Balancing India’s Economic Future: Consumption, Debt, and Sustainable Growth
By Saumitra Bhaduri & Shubham Anand, Professor and PhD Scholar, Madras School of Economics, Chennai
India stands at a pivotal moment in its journey as one of the world’s fastest-growing economies. The nation is experiencing an economic transformation marked by high domestic consumption, dwindling savings, escalating household debt, and increasing inequality. While the growth trajectory appears promising, careful policy calibration is crucial to ensure sustainable development.
Understanding India’s Economic Growth Drivers
The Rise of Domestic Consumption
India’s economic dynamism is increasingly fueled by its expansive domestic market. In FY25, household spending surged by 12%, a striking contrast to the historical average of 6.4%. Notably, spending in rural areas has outpaced that in urban centers, indicating broader participation in economic activities.
Consumer spending now contributes significantly to GDP, accounting for 61.4%. For context, the United States, a consumption-centric economy, notes household spending at 68% of GDP. This shift may signify India’s transition from an investment-led growth model to one more aligned with internal demand.
Challenges Paralleling Growth
Declining Savings Rates
Despite this prosperous consumption, a troubling trend is emerging: a decline in savings. The savings rate has dropped to 30.7%, well below China’s 40%. This downturn is largely driven by low interest rates and the allure of quick gains in the equities market. The recent financial distress, where retail traders lost approximately ₹1.8 lakh crore in the derivatives market (FY22-24), has further depleted household savings.
Inefficient Capital Utilization
The Incremental Capital Output Ratio (ICOR) stands at 5.3, indicating inefficiencies in capital deployment. This means lesser economic output is generated per unit of investment, resulting from project delays, suboptimal allocation, and structural bottlenecks. To achieve a GDP growth rate of 8%, India would require a savings rate of 42.4%, far exceeding the current level.
Surging Household Debt
Further complicating the landscape is the surge in household debt. As of June 2024, the household debt-to-GDP ratio rose to 42.9%, up from 26% in June 2015. Alarmingly, a significant portion of this debt is categorized as “destructive,” funding consumption rather than asset creation. Specifically, non-housing retail loans, which largely support consumption, constituted 54.9% of total household debt by March.
The easy access to credit—facilitated by aggressive bank lending, non-banking financial institutions, and the burgeoning fintech ecosystem—has amplified this trend. Lower-income households are particularly vulnerable, with nearly half of their loans directed toward daily expenses.
Widening Inequality
Income disparity compounds the issue. According to the World Inequality Lab Report (2024), economic growth is primarily concentrated among the wealthiest, leaving lower and middle-income families with stagnant real income growth. This situation pushes them towards escalating borrowing to uphold consumption levels, thereby creating a precarious reliance on credit over genuine income gains.
Safeguarding Economic Resilience
The Reserve Bank of India (RBI) highlights the resilience of household balance sheets; however, there is an urgent need for robust oversight. The vulnerabilities faced by lower-income households necessitate a prudent approach. Rising debt servicing costs impact discretionary spending, which in turn can weaken demand-side stimuli.
Strategies for Sustainable Growth
To ensure a more resilient and inclusive economic framework, India must recalibrate its growth strategies:
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Prioritize Asset-Creating Loans: Financial institutions should be encouraged to focus on lending that supports asset creation rather than mere consumption. This ensures equitable access to constructive credit for wealth generation.
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Promote Long-Term Savings: Policymakers must foster incentives for long-term financial savings, ensuring accessibility for all income brackets, especially lower-income groups.
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Enhance Financial Literacy: Targeted educational campaigns on responsible borrowing and financial planning are essential. Households should be informed about the risks associated with debt and informed about sustainable financial practices.
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Monitor Household Debt: Continuous oversight of household debt—especially among vulnerable populations—should be prioritized, aligning debt levels with income growth trends to identify potential vulnerabilities.
Conclusion: A Tightrope Walk Towards Prosperity
India’s economy currently navigates a delicate balance between opportunities and risks. While consumption-driven growth is commendable, the associated trends in debt, inequality, and inefficiency require urgent attention. To secure long-term prosperity, rebalancing economic pillars away from fragile debt foundations is imperative.
Failure to address these issues may lead to a precarious future, making it crucial for India to adapt and balance its consumption-driven populace with structural discipline necessary for wealth generation, inequality reduction, and resilience against global shocks.
Final Thoughts
Ensuring sustainable economic growth in India calls for concerted efforts across financial institutions, policymakers, and households. By fostering an environment conducive to responsible borrowing, savings, and investment, India can build a robust foundation for its economic future.
Views expressed herein are personal and do not reflect the official stance of any institution.
