There has been plenty of discussion on how over-leveraged US households are and how they have been living beyond their means. But what is the position of Indian households? Has the proliferation of retail credit led to too high a debt burden for Indian households also?
Well, the annual increase in financial liabilities of the household sector, which was Rs60,305 crore in 2002-03, was Rs2.08 trillion in 2007-08. But household financial assets too have increased during the period. In 2002-03, the change in financial assets was Rs3.22 trillion; in 2007-08, this had increased to Rs7.34 trillion.
A better measure therefore would be to compare the increase in financial liabilities during a year with the rise in financial assets.
As the table shows, the rise in household financial liabilities as a proportion of the rise in financial assets stood at 14.5% in 1997-98 and has risen to 28.4% in 2007-08. Notice that this percentage fell sharply in 2007-08, as banks cut back on housing loans and interest rates started to bite. The peak was reached in 2006-07, at 36.8%.
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The data indicates that the debt Indian households have taken on is quite low and easily covered by the increase in their assets.
Loans from banks are the main source of borrowed funds, amounting to 96% of the increase in financial liabilities in 2007-08. But household bank deposits rose by Rs4.06 trillion in 2007-08, while loans from banks by households went up by a much smaller figure—Rs1.99 trillion.
Growth in both household assets and household liabilities was lower in 2007-08 than in the previous year. The growth in liabilities fell off much more sharply, though, which is why the percentage of liabilities to assets went down that year.
Interestingly, there have been several occasions when the growth in household liabilities has been lower than in the previous year. These include 2000-01, 1996-97, 1995-96, 1993-94, 1991-92, 1990-91, 1989-90, if data since 1980 are considered. Over the same period, however, there has been only one occasion before 2007-08 when the growth in household assets has been lower than in the previous year. That was in 1995-96.
In other words, growth in household assets continued to increase even during the last slowdown in the early 2000s. That’s another indicator of the severity of the current slowdown and the fact that it closely resembles the credit crunch of the 1990s.
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Graphics by Ahmed Raza Khan / Mint