Household debt jumps to 37.3% of GDP in fiscal 2021, says report

Household debt has sharply jumped to 37.3 per cent of the GDP in the pandemic year from 32.5 per cent in FY20, says a report, confirming the deeper financial impact of COVID-19.

It also warned that the ratio may rise further this fiscal due to the second wave of the pandemic.

In fact, household debt has been steadily increasing ever since the GST implementation in July 2017, which was preceded by demonetisation in November 2016.

In four years since FY18, the household debt has jumped by 720 bps -- from 30.1 per cent in FY18 which was the year of GST implementation, to 31.7 per cent in FY19, 32.5 per cent in FY20 and to a massive 37.3 per cent in FY21, according to the report by SBI Research on Monday.

Household debt includes retail loans, crop loans and business loans from financial institutions like banks, credit societies, non-banks and housing finance companies.

The decline in bank deposits in FY21 and the concomitant increase in health expenditure may result in further increase in household debt to GDP ratio in FY22, as per the report, pencilled by Soumya Kanti Ghosh, the group chief economic adviser at State Bank of India (SBI).

However, even at over 37 per cent, the household debt to GDP ratio is still lower than most other countries, he said.

During the initial lockdowns in 2020, deposits of all commercial banks increased due to less avenues to spend. However, subsequently they declined marginally in the festive months.

The trend of deposits during the first wave (March-December 2020) of the pandemic -- as revealed by banks for 711 districts across all states/union territories -- shows deposit outflows from 112 districts at Rs 1.06 lakh crore.

However, since March 2021 the deposits outflow only declined to Rs 38,295 crore from 61 districts, suggesting revival in economic activity despite the second wave.

The beginning of the second wave, however, has resulted in significant deposit outflows from banking system in alternate fortnights, the pace of which has now moderated though.

Between March and December 2020, 599 districts saw an inflow of Rs 11,19,776 crore, while 113 districts saw an outflow of Rs 1,06,798 crore.

Higher household debt indicates the falling household financial savings rate due to the rise in consumption and health spends.

Conversely, the decline in bank deposits and the increase in health expenditure may result in further increase in household debt to GDP in FY22, it said.

Though India's household debt to GDP ratio is still lower than most other countries (highest at 103.8 per cent in Korea, 90 per cent in Britain, 79.5 per cent in the US, 65.3 per cent in Japan, 61.7 per cent in China, and the lowest in Mexico at 17.4 per cent), we need to supplement wage income, it added.

If we proxy employee expenses as wage income, as percentage of corporate gross value add for around 4,000 listed companies, it has come down to 30.6 per cent in FY21 from 34.1 per cent in FY20, even as their net income as percentage of corporate gross value add has significantly grown from 13.4 per cent in FY20 to 23.7 per cent in FY21.