Slowdown In Middle-Class Consumption Is Likely To Prolong — Here's Why

Slowdown in goods and services that middle-class people use for asset creation, and to upgrade their standard of living will likely be prolonged, Nandita Rajhansa and Saurabh Mukherjea deduced after analysing India's debt and savings trend. The onus is on rising debt among Indian households for consumption, instead of forming capital goods and services, the writers said in their latest article on Marcellus Blog.

Private consumption in India has slowed to 5.3% in 2022–23, compared to 7.9% 2019–20, according to National Statistical Office. On the other hand, India's net national savings as a percentage of GDP was at the lowest level in last 50 years.

Middle-class people create demand for entry-level cars, scooters, and consumer durables like computers, television, and washing machines. They also invest on rail tickets and FMCG products. Demand for these products will stay low as they grapple with debt burden with less savings, according to the article.

As a result of consumption slowdown, certain cities of India have already started reporting rise of supply of flats compared to demands. There's also a fall in demand for building material.

Citing their previous article, Mukherjea and Rajhansa said 5–10% Indians are in debt trap. They are taking multiple loans to finance their day-to-day consumption and keep up with their debt repayment.

Data from the Reserve Bank of India showed that retail credit disbursement also soared in last decade. The Financial Stability Report showed that 45% of the borrowers are subprime, meaning they have credit risk and are most likely to default.

Rise in non-performing assets and fall in savings are squeezing the low-quality lenders and pressuring their profit and net worth. This will ultimately weigh on credit growth in country, the two analysts wrote.

In the last decade, Indians have borrowed at fast rate — not to create asset but to satisfy consumption needs. Moreover, their income remained stagnated while food prices soared. This has made Indians the most indebted people, ex-mortgage, across the world surpassing US and China. India's non housing household debt as a percentage of GDP is second to South Korea.

The spike in non-house debts was noticed after 2020 when pandemic stunted the entire world. Now, India has surpassed countries which are traditionally known for being consumption heavy, the article said.

As long as Indians are busy reducing their debt burden, they will refrain from allocating any fund to create assets, ultimately keeping them in debt trap, it said.