India’s credit fuelled economic boom

It looked like everything was right as rain with the Indian economy until it wasn’t. The consumption growth that we have been singing praises of in India isn’t really an explosion that we wanted. 

India’s national income grew with compound annual growth of 12 percent per annum, driving a consumption driven economy around. 

Two other big factors responsible for this consumption drive economy is the triple growth in mobile telephony, in ready access to finance and road networks.

These networks drive consumption in any economy. This rise in networks contributed to demand for consumer goods, by more sales of phones, cars 2 wheelers and also flats.

But that was in 2012. And since then there hasn’t been  a big increase in either income or in But the consumption demand didn’t plummet. Even when the growth in national income plateaued, the consumption growth continued at 13.6%.

How why?

The consumption’s role in GDP increased from 56% i 2012 to 59% in2017

The employment growth slowed between FY 12 and 17 and employment numbers are showing that the bulk of the 440 million strong workforce is in low skill labor with no formal contracts. Govt. sector jobs sop up a large percentage of other jobs. This means the employment engine is stuttering to a halt.

The reason the growth didn’t plateau was because retail credit sustained the growth proving to be a necessary growth engine through and through.

India total back credit to gdp declined by 100 basis points. Because corporate credit demand slowed to a crawl and banks went to retail credit making houses and cars look attainable o EMIs.

NNow that we have that out of the way the second question is not a matter of if it’s a matter of when. How long will the credit boom last?

I don’t think it’s sustainable as long as there’s o real consumption growth.

This growth is going to be affected no matter how you see it.

There are a number of reasons to believe that consumption led growth will end because there’s no real investment supporting it ALso consumer confidence is at all time low. The household savings rate stands at 18 year low of 19% of gdp and the npa problem may swallow us alive.

India’s consumption boom has not been supported by investments

The evidence always points that consumption is only sustainable when there’s an equal amount of spending in investment that translates to a higher number of jobs. This peaks.

This fuels consumption as the credit boom taps out.

The inverse is true for the nation where consumption doesn’t mean an increase in investment. There has been a fall in investment to GDP.

Households’ savings ratio stands at an 18-year low

Indian households savings is going down and reached an 18 year low even as consumption gdp edged up.

Retail NPA problems have started to raise their head

Again retail NPAs are showing up. There are warning signs from microfinance institutions and housing finance companies. Such companies are’t able to meet their collecotions. One reason is demonetization.

They are showing sights of stress.

companies in the recent quarters.

This rise of consumption growth appears to be the result of the rise of retail credit. As corporate credit demand waned, banks and NBFCs aggressively pushed retail credit, resulting in India’s retail credit-to-GDP ratio rising from 13% in FY12 to 16% in FY17. Given that we expect employment growth to remain weak and given that cross-country evidence suggests that only consumption booms that are accompanied by an increase in investments tend to be sustainable, we highlight the high risk of a hard stop to India’s consumption boom materializing sooner than later.

People across spectrums in India differ from their younger counterparts in how they live. They live frugally to educate their sons and daughters and build houses.

Holidays are non-existent for this generation and they carefully take a loan to build houses that they pay off as soon as possible.

However millennials don’t do any of this. They work hard and spend the money faster than they earn.

Credit cards and expensive vacations are the norm for him.

Big ticket expenses are the daily part of life. The spend is more than the outlay from salaries often using emi based purchases to support the extravagance of lifestyle.

Most months the minimum is paid off while interest accrues on the remaining. The generation has forgotten how to save.

The financial habits are set to play spoilsport in a country where young save less and borrow more to live the lifestyle they want. Those credit card interest rates aren’t something they fully decipher.

This shift in attitude means an equal shift in lending habits. 

Borrowing is now online. People now have ready access to credit by filling up forms online they going to a branch. Fintech startups facilitate credit by making credit possible with peer to peer lending and chota packs.

Secured credit like home loans are declining. Personal loans and unsecured credit are on the rise. Its booming.

Economy as it moves from high to low savings marks a generation shift in thinking.

By 2018 millennials who took credit cards grew by 58% and at the same time the growth was 14% for non millennials.

Credit card penetration inn non metros is 4% while in metros is 12%

Banks too are catching on by making retail credit more than corporate borrowing.

One reason is the huge number of bad loans.

To remove the burden of risk, RBI advised against focusing so much on retail credit growth to people. THere are 2000 fintech startups and more digital lenders. 

Also the fact that we have aadhaar and other digital footprints means accessing someone’s identity is possible with a computer. The AI algorithms can also put a number behind someone’s credit risk as well.

Also cibil maintain credit scores and enable instant loans for many customers depending on their credit worthiness. In 2019 we saw the sharpest dip in number of new enquiries for homes and loans against property as well. Credit cards saw an uptick and then decline. Personal loans as well went down. The only uptick would be auto loans and unsecured loans.

