Household Debt Trap

A young workforce and growing credit culture are shrinking households' financial savings. Be it credit cards, personal loans or buying a house or car, youngsters prefer taking debt. Banks, housing finance companies and NBFCs are happy to oblige. This leads to rising financial liabilities, which, as a share of GDP, have moved up from 3.3 per cent to 4.3 per cent over the last seven years. During the period, net financial savings fell from 7.2 per cent to 6.6 per cent. Banks deposit growth has declined to 10-12 per cent from 20 per cent-plus two decades ago. These trends are settled now as there is a big change in investment, spending and savings behaviour of people. Government, too, is spending more than what it earns and fiscal deficit is over 3 per cent of GDP. Despite the growth of insurance, mutual funds and pension, financial savings are not improving. Gross financial savings have remained at 10 per cent in the last decade.

This behavioural shift leaves fewer resources for the corporate sector. The recent announcement to target foreign savings by way of a sovereign bond shows the government wants to leave domestic resources for the private sector. While sovereign bond issue comes with currency risk, crowding out savings and pressure on domestic interest rates have their collateral damages. Higher government borrowing in the domestic market came in the way of transmission of interest rates. The only way out is to have sustained higher growth, more jobs and a tamed fiscal deficit. A new policy push or a framework is needed to correct the imbalance.