New Delhi, January 10: Household (HH) debts have gone up due to increased financial inclusion amid increased wealth because of increased investments in real estate and equities according to a recent report 'India Strategy' by DAM Capital."due to increasing financial penetration.
Key Points
1.
Higher household financial assets reaching 158% of GDP
2.
Wealth effect increasing income inequality
3.
Rural financial inclusion driving economic changes
4.
Populist measures expected to boost consumption
18.3 per cent of adults have some outstanding loan, with rural males more likely to have debt. However, the wealth effect is kicking in: household gross financial assets (GFA) totaled 158% of GDP in Q1FY25, compared to 124% at the end of December 2019, largely due to investments in real estate and equities. The report indicates that higher indebtedness and the wealth effect have increased inequality, with the number of individuals earning over Rs. 1 crore increasing by 70 per cent in the last two years. The Q2FY25 GDP came in at 5.4 per cent, against RBI's expectations of 6.5 per cent, partly due to these factors.
In the medium term, growth is expected to return to the pre-Covid level of 6.5 per cent. "We expect medium-term growth potential to reach 6.5%, at the pre-Covid rate, normalized from the post-Covid recovery band of 7-8%," says the report. Other components contributing to the slowdown include GST implementation, which has severely impacted the SME sector that employs almost 40 per cent of the workforce, negatively affecting manufacturing capacity and leading to employment losses.
However, in 2025, the industry is likely to improve with the revival of capital expenditure (Capex) and consumption. This revival is expected to be driven by an anticipated easing of interest rates and improved agricultural produce due to better monsoons. Rural households will benefit from food income and higher Minimum Support Prices (MSPs), and the report expects RBI to ease regulatory tightening on unsecured lending and home loans by mid-2025 to revive consumption. The recent CRR cut and other measures by RBI will boost liquidity starting from Q4FY25.
Additionally, recent populist measures like direct money transfers announced by many states such as Maharashtra, Jharkhand, Madhya Pradesh, and Karnataka are expected to add over Rs. 2 trillion to total spending, equivalent to 0.7 per cent of GDP. These programs are anticipated to benefit 34 per cent of women in these states and increase average per capita consumption in both rural and urban areas.
Increased penetration of distribution, financialization, digitalization, and the convergence of wage growth are leading to reverse migration to rural areas. Furthermore, better physical infrastructure is enhancing rural mobility and reducing rural poverty compared to urban poverty, thus narrowing the gap in consumption inequality.
