Editor,
Apropos of the editorial “Calm before the ‘storm’” (ST December 11 2024) the current economic situation in India is indeed complex. While the country has shown resilience and growth, there are concerns about slowing GDP growth, high inflation, and rising unemployment. The recent GDP growth rate of 5.4% for the July-September quarter is the lowest in nearly two years. Additionally, inflation remains a significant issue, with food prices contributing to the overall rise. Critics argue that the Modi government’s economic policies have created a cycle of low growth, high unemployment, and rising prices. However, the government continues to emphasize its efforts to boost economic growth through infrastructure development, social welfare programs, and fiscal discipline. Whether this period is a calm before the storm or a phase of stabilization will depend on how effectively the government addresses these economic challenges and implements policies to sustain growth and improve the well-being of its citizens.
The economic downturn and persistent inflation in India have significantly impacted the financial behaviour of its population. According to the 2024 BankBazaar Aspiration Index report, there has been a sharp increase in the number of Indians relying on loans to cover basic needs and expenses. The report indicates that only 13.4% of respondents reported having no open credit, down from 19% in 2022. Rising living costs and stagnant incomes have forced more people to use credit for daily needs, from groceries to transport. The proportion of people borrowing for day-to-day expenses has increased, driven by stagnant incomes in an inflationary environment. This trend suggests that borrowing is up even for routine expenses, reflecting the financial strain on households. The inflation rate in India has also been a contributing factor, with the consumer price index (CPI) inflation rising to 6.21% in October 2024. This increase in inflation has further strained household budgets, leading to a greater reliance on loans.
It is true that a significant portion of Indian families rely on personal loans. According to a survey conducted by Saral Credit, 67% of respondents in India have taken a personal loan (As the editorial reflected) at some point in their lives to meet their financial requirements. This trend reflects the increasing importance of creditworthiness and the growing reliance on loans for various needs, including home purchases, renovations, and even travel. The increasing reliance on personal loans among Indian families, with 67% carrying the burden of such loans, has significant implications for financial well-being. A few key points to consider: High levels of personal debt can lead to financial stress, affecting mental health and overall quality of life. Families may struggle to meet their financial obligations, leading to anxiety and stress. Relying on loans for basic needs and expenses makes families more vulnerable to economic downturns and inflation. Any changes in interest rates or economic conditions can exacerbate their financial difficulties. High debt levels can reduce the ability to save for future needs, such as education, healthcare, and retirement. This can have long-term implications for financial security and stability. The trend of borrowing for day-to-day expenses reflects changes in consumer behaviour, where credit is increasingly used to maintain living standards. This shift can have broader economic implications, influencing spending patterns and economic growth. Overall, while personal loans can provide short-term relief, the long-term impact on financial well-being needs careful consideration. It’s essential for individuals and policymakers to address the underlying economic challenges and promote financial literacy to manage debt effectively.
The editorial is correct that there has been a significant shift in the composition of bank credit in India over the past decade. The share of loans to industries by banks has decreased from 42% a decade ago to just 22%. This decline is largely due to the increasing prominence of personal loans or retail credit, which has grown steadily and now constitutes a significant portion of total bank credit. The shift towards personal loans reflects changes in consumer behaviour and the banking sector’s focus on retail lending. This trend has implications for the overall credit allocation in the economy and highlights the need for adjustments in regulatory and policy approaches to ensure sustained economic growth and financial stability.
The two terms of Prime Minister Narendra Modi have seen both financial stability and economic growth. During his tenure, India has experienced significant economic reforms, infrastructure development, and social welfare initiatives. Economic Growth: India’s GDP per capita has increased significantly, with a notable rise from approximately $5,000 in 2014 to over $7,000 by 2022. The economy has shown resilience and growth, even surpassing China’s projected growth rate in recent years. Fiscal Discipline: The Modi government has maintained prudent fiscal management, with the fiscal deficit for 2024-25 estimated at 5.1% of GDP and a target of 4.5% by 2026. Social Welfare: Initiatives like the Aadhaar system and direct benefit transfers have improved the efficiency of subsidy delivery and reduced leakage, ensuring that benefits reach the intended recipients. Infrastructure Development: Extensive infrastructure projects, including rural road construction, have improved connectivity and stimulated economic activity in rural areas.
Overall, Modi’s tenure has been marked by efforts to balance financial stability with economic growth, addressing various aspects of inclusivity through structural reforms and development programs. However, there are two key issues that have to be addressed urgently: inflation and unemployment. More than five months into Modi 3.0, a third challenge has surfaced and that is the slowing economic growth which is threatening to worsen the unemployment crisis. Another cause for concern is the slowdown in consumption, particularly in urban areas. High prices of goods and stagnant wages and salaries have led to decline in urban consumption, which has been a major contributor to growth for years.
An economic slowdown in the developed world, coupled with the crisis in the Red Sea has impacted India’s merchandise exports due to the Iran-backed Houthi rebels disrupting trade. India exported petroleum products worth $31.8 billion (Rs 2.7 lakh crore) in April-August this year, down from $35.3 billion (Rs 3 lakh crore) in the same period last year. Economist Ashima Goyal, a former member of the RBI’s Monetary Policy Committee argued that there is indeed room for the central bank to cut interest rates to boost growth. This now depends on the new governor of the RBI, Sanjay Malhotra, whose views on growth, inflation and the rupee are not known to us.
Yours etc;
VK Lyngdoh,
Via email