Accounts for unsecured loans grew by 133%

There’s also a change in the size of loans that took a dip on personal loans and car loans with people opting for smaller ticket sizes.


The number of people seeking credit to fuel consumption is witnessing year on year growth with q3 seeing 22.8% growth, q3 2107 seeing 21.9% growing with 65.1 million customers and 2019 w3 seeing 17.6 growth taking the tally to over 95.5 million.


Credit is easy to avail. With that respect our country is becoming more like the U.S. 

This is facilitated by NNFBs, there are digital lenders and fintech startups. There are emis on Flipkart amazon and other such sites. These credit schemes and more help boost consumer demand and help the case of the customer.

Zero cost EMI is making consumption the default choice these days.

The zero cost emi expenses are absorbed as marketing expenses by the retailer.

The unsecured portfolio is growing. Even byju’s gives loans to customers to pay for products.

Startups like Cashe offer credit for a period of 2 months to as long as a year. They calculate risk worthiness as a function of their credit scores, digital footprint and details from social media. Most loans are between 20000 to 40000 and most customers between 24 to 34 years old

Lenders are getting customers who know nothing about credit and sometimes no credit scores. They use Ai to understand credit worthiness. With small loan amounts they supplement the profile to make decisions on whether they should extend more credit to these guys in the future. India historically maintained lower household debt which is now on the rise here.


11The credit cards with outstanding debt has growth from 17.6 million to 37.45 millon with a huge number of credit card takers as well.

Amazon has tied up with 25 banks to provide emis and 75% of large appliance shoppers use the option.

Zero cost emi helps them grow and that has helped them achieve double growth.

Flipkart pay later has a cardless credit offer for 1 lakh credit to shop for big ticket items.

This makes payments easy and they are using it to reach out to tier 2 cities.

EMIs also split the cost of big vacations sending customer spends to double.

Macro Ripples

The retail credit growth means structural shifts in economy. The access to credit and inclusion is going up. Consumer demand remains weak and these are just a few of the ways demand is picking up. Domestic savings are on the decline.

The rising debt is lowering the savings rate is something we aped from the west. Household debt is the highest we have seen in India so far. But in western world it’s way higher. Inn china is 54% of gdp and for US 76% gdp.

Household credit is risen for the household. 

Lending in India generally was on the back of some collateral. But now that is changing to unsecured credit with fintech startups.

That also means there’s the risk of such loans going bad as well.

Retail credit will continue and there are more than 230 million credit eligible customers in India who we could reach out to. There are 50 million credit cards with just 37 million customers.

The millennial 25 to 30 group is rpe for targeting. Fintech firms gae out 40% of personal loans in India.

That doesn’t mean the transition is going to be easy

The biggest issue might be that people don’t really understand what it is they’re being sitting ducks for. There are many deals, easy access to credit cards and cards dripping with tons of deals and benefits

To get these cards without fully comprehending the risks is suicidal.

People who used to borrow from each other are getting cards with 1.5 lakh limit. They have money that isn’t really theirs to spend. That means there can be a spending spree with that amount. If you pay the minimum the 40% interest keeps ballooning the principal. You will get by but won’t be ever free. Always stressed.

Credit cards means more purchasing power with more cards. Impulsive shopping expensive, birthday parties and big led tvs are some of those purchases I’m talking about.

Some go to the extent of borrowing cash with the credit card to pay off home loan emis or other purchases. That attracts more interest.

This gets you into adet trapt. The best thing to do will be to use a debit card to level up the purchase.

There are also payday loans for ultra short duration offered within 60 minutes. The annual credit interest comes to a 365% interest rate. This is something that’s cut throat and can make you go dry.

The evil there are payday loans are restricted in the US and CHina. But without financial knowledge these loans are doled out like cake.The problem is science there’s so little awareness around this nobody talks about these things. This all adds fuel to the fire leading the charge for the credit backed consumption stores There are things like layoffs as covid taught as as well as health emergencies.

When this happens there’s no social security high network to cushion the impact of the credit. This creates challenges for consumers and limits how much credit can grow. Indians are at the mercy of support from friends and family and there’s little social security net to draw on. Debt fuelled life means that low economic growth and absorbing shocks is limited and can drive you down

Cret is bringing transparency and offers attractive offers and payment dues.

Retail price inflation is going high and is near the dix year high of 7.3%.

This has led to worries that this retail inflation like rise in price of onions can prove detrimental to people.

There’s risk for stagnation

What is stagflation?

The scenario when high inflation doesn’t always mean high growth. It’s the combined plaguage of high inflation and low growth.

With the economy facing covent quarters of low growth the growth will remain low.

since 2018. Economic growth in the second quarter ending September, the The slowdown was first blamed to be the culprit for no takers and was called to be the prime reason for low price inflation.

