This follows an increase in 2025-26 to ₹12 lakh per annum—almost five times our national per capita income—in the limit above which personal income tax is due, as stated in the Union budget. Are these fiscal policies, along with lower policy rates of interest, sufficient to revive consumer spending growth on a sustainable basis?

These measures could support faster GDP growth in the near term. However, fundamental concerns over household finances will likely return after a few quarters, restricting consumption and thereby also GDP growth.

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The share of private final consumption expenditure (PFCE) increased to a two-decade high of 61.4% of GDP in 2024-25 from its nadir of 54.7% in 2010-11, the first such increase since the 1970s. Notably, Indian households are large investors as well, with their investments making up 12-13% of GDP. Household spending (consumption plus investment), thus, accounts for about three-fourths of India's GDP, the highest among the world's major economies (the US proportion is 72% and China's 55%).

This is why a strong financial position of India's household sector is a necessary (but not sufficient) condition for real GDP to grow at 8% or more on a sustainable basis.

In CLSA's recently published report on this subject, we discuss historical data and trends in personal disposable income (PDI) and income tax payments, as well as long-range trends in the spending, savings, debt and financial net worth of households. Our conclusion: household finances have weakened over the past decade or so. A combination of higher expenditure growth vis-à-visPDI growth, lower savings, higher debt and rising tax burdens have constrained their ability to keep their spending momentum going.

For the first time in Independent India's history, household spending growth outpaced PDI growth in the 2010s decade. This has continued in the post-pandemic period. The widening gap between spending and income growth was supported by saving withdrawals (savings plummeted to a 27-year low of an estimated 22.8% of PDI in 2024-25) and a surge in leverage (to an all-time high of 55% of PDI in 2024-25).

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Nevertheless, this fall in household savings was largely offset by record-high corporate savings and a contained fiscal deficit, limiting the fall in India's gross domestic savings (GDS). Between 2009-10 and 2024-25, household savings as a proportion of GDP declined by 7.3 percentage points, while corporate savings increased by 3.1 percentage points and the government's dis-saving was down by 2.1 percentage points.

Consequently, GDS fell by only 2.1 percentage points during the past 15 years. While household savings are important, GDS matters from the perspective of funding national investments (or the current account deficit).

Notwithstanding one of the lowest debt-to-income ratios overall, the unfavourable composition of debt leads to a much higher debt-service burden for Indian households. Mortgages account for only about a quarter of total household debt, which means that non-mortgage household debt in India was 32% of GDP in 2024-25, higher than in the US (21.8%), China (22.7%) and the UK (18.1%).

Non-mortgage personal loans (secured and unsecured consumption-based loans) have increased at the fastest pace, now accounting for about a third of total household debt, up from 28.7% in 2020-21.

Given their shorter tenures and higher interest rates, we estimate that a typical borrower spent 13% of the household's annual income on debt- related obligations (principal plus interest) in 2024-25, compared to 8-9% in the US, China and the UK, and higher than most other countries with elevated debt-to-income levels. In fact, it has risen from the 10-11% level of the pre-pandemic years. This burden constrains the ability of Indian households to expand their spending robustly.

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Our calculations also suggest that the financial net worth (FNW)—the difference between gross financial assets and debt—of India's household sector has improved remarkably to 109% of GDP in 2024-25 from 85-90% in the pre-pandemic years. However, an equity market boom accounted for almost the entire rise in FNW, led by a surge in stock market capitalization (to 126% of GDP from 75-80%) and increase in the exposure of households (which held 32.5% of the equity market capitalization in 2024-25, up from 28-29% in 2018-19).

Excluding equity and investment funds, we estimate household FNW at 67.8% of GDP in 2024-25vis-à-vis 67.5% in 2019-20. This means that a large majority of households did not experience any wealth accumulation (or destruction). It also explains the pick-up in household investment growth in the post-pandemic period—in contrast with weaker consumption growth.

Overall, household finances have deteriorated and this has hamstrung household spending. As income growth trails consumption growth, a drawdown in savings and rising unsecured debt are like twin arrows striking an Achilles' Heel. Despite a low debt-to-income ratio, households' debt-service burden has been mounting, along with a rise in their tax burden.

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Indian policymakers have noted this situation and are acting accordingly, but the deterioration stems from several factors that have emerged over time. The road to recovery, thus, will also be long and steep.

In conclusion, therefore, we expect India's real annual GDP growth to stay around 6%, with risks on the downside, over the next few years. As household finances slowly get repaired, which could happen through a reversal of the adverse gap between spending and income growth, and the government completes its fiscal consolidation, corporate sector investment confidence will rise, pushing real GDP growth higher after a few years.

The author is India economist and executive director, CLSA India Pvt Ltd, and author of 'The Eight Per Cent Solution'.