Private consumption forms the backbone of India's economy, accounting for more than 60% of its gross domestic product (GDP). In a country where the majority of the population is still climbing the income ladder, consumption is not just a reflection of purchasing power—it is also a driver of aspirations, investment, and broader economic momentum. As India's per capita income continues to rise, this trend is expected to strengthen further. However, a recent development has raised both hope and concern: the growing reliance on debt to finance current consumption among Indian households.

On the surface, this pivot towards credit-fueled consumption appears promising. It can provide an immediate boost to GDP, acting as a tailwind for economic growth. Easier access to credit allows households to spend more, which in turn stimulates demand for goods and services, encourages production, and creates jobs. In economies around the world, including India’s, retail credit has been a key enabler of middle-class expansion and economic dynamism.

But this optimistic narrative comes with a caveat. If the increase in household borrowing is not supported by a parallel and sustained rise in income levels, it can undermine the very foundation it seeks to strengthen. Borrowing to consume today must be repaid tomorrow, and if tomorrow's income does not keep pace, repayment can strain household finances, reduce savings, and eventually depress future consumption. This raises a serious question: is India’s growing household debt a sign of confidence in future income, or a symptom of stagnating incomes being masked by credit?

This is not a purely academic debate. In recent years, data from the Reserve Bank of India (RBI) and credit rating agencies have shown a sharp rise in unsecured loans, such as personal loans and credit card debt. While part of this can be attributed to financial inclusion and the rise of fintech platforms making credit more accessible, it also points to a behavioural shift—consuming now, paying later. For low- and middle-income households, this can often be a necessity rather than a choice, especially in the face of rising inflation and stagnating real wages.

The COVID-19 pandemic further complicated this picture. As incomes were hit and savings eroded, many households turned to credit to meet essential consumption needs. Although the economy has largely recovered, the financial scars remain for many families. Household balance sheets, which were once seen as relatively stable compared to those in more developed economies, are showing signs of vulnerability.

There’s also a structural concern. In economies like the US or Europe, credit expansion is often tied to well-developed safety nets, transparent credit systems, and robust income reporting mechanisms. In India, where a large section of the workforce is in the informal sector and lacks reliable income documentation, much of the borrowing happens based on expectations—often optimistic—about future earnings.

If these expectations do not materialise, it can lead to a dangerous cycle of over-indebtedness and defaults, with ripple effects for the broader financial system.

Policy responses need to be both cautious and creative. On one hand, it’s important not to stifle credit flow—consumption-led growth is still crucial for India’s economic journey. On the other hand, regulators and financial institutions must ensure that credit is extended responsibly. Strengthening credit assessment systems, promoting financial literacy, and discouraging predatory lending are essential steps.

Moreover, the focus must shift towards creating quality employment and raising income levels across the board. If income growth can keep pace with credit growth, then rising indebtedness is less a cause for alarm and more a sign of growing economic maturity. However, if income growth lags behind, the consequences may not only impact household welfare but could also jeopardise macroeconomic stability.

In conclusion, household indebtedness in India is a double-edged sword. It can be a catalyst for immediate economic growth but also a harbinger of long-term instability if not managed prudently. As India charts its path toward becoming a $5 trillion economy, understanding and addressing the nuances of household borrowing will be critical. Consumption must be fueled not just by credit, but by confidence backed by real, sustainable income growth.

(Author is Manager, Collaboration at MPower, an initiative of Aditya Birla Education Trust, Mumbai.)