This led RBI to cut interest rates to boost demand.

With the hope that these interest rate cuts would bring back demand n the economy.

The growth in the economy however didn’t lift its head. Growth rate continued on its downward spiral. Another leading factor was the rise in prices coupled with low growth.

This makes the odds of stagflation quite high. 

The traditional view says that economic growth and inflation and inversely related.

The statistical studies around inflation and unemployment all point out to this.

This has gained a lot of acceptance. The inverse relationship between lower number of jobs coupled with high inflation are markers of the larger trend.

In the short term inflation makes it appear that the wages are real wages and help people accept lower pay.

Low inflation would mean people are unwilling to accept low paying jobs and that would generally translate to a higher rate of unemployment.

There’s also the fact that beyond a point if inflation is high, that means labor is fully employed and that would mean employment is at full killing growth opportunities.

Certain inflation is essential to keep the growth engines on and running.

Why is stagflation a problem?

There’s no real demand in the economy to prop it up and that’s one big reason for the drooping growth. Greater spending is needed to put life back in.

That’s why there’s much hope on government spending to make this possible.

Now if there’s more money in the economy by dropping interest rates further that means inflation would spike up again. This would result in more problems..

No govt. Wants a stagflation economy because that means job loss and people losing the ability to afford basic things along with reduction in standard of living as well.

Is there a solution?

The economy seems to be in a quandary with nothing much to do to lift demand. There are things to do to recover from this. As such there needs to be a shift from thinking in the way we are thinking to boost demand and prop up the economy and gdp

The gdp growth is at a 75 year low and the inflation goal is keeping the economy from leaping forward. The spending should be done in a way to boost the infrastructure as well.

Economists are also raising fears that inflation on a broader level should remain within RBI’s stipulated limit.s Inflation being a key election winner.

For December core inflation remained at 3.7%.

The spending by govt. Will not cause other problems. This big spending approach even at the cost of a large fiscal deficit can save the economy.

Monetary easing has led to higher prices without really contributing to higher growth rates.

Getting more liquidity that means would increase inflation which isn’t something we want.

The drop in customer demand needs to be seen as the causative factor driving the slowdown rather than it being seen as one of the many symptoms.

A credit fueled boom’s end cycle is replete with declining growth in economy. It is to be said that easy availability of credit was the prime reason behind boosting this growth.

Central bank and debt laden govt spending if cyclic will not provide the required boost to the economy that’s essential to lift its dire straits.

There aneed to be major reforms on the supply side to make this happen.

Stimulus boosts the economy only in the short term.

The reason for the credit fuelled boom and near short term collapse is because of companies like ILFS.

ILFS collapse was the proverbial match to the tinderbox. ANd partly because the tinderbox had grown so large owing to what IL&FS did.

ILFS collapsed in September 2018. The reason why it created the splash it did was because they had over 90000 crores in debt. Its failure sent shocks through the system.

It also showed how weak the financial system was exposing underlying faultlines.

Markets discovered life changing mistakes.

A lot of the NBFC lending was concentrated on one particular sector—real estate.

Starting 2000s when incomes were going up developers marketed new housing projects for these high earners in the hopes that this new money will find a way to real estate.

After 2008 when recession struck and the housing bubble evaporated elsewhere the same happened in India. Infrastructure projects launched with great gusto had no takers.

The big problem was the level and number of unsold houses. Unsold inventory in top 8 cities was over 10 lajsy by June 219. ANnual sales plummeted at 2 lakh. That means 8 lakh crore of unsold inventory.

This incremental lending and due to non banking financial institutions hacked by ilfs amounted to half of 5 lakh crore o real estate loans.

All the funding relied on a single assumption. These victories would be sold off and rpeia.d

It wasn’t to be. 

To stop the bleeding banks began lending funds to good run NBFX and indirectly to badly run onnes by buying of the assets they held. Some worked but mostly bfcs were caught in a funding squeeze stopping them from making loans.

This meant the construction boom that relied on loans for everything from home to bikes and cars ended up dry.

Similar to the US bubble the funding squeeze had many versions of how it played out.

There was a rapid increase in financing that propped up artificial values even more.

Banks were even more stressed as this bubble let the air out in 2019

They were in bad from the bad loans and the second problems of real estate and nbfc lending made this even worse of.

The recapitalization of state banks protected them. But there was also additional stress. All of this meant credit expansion would slow down. That’s what happened. They lended less and the credit expansion slowed to 7 percent instead of 1 percent.

These loans peaked to 20lkah crore inn 19 and became nothing in six short month.s

This is what led the economy to a downward spiral. High rates on credit and little to no credit are making things bad from worse. It’s increasing the struggle in industries and fending on spending which forces financial sectors to become more and more wary of what they are doing.