Households in southern states more indebted than rest of India: Report

Household indebtedness is higher in the southern states as compared to the other parts of the country, a report said on Tuesday.

Citing the All India Debt and Investment Survey (AIDIS) data from 2013-2019, domestic agency India Ratings said household indebtedness both in rural and urban areas was higher in southern states than rest of India.

In 2019, Telangana with 67.2 per cent had the highest proportion of its rural households indebted and Nagaland with 6.6 per cent had the lowest proportion of its rural households indebted.

Kerala with 47.8 per cent of urban households indebted had the highest incidence of indebtedness among the urban households and Meghalaya with 5.1 per cent the lowest, it said.

Among the major states, the lowest proportion of indebted households in rural areas were in Uttarakhand, and in urban areas in Chhattisgarh.

Per capita income in southern states was higher than other states of the country, yet a higher indebtedness in both rural and urban households in these states may appear counterintuitive.

“Ind-Ra believes that one of the ways to understand this dichotomy is to look into the average amount of household debt, the average value of household assets and the debt-asset ratio as quite often the quantum of debt is linked to the assets one holds and/or can pledge,” the report said.

Except for Kerala, although a higher incidence of indebtedness in both rural and urban households in southern states did not find a reflection in either a high average amount of debt per indebted household or a high average value of assets per rural household, these states had a high debt to asset ratio in 2019, according to the report.

Four southern states – Andhra Pradesh, Kerala, Tamil Nadu and Telangana – figured among the five states having the highest debt to asset ratio both for rural and urban households, while the fifth – Karnataka – has a debt to asset ratio higher than all India average both for rural and urban households.

“This indicates that not only a higher proportion of households in southern states are indebted, but they were also more leveraged,” it pointed out. Generally, higher leverage is often interpreted as a sign of financial vulnerability, but the rating agency said it believes the ability to take higher debt and service the same is also linked to the asset/income profile of the households and added that the per capita income is higher than the national average for all the southern states.

“It appears that the higher per capita income and higher per capita income growth in combination with higher financial penetration/ inclusion perhaps has resulted in the higher incidence of indebtedness as well as higher leverage among the households in these states,” it said.

Household indebtedness has aggravated lately due to the impact of the Covid-19 pandemic, it said, adding that RBI data is already indicating that the household debt to GDP ratio rose to 37.9 per cent in Q3FY21 from 33.8 per cent Q4FY20.

In the absence of income growth possibilities, a meaningful switch to discretionary spending from essentials only is unlikely to take place, the agency said, adding that the government will have to keep supporting the economy through spending.