Investment and Debt of Urban Indian Households
Indian Approach to Household Finance
Indian society is strongly rooted in prioritizing savings and “living within one’s means”. Consumerism is looked down as a negative trait. This thinking is reflected in many aspects of India including popular culture. For example, “Bhama Vijayam”, a Tamil movie from the 1960’s that revolves around the ills of excessive consumerism is still celebrated to this day. In fact, a popular song in the movie about household finances, is still much liked (வரவு எட்டணா செலவு பத்தணா). The song strongly resonates with most Tamil middle class households, across generations.
It talks about how harboring desires beyond one’s economic capacity would disrupt peace in the household (“நிலைமைக்கு மேலே நினைப்பு வந்தால் நிம்மதி இருக்காது”), and how such desires would end up resulting in a major loss to the family, where even what the family has is lost (“அளவுக்கு மேலே ஆசையும் வந்தால் உள்ளதும் நிலைக்காது”). It almost perfectly captures the Indian approach to household finances, which is to reduce consumption, increase savings, and avoid debt by all means.
The entire plot of the movie revolves around this theme of avoiding debt and improving savings. The movie is about a joint family, where a father and his three sons (along with their wives and children) live together. The father is a typical, financially conservative person, while his three sons (and their wives) aspire for a more luxurious life (like that of their neighbor). The sons (to impress their neighbor) start splurging on furniture, jewelry, and other expensive products — all on installments and credit. The story then goes on about how this spending splurge brings the family to its knees, and how the family is saved.
In one scene, shocked with the amount of spending, the father worriedly enquires one of his sons where they got the funds to support their spending spree. To this, the son replies, “Father, haven’t you heard of the term installment?”. The father then retorts saying, “Son, haven’t you heard of the term insolvent?”. This scene perhaps succinctly summarizes the Indian approach to household finances — to live within one’s income, avoid debt, and save as much as possible.
This thinking has probably been in the Indian psyche for millennia. The Tamil poet Avvayaar (probably from 1st century BCE) emphasizes how a person would lose all their dignity if they spend more than their earning. Further, she stresses how this shame would not just last this birth but will continue for seven births to come (“ஆன முதலில் அதிகம் செலவானால் மானம் அழிந்து மதிகெட்டுப் — போனதிசை எல்லார்க்கும் கள்ளனாய் ஏழ்பிறப்பும் தீயனாய் நல்லார்க்கும் பொல்லனாம் நாடு.”). This goes to show how avoiding debt and living within one’s means is almost engrained in Indian thinking.
It is therefore not surprising that India’s savings rate is substantially higher than that of the West (specifically when compared to the United States), as illustrated in the chart below.
It is evident that India is a more savings driven society than the US or Europe. This naturally raises several questions. Where do Indians invest their savings? How have the investment patterns changed over time? Have Indians become more accepting of debt? What are their sources for credit? What does it all mean from a policy perspective?
In this article, I attempt to answer these questions for urban India.
Investments of Urban Indian Households
As a first step, I analyze the average value of assets that urban Indian households own. The top five asset classes are Land, Buildings, Financial Assets (such as bank deposits, pension funds, and life insurance), Vehicles, and Ornaments (including bullion).
The chart below shows the average value of each asset class for urban households in 2002 and 2018, with a green arrow indicating the extent of increase and a red arrow indicating the extent of decrease. All the values are inflation adjusted, to ensure comparability.
It is evident from the chart, that the investment by urban households in Land and Buildings has significantly appreciated over time, while smaller but significant increases are seen among Financial Assets, Vehicles and Ornaments.
The Indian stereotype of investing in land, houses, fixed deposits, vehicles, and gold is quite strongly validated by the results. In fact, it has remained unchanged over time.
When looking at the asset composition on average, Land and Buildings account for 87% of the household assets. In specific, the share of Land investments has significantly increased between 2002 and 2018 (from 40% to about 50%). However, all other assets have decreased in share (with the notable exception of Mutual Funds which rose from 0.04% to 0.16%) .
The increasing prominence for Land investments is not too surprising. Land serves as a tangible investment, where the appreciation of the asset is easier to understand and track. With increasing densification of Indian towns and cities, it is also not surprising that Indian’s want to make the best use of the appreciation of land.
