The tendency to splurge while in possession of a credit card is something to worry about.
And not all because the conventional wisdom of not spending more than what one earns is forgotten in the era of the all-important EMIs; this splurging is what drives the growth of the economy.
While consumption is meant to drive the growth of the economy, the Reserve Bank of India is concerned about the sustainability of a consumption-led economy.
For one, it transpires that much of the consumption by households, meaning individuals, has increased, leading to growth. But the consumption has been not based on earnings, increased salaries and savings, but on borrowings from banks and other lending agencies. This apparently leads to a loan-led growth, and not growth based on actual incomes.
The RBI, in its annual report, points out that the GDP growth in India has been consumption-led, particularly in 2013-14 and 2016-17. “In such a phase of growth, consumption grows faster than GDP, either in nominal or real terms, so that the consumption-to-GDP ratio increases over time, or alternately real consumption growth exceeds real GDP growth," the reports says, suggesting high household indebtedness.
According to the central bank, such consumption-led growth can “arguably lead to a slackening of future growth if it entails growing imbalances due to limits to capacity creation and rising debt burdens, particularly for households”.
Worries over growth slackening had hitherto rested on the premise of low consumption or low demand, be it for goods consumed by households or capital goods.
This loan-led-consumption comes with the debt-servicing burden, which may affect future consumption adversely.
Private consumption significantly contributes more than half of India's GDP growth. By nature, it is not very volatile. Given the size of the Indian market—remember former RBI governor Raghuram Rajan's suggestion that it should be "make for India" rather than “make in India"—the central bank also believes private consumption "may be the inevitable means" of economic growth.
But in the short term, the RBI says, the negative impact of such loan-based, consumption driven growth was not statistically significant.
