India’s Household Balance Sheet Under Strain: The Silent Risk Before Union Budget 2026

Why in News?

As Union Budget 2026 approaches, India’s macroeconomic indicators project stability and relatively strong growth amid global uncertainty. However, a closer reading of RBI data (Financial Stability Report, Annual Report 2024–25) and recent Budget documents reveals a structural shift in India’s growth model — households are saving less and borrowing more, thereby absorbing risks earlier shared by the State.

Aggregates Presenting a Partial Picture

Headline indicators suggest stability:

• Household debt: 41.3% of GDP (March 2025), lower than peers such as:
  • China: 60.1%
  • Malaysia: 69.6%
  • Thailand: 88%
• Trajectory: A gradual rise from ~36% (mid-2021) to 41% (2025), indicating no conventional household debt crisis.

Limitation: Debt-to-GDP ratios reveal how much debt exists, not why households are borrowing, nor their capacity to service debt under income stress.

Uneven Incomes, Stable Consumption

According to the RBI Annual Report (2024–25):

• Real income growth has been uneven, especially outside formal, high-productivity sectors.
• Despite this, consumption has remained resilient, suggesting households are maintaining spending through borrowing rather than income growth or savings.

Inference: Consumption stability masks underlying income fragility.

Credit as a Cushion, Not Capital

• Shift in credit usage: Borrowing is increasingly used to bridge income–expenditure gaps, rather than to build productive assets.
• Household vulnerability: Even moderate debt becomes risky when it substitutes for:
  • Wage growth,
  • Stable employment,
  • Household savings.

Implication: Credit is acting as a shock absorber, not as a growth accelerator.

Stock vs Flow — Where the Stress Lies

Balance Sheet Position (Stock):

• Financial liabilities: 41.3% of GDP (March 2025)
• Gross household financial assets: 106.6% of GDP

Households remain net holders of financial wealth, indicating no immediate balance sheet insolvency.

Flow Dynamics (Critical Insight):

• Net financial savings: Fell to 3–4% of GDP, later rebounding to 7.6% in Q4, 2024–25.
• Volatility driver: Liabilities growing faster than assets.

Inference: Financial wealth may still rise, but the shock-absorbing buffer is thinning, weakening household resilience to future shocks.

Why Are Households Borrowing More? (The Fiscal Angle)

At the State Level — A Quiet Transfer of Risk:

• State Budgets 2024–25 show:
  • Priority to capital expenditure,
  • Compression of revenue expenditure.
• Committed expenditures (interest, pensions, salaries) account for 30–32% of State revenue receipts, limiting space for:
  • Income support,
  • Countercyclical transfers.

Result: States have become fiscally leaner but less responsive to household income stress, effectively shifting risk onto households.

At the Union Level:

• Union Budget 2025–26:
• Capital expenditure: ₹11.2 lakh crore,
• Effective capital expenditure: ₹15.5 lakh crore.

This strategy:

• Boosts medium-term growth potential,
• But does little to smooth short-term income volatility.

Conclusion: Growth-enhancing, but not household-neutral.

A Macro Risk Hiding in Plain Sight

• Private consumption: ~60% of GDP, making households the economy’s primary stabiliser.
• Three interacting trends:

1. Uneven income growth,
2. Rapid expansion of unsecured retail credit despite improved borrower profiles,
3. Volatile and compressed net financial savings.

Risk: Any shock — income slowdown, tighter financial conditions, unemployment — could trigger abrupt consumption retrenchment, destabilising growth.

Challenges and Policy Options for Budget 2026–27

Key Challenges:

• Rising household leverage, especially among vulnerable groups.
• Consumption-led growth increasingly debt-financed.
• Reduced fiscal cushioning at both State and Union levels.
• Declining household capacity to absorb economic shocks.

Policy Options:

1. Enhance disposable incomes:
   • Targeted income support,
   • Tax relief for middle and lower-income groups.
2. Promote labour-intensive employment:
   • Stabilise income flows and reduce informal sector vulnerability.
3. Rebalance fiscal policy:
   • Complement capital expenditure with selective revenue spending for income smoothing.
4. Strengthen household savings:
   • Incentivise financial savings,
   • Reduce dependence on unsecured credit.
5. Align growth with resilience:
   • Ensure consumption growth is backed by incomes, not debt.