In the period between 2002 and 2018, anecdotally, there has been a massive increase in the number of advertisements for residential plots in televisions and other media outlets. For example, plots in and around a 100 kilometer radius of Chennai were marketed with the phrase “சென்னைக்கு மிக அருகில்” (roughly translates to “very close to Chennai”). This phrase is now used sarcastically in day to day interactions to make fun of misleading advertisements or statements.
While this is the overall picture, one wonders how different the urban rich’s portfolio looks like, when compared to that of the urban poor.
Investments of India’s Urban Rich vs. India’s Urban Poor
I first define the urban rich as those households in the top 25% of the per-capita household expenditure distribution. The top six asset classes for urban rich is the same as the overall average. The major difference is with the greater prominence of mutual funds among the rich (which is expected).
For the urban poor, ornaments play a more important role than financial assets, which is again as expected.
It is abundantly clear that the investment pattern has largely remained the same over the years — the key assets are Land, Buildings, Financial Assets, Vehicles, and Ornaments. The move away from physical assets and towards financial assets and instruments is still a long way away.
While the number of securities depository accounts (with NSDL) has grown from around 3.8 million in 2002 to 17 million in 2018, the amount of investment in non-physical assets is still quite small compared to physical assets (such as Land, Buildings, and Ornaments).
From a policy perspective, while there may be a need to ensure better awareness about financial assets and instruments, the preference for land/ornaments may not necessarily be bad, as these are more stable assets that do not need the extent of expertise required for investing in say the stock market or in debentures.
Indebtedness of Urban Indian Households
The flip side to investment is of course, debt. As emphasized in the beginning of this article, debt has always been seen as something to avoid among Indian households. This again shows in the data, India’s household debt as a share of GDP is around 35%, whereas it is around 78% for the US.
First, it would be helpful to understand the share of households that are indebted (called the incidence of indebtedness) and how it has changed over time. The share of indebted households (including those that have taken in-kind loans) has increased from 25% to 30% between 2002 and 2018.¹
It is indeed remarkable to see the extent of formal credit penetration. Only around 3% of households had bank loans in 2002, this has however increased to around 13% in 2018. This increase is alongside decreases in informal sources such as Money Lenders and Friends & Family.
Even in terms of value, the average value of bank loans has increased quite substantially.
This increased reliance on bank loans is specifically seen among the urban rich, as shown in the graph below, a jump in the share of debt from around 40% to 80%.
For the poor, Banks and Financial Corporations/Companies (including Non-Banking Financial Companies) have gained significant prominence, as seen in the figure below. It is important to note that banks have overtaken money lenders as the primary source of credit (by value) for the urban poor.
In terms of incidence of indebtedness among the poor households, the share of households taking bank loans has substantially increased from just 2% in 2002 to 8.5% in 2018 (see figure below). This is accompanied by decreases in incidence of money lenders (from 7.5% to 6%), and in-kind loans (11% to just 6%).
These findings point to the extent of formalization that has happened over the past years in the Indian household credit market. This is truly a welcome sign, and a strong testimony to the efforts of the government to formalize credit.²
Summary
Investment and Debt are two key aspects of household finances. Urban Indian households have focused primarily on investing in Land, Building, Financial Assets, Vehicles, and Ornaments. While the value invested in each has seen varied increase, these asset types remain among the most preferred by households. While mutual funds have seen an increase in prominence, investments in mutual funds are still substantially lower than that in the aforementioned asset classes. The preference for physical assets has largely prevailed between 2002 and 2018.
Unlike in the case of assets, there has been substantial change in terms of the sources of debt between 2002 and 2018. Bank loans have effectively risen to become the primary source of debt (even among the urban poor). Reliance on informal sources of credit has decreased across the board, indicating the increasing formalization of credit in India.
While, improving financial literacy and awareness of financial assets may boost investments in non-physical assets, physical assets such as land, buildings, and vehicles would remain to be prominent, as Indians aspire to improve their quality of living with the burgeoning economy.
On the other hand, credit formalization is a very welcome sign, and one that can significantly enhance livelihoods by providing an opportunity for Indian households to pursue their aspirations (be it education, entrepreneurship or standard of living).
Footnotes:
[1] It is important to note that the Ministry of Statistics and Programme Implementation does not include in-kind loans for incidence, however, I include it.
[2] See this website for more details on the government’s credit schemes.
Errata — 21 August 2023:
There was a minor error in the inflation correction, which has been rectified. None of the initial findings were changed.
