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India’s Household Leverage and the COVID-19 Crisis
The outbreak of the COVID-19 crisis has deepened the recession in the Indian economy and caused a significant leap in household financial savings given their cutbacks in consumption and reduced demand for credit amid rising income uncertainties. Banks have also tightened lending due to asset quality concerns. This shift in household financial behaviour was caused by the continuous amplification of household leverage in the pre-COVID-19 years, resulting from a sharp increase in household financial liabilities on account of the robust growth in personal loans. As demonetisation created surplus liquidity in the banking system, it brought about a persistent build-up of unsecured household debt. This paper analyses trends in credit deployment across different sectors of the economy to illustrate the rising share of household credit concentrated in credit card receivables and other personal loans post demonetisation.
The author would like to thank the anonymous referee for providing constructive comments that greatly helped in improving the analysis of this paper.
The 2010s ended with the unprecedented COVID-19 pandemic, which caused a public health emergency as well as economic instability as a result of the associated lockdowns, resulting in the further deterioration of the Indian economy that was already experiencing a growth slowdown prior to the crisis. The growth rate of the real gross domestic product (GDP) had precipitously plummeted to a six-year low of 4.5% in 2018–19 during the pre-COVID-19 years due to a slowdown in domestic economic activity caused primarily by a deceleration in investments, exports, and private consumption. However, as the data for the second quarter of the financial year 2020–21 from the National Statistical Office indicated a much shallower contraction compared to the pandemic-imposed retrenchment in the previous quarter, this elevated expectation that the real GDP growth would break into positive territory over December 2020 and January 2021, taking into consideration the underlying trends from October and November 2020, which revealed signs of buoyancy and momentum in economic activity.
The Reserve Bank of India’s (RBI) monthly bulletins for November and December 2020 (RBI 2020d, 2020e) point to significant headwinds, an anticipated bouncing back, and a possible steady reflation of the Indian economy towards the last quarter of 2020–21 based on the update of the economic activity index. This is in light of some key background forces, including the bending of the COVID-19 infection curve, improvements in recovery rates, an increase in consumer spending, and enhancement of business confidence on the back of “vaccine optimism.” These forces have brightened near-term prospects and stirred up the revival of the Indian economy beyond the mere satiation of pent-up demand following the lifting of lockdowns.
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