pandemic exacerbated the trend of rising household debt. Lockdowns and job losses led to income disruptions, forcing many households to rely on borrowing to meet essential expenses. The rise of fintech companies and digital lending platforms has further increased access to credit, often with limited regulatory oversight.

While the economy has rebounded, income growth remains uneven, and inflation has eroded purchasing power. Looking ahead, the government's focus on infrastructure development and manufacturing could create new employment opportunities and boost income growth. However, addressing the underlying structural issues of income inequality and financial vulnerability will be crucial to ensure sustainable and equitable growth.

Practice Questions (MCQs)

1. Consider the following statements regarding the trend of household debt in India: 1. Increased access to credit since the 1990s has been a major driver of rising household debt. 2. Uneven income growth, particularly outside the formal sector, contributes to households borrowing to sustain consumption. 3. Household financial liabilities are currently more than gross financial assets as a percentage of GDP. Which of the statements given above is/are correct?