Higher indebtedness and wealth effect have increased inequality: Report

NEW DELHI: Household (HH) debts have gone up due to increased financial inclusion amid increased wealth because of increased investments in real estate and equities according to a recent report 'India Strategy' by DAM Capital.

"Due to increasing financial penetration. 18.3 per cent of adults have some outstanding loan, rural male more likely to have debt. But, Wealth effect kicking in: HH's GFA totalled 158% of GDP in Q1FY25 vs. 124% at end-Dec-19, largely due to realty & equity investments." said the report.

The report says that higher indebtedness and wealth effect have increased inequality. The number of individuals with gross income of over Rs1cr has increased by 70 per cent in the last two years.

The Q2FY25 GDP came at 5.4 per cent against RBI's expectations of 6.5 per cent is also because of this.

However, in the medium term, the growth will come to the pre-Covid level of 6.5 per cent. "We expect medium term growth potential to 6.5%, at the pre-Covid rate, normalized from the post-Covid recovery 7-8% band".

Other components of the slowdown include GST implementation which has smashed the SME sector, almost 40 per cent of the workforce comes from it. This has negatively impacted the manufacturing capacity and led to employment losses.

But in 2025, the Industry is likely to improve with the revival of Capex and consumption. The revival is also likely to come from the expected easing of rates and improved agricultural produce because of better monsoon.

Rural households will benefit from food income and be protected by higher MSPs. The report expects RBI to ease regulatory tightening on unsecured lending & home loans by mid-2025 to revive consumption. The recent CRR cut and other measures by RBI will boost liquidity from Q4FY25.

Also, the recent populist measures like direct money transfers announced by many states like Maharashtra, Jharkhand, M.P., Karnataka etc will add to total spending of over Rs 2 trillion, which is equivalent to 0.7 per cent of the GDP.

These freebies programmes will benefit 34 per cent of women in these states and it will add to the average per capita rural as well as urban consumption.

Increased penetration of distribution, financialisation, digitalisation and convergence of wage growth are leading to reverse migration to rural areas.

In addition, better physical infrastructure is leading to enhanced rural mobility and a decline in rural poverty vs. urban poverty, which is narrowing the gap in consumption inequality.