The financial position of the listed corporate sector in India has improved markedly in the past three years. Not only its profits have more than doubled, but it has also de-leveraged, improved its cash position, along with gains in market share. But can we conclude the same with as much confidence for the household sector (including individuals, along with small producers)? Let’s look at some data in order to answer this question.

We will start with the most important household related macroeconomic aggregates such as income, consumption, investments, savings and debt. Aggregate income (equal to GDP) generated in an economy is distributed among the only three domestic economic participants — household (HH), corporate and the government. The share of labour income (measured by household or personal disposable income [PDI]) in India’s total economic output (i.e., GDP) has declined to 79.1 per cent in FY23, down from more than 80 per cent in early-2010s (and 83.4 per cent in FY21). This trend, however, is neither unprecedented nor unique and also not necessarily unwanted. India’s economy witnessed this trend, even more vigorously, in the 2000s decade, as PDI declined from its multi-decade high of 87.1 per cent of GDP in FY02 to all-time low of 76.2 per cent in FY08 (i.e., the share of labour income declined during the best growth period). Further, a study of successful economic transitions confirms that the share of household sector (or PDI) has fallen in most cases.

What, however, is concerning is household spending (including final consumption and investment expenditure [also called physical savings]) has increased at an average of 11 per cent in the past decade (FY14-FY23), faster than 10.4 per cent growth in PDI. This trend started gathering pace from early 2010s, which was the first decade in the post-Independence era, when PDI growth lagged the growth in HH spending. Faster growth in HH spending than PDI was possible only because of a fall in household savings (i.e., HH net financial savings [HHNFS]) and a rise in its leverage. During the past decade, household savings grew at an average of only 8.7 per cent, while household debt increased by an average of 15 per cent (annual borrowings grew at an average of 19.1 per cent).

Again, similar trend of higher growth in debt (or borrowings) vis-à-vis HHNFS (net financial savings) was seen in the 2000s decade as well; however, the decline in HHNFS — as per cent of GDP — started only from the 2010s decade (which means that HHNFS grew faster than income/GDP in the 2000s decade). This is because gross financial savings were growing at a faster pace in the 2000s decade. In short, the falling share of labour in economic output becomes a concern because it is not matched by a slowdown in their spending, which is leading to a fall in savings and a rise in household leverage. Compare this with a company, whose spending is growing faster than its revenue and profit, along with its rising debt. How much confidence would you have in the sustainability of such company’s operations or would you be ready to invest in such a stock for a long period?

These trends started in the 2010s decade and have worsened further in recent years after the pandemic, as reflected by much weaker growth in NFS (a simple average of only 2.6 per cent) during FY20-FY23 and higher growth in debt/borrowings (16.1 per cent/22.7 per cent), which supported 10.5 per cent growth in household spending, compared to 9.3 per cent growth in PDI, which was slightly lower than nominal GDP growth of 9.5 per cent. Not surprisingly then, HHNFS — the amount of household surplus available into the system to fund the deficit/borrowings of the government and the corporate sector — collapsed to 47-year low of 5.3 per cent of GDP in FY23 (from 7.4 per cent of GDP in FY13) and household debt amounted to 38 per cent of GDP (from around 26 per cent of GDP).

Overall, the falling share of labour in total economic output is not a concern. But faster growth in household spending than PDI is. This is because spending growth is supported by a withdrawal from savings (HHNFS) and taking on more leverage. These trends, to my mind, confirm weak financial position of the household sector in India. The improvement in the financial position of the listed corporate sector is just a mirror image (or obverse) of this deterioration in the household sector. Labour income is the biggest cost for producers and household spending decide their revenue. Slower growth in the former than the latter suggests expansion of corporate profits, assuming other things constant (of course, various other factors such as total investments, fiscal deficit and current account deficit also influence corporate profits in an economy).

Weak financial position of households matters because any uncertainty over the sustainability of final consumption demand in an economy can make the producers (i.e., the corporate sector) wary of expanding their capacity and boosting investments. This is more important, when the government sector is also following strict fiscal consolidation to narrow its deficit, keeping their hands tied in terms of their spending growth.

My thesis, however, is not without its fair share of debate. There are at least three facts that can counter my conclusions: (1) If the financial position of the household sector is weak, especially the income growth, then what explains the strong growth in personal income tax receipts? (2) Even if HHNFS is at a four-decade low, HH total savings (including physical savings) was at a decent 18.4 per cent of GDP (see chart 2). There is, thus, a shift towards physical savings. Further, it seems to have increased in FY24. What is so concerning then?, and (3) So what, if household leverage is going up? At 38 per cent of GDP in FY23 (and an estimated 40 per cent as of December 2023), it is still among the lowest compared to other major nations in the world.

There is enough room to expand household debt in India. These counter-arguments and more will be addressed in ensuing articles.

The writer is Senior Group Vice President - Institutional Research - Economist, Motilal Oswal Financial Services Ltd

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