Indian households outdo emerging market peers on cutting debt levels

Only one among BRIC countries to have cut leverage to levels to pre-pandemic levels

Indian households cut debt levels faster than major emerging market peers.

Household debt levels are now lower than they were before the Covid-19 pandemic. Peer economies like Brazil, Russia and China had higher household debt than they did in 2019; shows an analysis of updated Global Debt Database numbers from the Washington-based International Monetary Fund (IMF) released on December 12. India’s household debt was the equivalent of 34.6 per cent of its gross domestic product (GDP) in 2021 compared to 36.4 per cent in 2019.

The GDP is a measure of a country’s economic activity. Measuring debt as a percentage of GDP allows comparisons of debt levels across countries relative to their economic size. Household debt includes all loans and debt securities at the household level.  

India’s household debt declined by 1.8 percentage points of GDP between 2019 and 2021. It is up by 2.6 percentage points of GDP in Russia, 3.8 percentage points of GDP in Brazil, and 6.3 percentage points of GDP in China (chart 1).                

General government debt is higher than it was before the pandemic, though it is lower in 2021 than in the previous year for most countries under consideration. Russia’s government debt is up by 3.2 percentage points of GDP between 2019 and 2021. It is up by 5.2 percentage points of GDP in Brazil, 9 percentage points in India and 14.2 percentage points in China.

China is the only country which saw a rise in government debt between 2020 and 2021. Most countries had lower debt levels in 2021 than in 2021. China’s general government debt rose from 68.1 percentage points of GDP in 2020 to 71.5 percentage points of GDP in 2021. It was 57.2 percentage points of GDP in 2019 (chart 2).

Inflation and growth in nominal GDP growth had a role to play in the relatively lower levels of global debt seen in 2021, compared to 2020, according to the IMF’s 2022 Global Debt Monitor report.

“What drove debt ratios down was mainly rising nominal GDP. For instance, real growth helped to reduce G-20 public debt on average by near 4½ percentage points of GDP while high inflation pushed debt ratios down by about 5 percent of GDP,” it said.

The levels of household debt in the IMF study echo what was said in the Reserve Bank of India (RBI) October bulletin. India’s household debt is higher than BRIC peers barring China, noted the October 2022 study ‘Financial Liabilities of Household Sector in India – An Assessment,’ from authors Richa Rawat, Tarun Kumar Saxena and Vivek Kumar published in the RBI bulletin.

“Indian position appears moderate with respect to the credit to GDP ratio at 37.7 per cent as compared to China’s 61.7 per cent in 2020 but coinciding with South Africa from 2017 onwards. Recently, Brazil has also converged to India’s level,” it said.

“The sustainability index shows that borrowing of Indian households remained within sustainable levels in the last three decades including the times of stress such as the pandemic,” it added.