By Ajit Ranade
India’s households long regarded as cautious savers are quietly taking on record levels of debt. According to the Reserve Bank of India’s Financial Stability Report, household debt in India is 42% of GDP at the end of 2024, up from just 26% in 2015. Which means that in absolute terms the total debt is nearly three times bigger. The average debt per individual has jumped 23% in just two years. This means the average debt per person is rising at twice the speed of national income. It has risen from Rs 3.9 lakh in 2023 to Rs 4.8 lakh by March 2025. More than half of this borrowing i.e. about 55% comes from non-housing retail loans such as credit-card dues, personal loans, auto loans, and gold loans, while traditional home loans make up only about 29% of total household debt. Thus, an increasing share of household borrowing is being used not to build assets but simply to make ends meet. The middle-class and lower-middle-class families who prided themselves on thrift and saving for children’s education, gold jewellery, or a small home are borrowing to spend on current consumption.
A rising debt-to-GDP ratio, especially if the borrowing is driven by consumption rather than productive investment, will weaken the foundation of India’s long-term sustained growth. India’s debt ratio is still much below other developed economies. For instance, in Australia and Canada the household debt is more than 100% of GDP. But unlike India, these two countries have a generous social security and old age assured income security, reducing their households’ need to have high savings. In the US too the ratio of household debt to GDP is 75% and is 63% in China. The memory of the financial crash and crisis caused by housing mortgage in the US and the Evergrande crash in China is hopefully not forgotten. Compared to a potential bubble-like build-up, Indian household debt at 42% of GDP looks manageable. But one must note that it has risen steadily for five years, substantially outpacing income growth. A study by the Bank for International Settlements spanning 54 countries found that while higher household debt initially boosts consumption and GDP, beyond a threshold of 60% of GDP it begins to drag growth down, reducing long-run GDP by 0.1 percentage point for every additional point of debt. India’s ratio, though currently lower, is moving in that direction.
The problem is not household borrowing per se, but what is the purpose. Loans for education, housing, or small businesses build future assets. But loans for consumption create no productive capacity. As households divert more of their income toward servicing personal loans and credit-card bills, less remains for savings or investment. This has been enabled further by easy digital lending, instant credit-card approvals, and aggressive consumer-finance marketing. It has become very easy, effortless to borrow small amounts. But what looks like convenience often hides vulnerability. A growing number of households are using credit simply to pay for everyday expenses such as groceries, utility bills, school fees, or healthcare.
This is seen in the ballooning of gold loans too. The data from the RBI shows that gold loan portfolios more than doubled between mid-2023 till mid-2025. The growth rate for all gold loans was a whopping 122% in July 2025. The bulk of the gold loans from banks are of ticket size of less than 2.5 lakh, for which the RBI has slackened the regulatory limits. There is lighter appraisal and loan to value ratio is allowed to be as high as 85%. But the RBI is also aware of the build-up of bad loans in micro-finance and has tightened regulation there. During this same period, microfinance outstanding loans have dropped by 16.5%, indicating that some of the increase in gold loans is a substitution. It means that lower and middle income households who depended on MFI’s or unsecured credit are turning to gold loans, which have also been fuelled by soaring gold prices. In the next few years the expected growth rate in gold loans is more than 15% per year. But we must keep in mind, that surge in gold loans is not a sign of financial deepening. It signals that households are liquidating their last-resort savings to finance consumption or service other debts. The gold loan boom reflects an uncomfortable reality: it is both a safety valve and a red flag.
Along with rising household indebtedness are two other phenomena causing concern. One is that rural wages have remained stagnant in inflation adjusted terms. The cost of urban living is rising. Hence debt has become a coping mechanism. The second is the phenomenon of declining financial savings of households. The net financial savings have declined from 11% of GDP in FY21 to just 5% in FY23. There has been a slight improvement in the past two years. The household savings pool has been the bedrock on which both the government’s fiscal needs and companies’ credit needs are financed. With declining savings these will become costlier to finance.
There are aspirations for higher living standards. Digital credit is easy to access, and there is perhaps a post-pandemic desire for instant gratification. The fact is that consumer loans have been outpacing bank credit growth for the past five years. Nearly 55% of household debt is non-housing which means essential consumption loans. Credit card spending has increased 13 times in 13 years, and the number of credit cards in use has quintupled. Younger, salaried consumers are borrowing heavily against future income to sustain present lifestyles. At the same time, lower-income and rural households, facing stagnant earnings, are turning to gold and small personal loans to manage essential spending.
Credit expansion boosts demand and growth in consumer goods. But it makes households vulnerable to shocks caused by job loss, illness or crop failure. Beyond a point it increases financial system stress. If left unchecked it can erode the very resilience that once defined Indian households. Reversing the slide requires restoring the habit of financial savings, raising real incomes, and ensuring that borrowed money builds tomorrow’s assets, not just today’s consumption. It requires regulating aggressive consumer lending. It needs to encourage loans for education, homes and MSME’s. India’s households, once the quiet financiers of both growth and government, must be restored to financial health which can be achieved by returning to traditional values of caution and thrift rather than leaving them on the path to distress and debt.
The writer is a noted economist. ©The Billion Press
