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For a fast-growing economy like India, with an ever-growing middle class, per capita household wealth should be the yardstick, not per capita income
PCHW for India is a solid $15,000, as our household wealth stands at a whopping $20 trillion. (Representative image)
There is much debate about the fact that although India is the world’s fifth largest economy, its per capita income remains on the lower side. The question at hand is therefore whether this concern about per capita income (PCI) is justified or exaggerated. It is clear that it is exaggerated. For a fast-growing economy like India, with an ever-expanding middle class, per capita household wealth (PCHW) should be the yardstick, not PCI.
For example, the PCHW for India is a solid $15,000, as our household wealth stands at a whopping $20 trillion. It’s time for us to stop obsessing over our $2,800 per capita income. Also, for those who like comparisons, it is worth noting that each household in the United States has a debt of $247,000 and each American citizen is burdened with $107,000 in debt. America’s total debt stands at a dangerous $38 trillion and continues to grow.
In India, household debt as a share of nominal GDP was just 17.4 percent last year, and the year before that it was even lower, just 14.8 percent. In stark contrast, US household debt stood at 62.3 percent of the country’s nominal GDP in September 2024. Even using the debt-to-income (DTI) benchmark, the situation looks promising for India but very bleak for the US.
Generally speaking, a DTI ratio of 35 percent or less is considered favorable, as your debt is seen as manageable. You will likely have money left over after paying monthly bills. A DTI ratio of 36-49 percent is apparently sufficient but indicates room for improvement. But anything above 49 or 50 percent is undoubtedly cause for concern. On the other hand, a DTI ratio below 20 percent is considered excellent. And guess what? For most Indian households, the DTI ratio is less than 20 percent, while for most American households it exceeds 50 percent.
A lower DTI ratio indicates that you are not financially strained and are more likely to repay new debt. It can also improve your chances of getting a loan and help you get a lower interest rate. It is clear that looking at the per capita income (PCI) figure in isolation is not the right approach. A country like the US may have a very high PCI, but it may also have an equally high DTI, thus negating the potential benefits of a high PCI.
Let’s examine another measure – household debt in India as a percentage of personal disposable income (PDI). In FY23, this was just 48 percent or lower, compared to figures of 80-100 percent in the West and as much as 100 percent in China. Similarly, household debt as a share of real GDP was 38 percent in India, compared to 78 percent in the United States, 82 percent in the United Kingdom, 110 percent in Australia and 66 percent in China. These comparisons place India in a very favorable light relative to other global peers.
To put it bluntly, while India may have a lower per capita income (PCI), its citizens do not carry a significant debt burden, as the government has not borrowed recklessly. Therefore, odious comparisons – such as those between the US and India, or India and China – using PCI as a benchmark are deeply flawed. An average middle-class Indian taxpayer will, in most cases, have more purchasing power than an average American taxpayer, since the latter has minimal savings and a disproportionately high debt burden.
The Federal Reserve Bank of New York’s Center for Microeconomic Data found in its latest quarterly report that total household debt in the United States stands at a staggering $17.94 trillion, accompanied by elevated crime rates. Mortgage balances reached $12.59 trillion at the end of September 2024, while credit card balances stand at $1.17 trillion and auto loan balances at $1.64 trillion. Student loan balances now total $1.61 trillion. The overall delinquency rate in the United States has risen in recent years, with over 3.5 percent of outstanding debts in some stage of delinquency. Credit card delinquency, at 9.1 percent, is at its highest levels in recent memory.
When it comes to wealth or income inequality, every economy – from the US, China and Japan to France, Germany and Australia – suffers from what is commonly known as the Pareto Principle. According to this principle, over 80 percent of the wealth is owned by the top 20 percent of the population, while the bottom 80 percent owns less than 20 percent of the wealth. To single out India on this point is unfair. In fact, despite perceived inequalities, India’s scenario is significantly better than many other nations, thanks to initiatives like Direct Benefit Transfer (DBT). Under Prime Minister Narendra Modi’s landmark DBT scheme, over Rs 35 lakh crore has been directly credited to the bank accounts of the poor and needy.
The massive increase in India’s middle-class population, especially in the last ten years, is further proof of how the country’s aspirational class, with significant purchasing power, is redefining the very benchmark of affordability. To look at India’s low PCI figure alone and wrongly conclude that the average Indian is barely surviving is therefore completely false and steeped in ignorance. Economists are expected to look at multiple data points before making sweeping generalizations, if any. In terms of wealth, household financial assets include currency, deposits, equity and mutual funds, insurance funds and pension funds.
