Opinion | The PCI Obsession: Why It’s Time To Look Beyond Per Capita Income For India

In India, household debt as a percentage of nominal GDP was a mere 17.4 per cent last year, and the year before that, it was even lower at just 14.8 per cent. In sharp contrast, the USA’s household debt accounted for 62.3 per cent of the country’s nominal GDP in September 2024. Even when using the debt-to-income (DTI) benchmark, the situation looks promising for India but very bleak for the USA.

Generally, a DTI ratio of 35 per cent or less is considered favourable, as your debt is viewed as manageable. You are likely to have money remaining after paying monthly bills. A DTI ratio of 36–49 per cent is seemingly adequate but indicates room for improvement. However, anything above 49 or 50 per cent is undoubtedly a cause for concern. On the other hand, a DTI ratio below 20 per cent is considered excellent. And guess what? For most Indian households, the DTI ratio is less than 20 per cent, whereas for most American households, it exceeds 50 per cent.

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 loan approval and help you secure a lower interest rate. Clearly, looking at the per capita income (PCI) figure in isolation is not the correct approach. A country like the USA may have a very high PCI, but it may also have an equally high DTI, thereby nullifying the potential benefits of a high PCI.

Let us examine another metric—household debt in India as a percentage of personal disposable income (PDI). In FY23, this stood at just 48 per cent or lower, compared to figures of 80–100 per cent in the Western world, and as much as 100 per cent in China. Similarly, household debt as a percentage of real GDP was 38 per cent in India, compared to 78 per cent in the USA, 82 per cent in the UK, 110 per cent in Australia, and 66 per cent in China. These comparisons cast India in a very favourable light relative to other global peers.

To cut to the chase, 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 USA and India, or India and China—using PCI as a benchmark are deeply flawed. An average Indian middle-class taxpayer will, in most cases, have greater purchasing power than an average American taxpayer, as the latter has minimal savings and a disproportionately high debt burden.

The Federal Reserve Bank of New York’s Center for Microeconomic Data, in its latest quarterly report, stated that total household debt in the USA stands at a staggering $17.94 trillion, accompanied by elevated delinquency rates. Mortgage balances reached $12.59 trillion by 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. Aggregate delinquency rates in the USA have risen in recent years, with over 3.5 per cent of outstanding debt in some stage of delinquency. Credit card delinquency rates, at 9.1 per cent, are at their highest levels in recent times.

When it comes to wealth or income inequality, every economy—from the USA, China, and Japan to France, Germany, and Australia—suffers from what is widely known as Pareto’s principle. Under this principle, over 80 per cent of wealth is owned by the top 20 per cent of the population, while the bottom 80 per cent owns less than 20 per cent of the wealth. To single out India on this count 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 into the bank accounts of the poor and needy.

The massive rise in India’s middle-class population, particularly in the last ten years, is another testament to how the country’s aspirational class, with significant spending power, is redefining the very benchmark of affordability. Therefore, looking solely at India’s low PCI figure and erroneously concluding that the average Indian is barely surviving is entirely false and steeped in ignorance. Economists are expected to look at multiple data points before making sweeping generaliations, if any. Speaking of wealth, household financial assets include currency, deposits, equity and investment funds, insurance funds, and pension funds.

Interestingly, over the last decade, the share of equity and investment funds in household gross financial assets (HGFAs) has surged. This share is estimated to have risen to 28 per cent in Q1 FY25, more than double what it was approximately a decade ago. While the share of equities in HGFAs is at an all-time high, it is important to note that the household sector’s share in India’s equity market has remained range-bound, oscillating between 18 per cent and 22 per cent, according to a report by Morgan Stanley. This essentially indicates that Indian households are still under-invested in equities.

Broadly speaking, only 3 per cent of India’s household balance sheet is allocated to equities, excluding the equity holdings of founders. This figure has the potential to grow exponentially to double digits in the coming years, further contributing to household wealth and India’s per capita household wealth (PCHW). Over the last ten years, the market capitalisation 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 in global market capitalisation rose to 4.3 per cent in November 2024, up from a low of 1.6 per cent in 2013, positioning it as the second highest among emerging markets.

Gold has also been a significant wealth creator, contributing 22 per cent of the wealth added over the past decade. Household wealth has gained significantly from an outsized 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 rising household leverage in India are entirely unwarranted. Estimates indicate that the net financial wealth (NFW) of Indian households as a percentage of GDP stood at 97 per cent in March 2023, significantly higher than the pre-pandemic level of 85 per cent, according to a research paper by RBI economists published in a recent RBI Bulletin. Similarly, a study by Bank of Baroda (BoB) found that household wealth in India is increasing rapidly. While borrowing has also risen, the growth in assets has far outpaced it. As a percentage 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, which again busts the fake narrative by the likes of Rahul Gandhi, who falsely allege that banks only lend to big businesses.

Interestingly, the household leverage ratio—defined as the ratio of household debt to financial assets—has remained largely flat and range-bound since 2014. This is a positive sign, as it indicates no perceptible increase in the indebtedness of Indian households.

Taking this analysis further, noted brokerage firm Motilal Oswal highlights that the NFW of households has not only reached 97 per cent of GDP but has surged to an all-time 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 per cent of GDP in Q1 FY25, surpassing the previous high of 152.9 per cent recorded in Q4 FY21. Before the pandemic, household financial assets stood at 123 per cent of GDP. Meanwhile, household financial liabilities and debt have remained stable, fluctuating between 37 per cent and 42 per cent of GDP in Q1 FY25.

Coming back to per capita income (PCI), by itself this is clearly an overrated yardstick and should never be looked at in isolation. For example, Luxembourg, with a population of just 7 lakh, boasts a GDP per capita of over $128,259, significantly higher than the USA’s $82,715. However, does this make Luxembourg a strong economy? Certainly not. Luxembourg is primarily a tax haven for the wealthy and nothing more. The key metric to assess India’s remarkable progress under Prime Minister Modi is per capita household wealth (PCHW), not PCI.

For instance, Morgan Stanley estimates that Indian households added $8.5 trillion in wealth in the last decade, about 11 per cent of which came from equities. If one includes founders, the wealth added by Indian households climbs to an extraordinary $9.7 trillion over the same period. Furthermore, in the past decade, the average middle-class income in India has surged from just Rs 1.2 lakh to an impressive Rs 14.3 lakh per annum, marking an extraordinary increase of 1,092 per cent.

So this argument that only big businesses have benefitted under the Modi government is absolutely false. Big businesses contribute significantly to India’s GDP, employment, growth, and infrastructure development. Demonising law-abiding corporates is neither fair nor constructive. That said, under Prime Minister Modi’s leadership, micro, small, and medium enterprises (MSMEs), entrepreneurs, and India’s ever-expanding middle class have also reaped significant benefits.

Recent estimates suggest that India’s middle class comprises roughly 34 per cent of the population, meaning that nearly one-third of Indians are considered middle class. This segment is typically defined as those earning between Rs 5 lakh and Rs 30 lakh per annum. Moreover, the middle class is expected to expand significantly in the coming decades, with projections indicating it could encompass 63 per cent of the population by 2047.

With their growing purchasing power, the Indian middle class is considered a crucial driver of the country’s economic growth. So, an ever-expanding household wealth, stable household debt, increasing number of people joining the middle class each year, and massive rise in per capita household wealth (PCHW) clearly demonstrate that the average Indian is far better off than they were 10 years ago. And things will only get better going forward, given the Modi government’s relentless commitment to structural reforms and welfarism.

Sanju Verma is an Economist, National Spokesperson of the BJP and the Bestselling Author of ‘The Modi Gambit’. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.