Consider the following statements regarding household debt in India:

1. Household debt has shown a gradual decrease from 2021 to 2024.

2. Household debt in India is lesser than most emerging market economies.

3. Household assets have increased from 2021 to 2024.

Which of the statements given above is/are correct?

The correct answer is option 2.

In News

• The RBI’s Financial Stability Report (FSR) 2024 highlights a rise in household debt and a decline in household assets, raising concerns about increased borrowing for consumption rather than asset creation.

Key Points

• Household debt has increased, not decreased, rising from 36.6% of GDP in June 2021 to 42.9% in June 2024.
  • This rise in debt-to-GDP ratio is a cause for concern, as it indicates greater borrowing, particularly for consumption rather than investment in assets.
    • Hence, Statement 1 is incorrect.
• Despite the increase in household debt, India’s debt levels remain lower than most emerging market economies.
  • However, the rising household debt-to-GDP ratio could pose macroeconomic risks if left unchecked.
    • Hence, Statement 2 is correct.
• Household assets have declined, falling from 110.4% of GDP in June 2021 to 108.3% in March 2024.
  • This suggests that a higher proportion of borrowing is being used for consumption rather than investment in housing, vehicles, or education.
    • Hence, Statement 3 is incorrect.

Additional Information

• The shift in borrowing trends:
  • The RBI report notes a shift towards prime and super-prime borrowers, indicating relatively stable lending practices.
  • However, lower-income households are taking on more unsecured debt (credit card, personal loans), which increases financial stress.
• Macroeconomic concerns:
  • A rise in borrowing for consumption instead of asset creation could weaken economic growth by reducing the income multiplier effect.
  • Sub-prime borrowers are at higher risk of default, which could create financial instability.