Interestingly, the share of equity and investment funds in household gross financial assets (HGFA) has increased over the past decade. This share is estimated to have risen to 28 percent in Q1 FY25, more than double that of about a decade ago. While the share of shares in HGFA is at an all-time high, it is important to note that the household sector’s share of India’s equity market has remained range-bound, fluctuating between 18 percent and 22 percent, according to a Morgan Stanley report. This essentially indicates that Indian households are still underinvested in equities.
Roughly, only 3 percent of India’s household balance sheet is allocated to equities, excluding founders’ shareholdings. This figure has the potential to grow exponentially into double digits in the coming years, further contributing to household wealth and India’s Per Capita Household Wealth (PCHW). Over the past ten years, the market capitalization of all companies listed in India has soared to an impressive $5.4 trillion, up from $1.2 trillion in March 2014, making it the fifth largest market globally. India’s share of global market capitalization rose to 4.3 percent by November 2024, up from a low of 1.6 percent in 2013, positioning the country as the second highest among emerging markets.
Gold has also been a significant wealth creator, contributing 22 percent of wealth added over the past decade. Household wealth has increased significantly from an oversized position in gold. According to a recent research report by Morgan Stanley, gold and equities have been the best performing asset classes in India over time.
Concerns about increasing household effects in India are completely unwarranted. Estimates suggest that the net financial wealth of Indian households as a percentage of GDP stood at 97 percent in March 2023, significantly higher than the pre-pandemic level of 85 percent, according to a research paper by RBI economists published in a recent RBI Bulletin. Similarly, a study by the Bank of Baroda (BoB) found that household wealth in India is increasing rapidly. While borrowing has also increased, growth in assets has far outstripped it. As a share of GDP, household wealth is now higher than pre-pandemic levels, BoB reported. This is partly attributed to a robust revival in both bank and non-bank lending to households, again shattering the false narrative of the likes of Rahul Gandhi, who falsely claim that banks only lend to large corporates.
Interestingly, the household leverage ratio – defined as the ratio of household debt to financial assets – has remained largely unchanged and range-bound since 2014. This is a positive sign, as it does not indicate any noticeable increase in Indian household indebtedness.
Taking this analysis further, listed brokerage firm Motilal Oswal points out that household NFW has not only reached 97 per cent of GDP but has risen to a record high of 115.9 per cent in the quarter ended June 2024 (Q1 FY25). According to a research report by the firm, household gross financial assets (HGFA) peaked at 157.9 percent of GDP in Q1 FY25, surpassing the previous high of 152.9 percent in Q4 FY21. Before the pandemic, household financial assets amounted to 123 percent of GDP. Meanwhile, household financial debt and liabilities have remained stable, fluctuating between 37 percent and 42 percent of GDP in Q1 FY25.
Coming back to per capita income (PCI), this is clearly an overrated metric and should never be viewed in isolation. For example, Luxembourg, with a population of just 7 lakh, has a per capita GDP of over USD 128,259, significantly higher than the US’s USD 82,715. But does this make Luxembourg a strong economy? Absolutely not. Luxembourg is primarily a tax haven for the rich and nothing more. The key metric to gauge India’s remarkable progress under PM Modi is per capita household wealth (PCHW), not PCI.
Morgan Stanley, for example, estimates that Indian households added $8.5 trillion in wealth over the past decade, about 11 percent of which came from stocks. Including founders, the wealth contributed by Indian households rises to an extraordinary $9.7 trillion over the same period. Moreover, over the past decade, the average middle class income in India has risen from just Rs 1.2 lakh to an impressive Rs 14.3 lakh per annum, marking an extraordinary increase of 1,092 percent.
So this argument that only big companies have benefited under the Modi government is completely false. Large companies contribute significantly to India’s GDP, employment, growth and infrastructure development. Demonizing law-abiding companies is neither fair nor constructive. That said, under Prime Minister Modi’s leadership, micro, small and medium enterprises (MSMEs), entrepreneurs and India’s ever-growing middle class have also reaped significant benefits.
Recent estimates suggest that India’s middle class makes up roughly 34 percent of the population, meaning that nearly a third of Indians are considered middle class. This segment is usually defined as those earning between Rs 5 lakh and Rs 30 lakh per annum. In addition, the middle class is expected to expand significantly over the coming decades, with projections suggesting it could comprise 63 percent of the population by 2047.
With its growing purchasing power, the Indian middle class is considered a crucial driver of the country’s economic growth. So an ever-growing household wealth, stable household debt, an increasing number of people joining the middle class every year and a massive increase in Per Capita Household Wealth (PCHW) clearly shows that the average Indian is much better off than they were 10 years ago. then. And things are only going to get better going forward, given the Modi government’s relentless commitment to structural reforms and welfare.
Sanju Verma is an economist, national spokesperson of the BJP and best-selling author of ‘Modi Gambit’. Opinions expressed in the paragraph above are personal and solely those of the author. They do not necessarily reflect the views of News18.
