Is India's Growth Debt-Driven?

A "borrow-and-spend" cycle, if unchecked, risks creating a fragile economic foundation where growth is driven by debt rather than genuine income and savings

- SAUMITRA BHADURI SHUBHAM ANAND

INDIA, ONE OF the fastest-growing economies, stands at a crossroads. As it enters a new era of economic transformation, the country faces a delicate balancing act. Surging domestic consumption, falling savings, rising household debt, and widening inequality together paint a nuanced picture of the country's economic health. While growth is robust, the path ahead demands prudent policy calibration.

India's economic momentum is increasingly powered by its vast domestic market. Household spending surged by 12% in FY25, marking a departure from the historical average of 6.4%. Rural per capita spending outpaced that of urban India, hinting at broader economic participation.

This shift toward internal demand is highlighted by consumer spending's contribution to GDP, now at 61.4%. For comparison, the US, a consumption-driven economy, sees household spending at 68% of GDP. This trend suggests India may be realigning from its traditional investment-led growth model.

However, the rise in consumption coincides with declining savings and inefficient capital utilization. From the savings perspective, the rate has dropped to 30.7%, significantly lower than China's average of 40%. This decline is driven by lower interest rates and the lure of quick returns from equities. The ₹1.8 lakh crore lost by retail traders during FY22-24 in the derivatives market has further eroded household savings.