The households in India remain well positioned to support 6.5 per cent growth over the next 3-5 years, a Morgan Stanley report said on Friday.

Current household debt level in India is manageable and household debt (core) remains at levels lower than other economies, the report emphasised, adding that even as it rises, it expects the trend to be manageable driven by income growth.

The recent rise in retail loans has led to concerns on rising indebtedness at the household level. This has led to the narrative of higher household leverage, lower net financial saving, and patchy income growth, increasing distress in the household balance sheet.

According to the report, the rise in retail loans has been the key driver of credit growth post the pandemic, leading to concerns of over-leverage.

“To assess household debt, we believe that core household debt – which is the sum of personal loans (only to households) and credit extended by nonbank sources only to households – is a better metric to track, while the RBI follows a wider definition for household debt that also includes unincorporated enterprises,” said Bani Gambhir and Upasana Chachra from the India Economics team.

“As such, our definition of household debt pegs it at 23.1 per cent of GDP in F2024, meaningfully lower than the RBI's estimate of 42.1 per cent of GDP,” they noted.

The downtrend in net financial savings only paints a partial picture mortgage-led leverage drove the increase in financial liabilities, but, at the same time, also brought about an increase in physical saving.

At the aggregate level, total household saving (financial and physical) remains range-bound at 18.1 per cent of GDP in FY2024, vs 19 per cent of GDP pre-pandemic.

“Looking at the trend in asset quality as a marker for household stress, we see that stressed assets in the personal loan segment rose only marginally,” the economists said.

The report expects household debt growth to continue to outpace nominal GDP growth as a reflection of improved credit penetration.

“The key to assess sustainability of the debt dynamics will be income growth, which, in our view, will sustain around nominal GDP growth,” the report noted.