Household borrowing is becoming an integral part of everyday consumption. Credit cards, personal loans, consumer durable loans, digital lending and buy-now-pay-later arrangements have expanded the possibilities of bringing future income into the present. The latest evidence points to a significant expansion of household leverage. According to the Reserve Bank of India (RBI), as of September 2025, India’s household debt stood at 45.5% of its gross domestic product (GDP). In June 2023, the debt had been around 42% of GDP. The household debt had stood at 39.2% in March 2021. While this remains relatively modest compared with several emerging market economies, the composition and pace of household borrowing deserve closer attention.

The household savings transition

The conventional Indian household financial model was built around savings. This model has been undergoing a transformation. Household net financial savings declined sharply from the exceptionally high levels witnessed during the COVID-19 pandemic, though recent data suggest some recovery. According to the government’s response in Parliament, household net financial savings increased to around 6% of GDP in 2024-25 from 5.2% in 2023-24. Thus, the story is not one of an across-the-board collapse of household savings. Housing loans traditionally represented a major component of household debt. Such borrowing creates an asset and can therefore be viewed differently from borrowing to finance routine consumption.

The rapid expansion of personal loans, credit-card borrowing and other unsecured loans raises a different set of questions. These loans enable households to smooth consumption when current income is inadequate, but they also bring future income under commitment. This is particularly important in an economy where employment remains highly unequal and income growth is uneven. A salaried household with predictable monthly earnings can service a loan relatively comfortably. A self-employed worker, informal-sector employee or casual worker faces a very different risk profile. The RBI has noted that consumption-oriented borrowing remains significant, although its growth has moderated, while borrowing for productive purposes has been increasing. This should be welcomed, but should not obscure the distributional dimension of household indebtedness.

The fundamental question is why households are borrowing. If borrowing increases because incomes are rising and households are investing in houses, education or productive assets, higher indebtedness need not necessarily be a source of concern. But if borrowing is required to finance food, health care, education, housing rents, durable goods or other routine expenditures because current incomes are inadequate, debt becomes a mechanism for postponing rather than resolving the income constraint.

Digital lending platforms, instant personal loans, app-based credit and online consumer finance have substantially reduced the transaction costs associated with borrowing. The boundary between what a household can afford and what it can borrow becomes blurred. At the macroeconomic level, consumption financed through credit can support aggregate demand. At the household level, however, the same process creates future repayment obligations. When households borrow to finance health care, education, housing or old-age needs, debt is effectively substituting for inadequate social protection. In this sense, household debt is not merely an outcome of individual financial choices. It is shaped by the institutional structure of the economy.

The macroeconomic implications

Household debt has implications beyond individual borrowers. In the short run, credit expansion can stimulate consumption and support economic growth. But excessive household leverage can eventually have the opposite effect. As debt-servicing obligations rise, households reduce discretionary expenditure. Consumption becomes increasingly sensitive to interest rates and employment conditions. The macroeconomic transmission mechanism is straightforward: Income stagnation, borrowing to sustain consumption, rising debt service, declining disposable income, weaker consumption, greater dependence on credit.

If this cycle becomes entrenched, credit ceases to be an instrument for productive investment and becomes a mechanism for sustaining consumption in the face of inadequate income growth. There is therefore a potential contradiction between credit-led consumption growth and income-led demand expansion.

The first can generate a temporary acceleration of demand. The second provides a more sustainable foundation. The policy response to rising household debt should not be simply to restrict lending. Credit is an essential component of economic development, and access to formal credit can substantially improve household welfare. The challenge is to distinguish productive credit from distress credit and asset-building borrowing from consumption smoothing under income pressure.

What the central issue is

India’s household debt story is therefore more complicated than the headline number suggests. The government has emphasised that India’s household leverage remains below that of many emerging-market peers and that household net financial savings have improved. But the central issue is not simply how much households owe. It is why they owe it, to whom they owe it, at what cost, and against what income.

The danger lies in confusing access to credit with improvement in economic welfare. The more unequal and uncertain incomes become, the greater the temptation to finance living standards through borrowing. The question before policymakers is therefore not merely how to regulate household debt, but how to build an economy in which households can live on their incomes rather than against their future incomes.

M. Suresh Babu is Director, Madras Institute of Development Studies, Chennai. The views expressed are personal