Household Finances in India – The Hidden Fault Line before Union Budget 2026

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• With Union Budget 2026 approaching, India’s macroeconomic indicators project stability and strong relative 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 mode.
• The Indian households saving less and borrowing more, thereby absorbing economic risks earlier shared by the State.

Aggregates Presenting a Partial Picture

• Household debt: 41.3% of GDP (March 2025), lower than peers like China (60.1%), Malaysia (69.6%), Thailand (88%).
• Trajectory: Gradual rise from about 36% (mid-2021) to 41% (2025), indicating no traditional household debt crisis.
• Limitation: Debt-to-GDP ratios reveal how much debt exists, not why households are borrowing or their repayment capacity.

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Uneven Incomes, Stable Consumption

• RBI Annual Report (2024–25): It highlights uneven real income growth, especially outside formal and high-productivity sectors.
• Borrowing as an adjustment mechanism: Despite this, consumption remains resilient, implying households are adjusting via borrowing, not income growth or savings.

Credit as a Cushion, Not Capital

• Asset vs consumption credit: Borrowing is increasingly used to bridge income–expenditure gaps, not to create assets.
• Household vulnerability: Even moderate debt becomes risky when it substitutes for income growth and savings.

Stock vs Flow – Where the Stress Lies

• Balance sheet position:
  • Financial liabilities accounted for 41.3% of GDP (in March 2025), while gross household financial assets stood at 106.6% of GDP. 
  • There is no indication that liabilities have surpassed assets, and households continue to be net holders of financial wealth – meaning household finances remain sound.
• Flow data (critical insight):
  • Net financial savings fell to 3–4% of GDP, later rebounding to 7.6% (Q4, 2024–25).
  • Volatility is driven by faster growth of liabilities than assets.
  • Inference: Financial wealth may rise, but the shock-absorbing buffer is eroding.

Why are Households Borrowing More (The Fiscal Angle)

• At the State level (Quiet transfer of risk from State to households):
  • A Study of Budgets 2024–25 reveals that State governments have prioritised capital expenditure while limiting revenue expenditure.
  • Committed expenditures — interest payments, pensions, and salaries — now account for between 30 and 32% of State revenue receipts, leaving little space for income support or countercyclical transfers. 
  • States have actually become less responsive to household income stress while also becoming fiscally leaner.
• At the Union level:
  • The Budget 2025-26 shows a continued emphasis on public investment, with capital expenditure budgeted at ₹11.2 lakh crore and effective capital expenditure at ₹15.5 lakh crore. 
  • This strategy is growth-enhancing, but it is not household-neutral. 
  • Infrastructure investment raises medium-term potential, yet does little to smooth short-term income volatility.

A Macro Risk Hiding in Plain Sight

• Private consumption: Accounts for close to 60% of GDP, making household spending the economy’s primary stabiliser. 
• Three interacting trends:
  • Uneven income growth (RBI Annual Report).
  • Rapid expansion of unsecured retail credit despite improved borrower profiles.
  • Volatile and compressed net financial savings.
• Risk: Any shock—income slowdown, tighter financial conditions, unemployment—could force abrupt consumption retrenchment, destabilising growth.

Challenges and Policy Options for Budget 2026-27

• Challenges:
  • Rising household leverage: Especially among vulnerable groups.
  • Debt-financing: Consumption-led growth.
  • Reduced fiscal cushioning: At State and Union levels.
  • Declining household capacity: To absorb economic shocks.
• Policy options:
  • Enhance disposable incomes: Targeted income support, tax relief for middle and lower-income groups. 
  • Promote labour-intensive employment: To stabilise income flows.
  • Rebalance fiscal policy: Complement capital expenditure with selective revenue spending for income smoothing.
  • Strengthen household savings: Incentivise financial savings and reduce dependence on unsecured credit.
  • Align growth with resilience: Ensure that consumption growth is backed by incomes, not debt.

Conclusion

• India’s macroeconomic stability ahead of Union Budget 2026 masks a fragile household finance dynamic. 
• Growth sustained by debt-financed consumption is not self-sustaining. Restoring balance between income, savings, and borrowing must become a central fiscal priority. 
• Without strengthening household shock-absorbing capacity, India risks an economy where growth persists on the surface while resilience steadily weakens beneath.

Source: TH