Limits of Household Stability | 24 Jan 2026

Source: TH 

Why in News?  

As the Union Budget 2026 approaches, India’s macroeconomic indicators present a picture of aggregate stability and relative strength amidst global uncertainty.  

• However, a deeper analysis of the Reserve Bank of India’s (RBI) Financial Stability Report ( 2025) and Annual Report 2024–25 reveals a concerning structural shift that households are saving less, borrowing more, and increasingly absorbing economic risks that were previously shared by the State.

What are the Concerns Regarding the Household Stability?

• Declining and Volatile Household Savings: Net financial savings recovered to 7.6% of GDP in the last quarter of 2024-25, but this came after a compression to about 3-4% of GDP in the preceding quarter.  
  • Such volatility weakens households’ capacity to absorb income, health, or employment shocks. 
• Rising Household Debt: Household debt increased from about 36% of GDP in 2021 to 41.3% in March 2025.  
  • According to the RBI’s Annual Report 2024–25, real income growth remains uneven, income gains are concentrated in formal sectors, while informal and self-employed workers face stagnant or volatile earnings, constraining consistent savings. 
• Borrowing Driven Consumption: Stable consumption despite weak income growth indicates rising reliance on credit.  
  • Private consumption contributes nearly 60% of GDP. Dependence on debt-supported consumption increases the risk of abrupt spending contraction during economic stress. 
  • Debt-financed consumption offers limited adjustment space during downturns and heightens vulnerability to interest-rate changes. 
• Faster Growth of Financial Liabilities: While gross household financial assets stood at 106.6% of GDP, liabilities rose to 41.3% of GDP by March 2025. Faster liability accumulation explains the compression of net financial savings. 
• Rising Exposure to Unsecured Retail Credit: Rapid growth in unsecured personal loans and credit cards increases household vulnerability, as these loans carry higher interest rates and limited repayment flexibility during stress periods. 
  • A rising share of fresh savings is offset by new borrowing, reducing households’ ability to manage shocks from unemployment, inflation, or medical emergencies. 
• Fiscal Consolidation Shifting Risk to Households: Budgets 2024–25 show States and the Union prioritising capital expenditure while compressing revenue spending. With 30–32% of State revenues locked into salaries, pensions, and interest, fiscal space for income support has shrunk.  
  • While this investment-led strategy boosts medium-term growth, it does little to cushion short-term income shocks, leading to a quiet shift of economic risk from governments to households. 

What are the Implications of Volatile Household Savings? 

• Macroeconomic Implications: 
  • The "Savings-Investment" Gap: A decline in household savings compels the government and the private sector to depend more on Foreign Portfolio Investment (FPI) and external borrowing; however, with FPIs aggressively exiting India and withdrawing a record ₹1.66 lakh crore in 2025, this reliance heightens vulnerability to external shocks and financing stress. 
    • This increases India’s vulnerability to global "shocks" (like Fed rate hikes) and worsens the Current Account Deficit (CAD). 
  • Fiscal Deficit Crowding Out: With lower domestic savings available, the government may find it harder to fund its fiscal deficit at low interest rates. 
    • This could lead to higher borrowing costs for the state, "crowding out" private investment. 
• Financial Systemic Implications: 
  • Deterioration of Bank Funding Quality: Traditionally, banks relied on low-cost, stable household deposits.  
    • The shift towards Financialization (households moving money to Mutual Funds/Equities) forces banks to use expensive wholesale funding, which is more volatile and squeezes bank margins (NIMs). 
  • Asset Quality Stress: A significant portion of current debt is unsecured retail credit (personal loans, credit cards).  
    • These are "first-loss" assets; if the economy slows, defaults in this segment hit bank balance sheets directly without any collateral to recover. 
  • Market Volatility Risk: As more households enter the stock market via systematic investment plans (SIPs) without a "safety buffer" of bank deposits, a prolonged market crash could lead to panic withdrawals, creating a feedback loop that destabilizes both the equity market and household wealth. 
• Socio-Economic Implications: 
  • Threat to the Demographic Dividend: If a large portion of household income is diverted to debt servicing (EMIs), investment in "Human Capital" (quality education and nutrition for children) often takes a backseat, undermining India’s long-term productivity. 
  • Rising Inequality: The "K-shaped" stability trend shows that while high-income households see their wealth grow via stock markets, low-income groups are borrowing to survive.  
    • This widens the wealth gap and can lead to social friction. 

What Steps are Needed to Improve the Household Savings? 

• Recalibrating Inflation Targets: The government and RBI should review the Consumer Price Index (CPI) basket to better reflect the rising costs of education and healthcare, ensuring that monetary policy accurately protects the purchasing power of the middle class. 
• Incentivizing Financial Savings: Tax incentives for traditional long-term savings instruments (like PPF or long-term bank deposits) should be enhanced to discourage excessive shift toward high-risk speculative markets. 
• Focus on Real Wage Growth: Policy must pivot toward creating high-quality, formal-sector jobs.  
  • Strengthening the manufacturing sector through Production Linked Initiative' (PLI) schemes can provide the stable income growth needed to outpace debt. 
• Strengthening Social Safety Nets: By expanding the reach of affordable public healthcare and insurance (like Ayushman Bharat), the government can reduce the "precautionary" need for households to hold large sums of cash or borrow during health crises. 
• Financial Literacy and Regulation: The RBI must continue its proactive stance on "macro-prudential measures," such as increasing risk weights on unsecured loans, to prevent households from falling into a permanent debt trap. 

Conclusion 

Stability that depends on households taking out loans to maintain demand is not self-sustaining. As the Union Budget 2026 approaches, the key fiscal task is to restore balance in the household budgeting calculus to ensure that India’s growth story is both inclusive and resilient.