A recent report by the RBI-promoted Centre for Advanced Financial Research and Learning (CAFRAL) studied the correlation between consumption expenditure and credit growth. With banks and non-banking financial companies (NBFCs) pushing retail credit, individuals have been taking on loans like never before. Mint takes a look at the CAFRAL report and what it says about consumption.

How has household consumption fared?

The report said household consumption expenditure increased from ₹49 trillion in 2012 to about ₹143 trillion in 2022, or about 6% year-on-year (yoy) since FY14 except for the pandemic period of FY19 to FY 2021. Despite a changing growth rate over the years, the share of consumption expenditure in GDP rose from 56.5% in FY12 to 60.9% in FY22. Even during the covid years, it remained stable at 60% and above.

Why is credit so important to Indian households?

Like those in other developing nations, Indian households need to borrow to consume. The CAFRAL study said limited access to alternative sources of funds to cover unanticipated spends also increased the demand for credit. It said that since credit acts as a buffer against unexpected expenses, measuring the consumption response of households to loans would help understand how lending affects financial inclusion.

How are consumption and credit related?

The report combined data on loans from credit bureau TransUnion Cibil with household consumption expenditure data from the Consumer Pyramids Households Survey (CPHS) of the Centre for Monitoring Indian Economy (CMIE). 

Consumption expenditure refers to total expenditure, excluding equated monthly installments (EMIs). The report, which had monthly numbers for both sets of data at the district level, found a positive correlation between the growth of credit and consumption spending. 

It found a somewhat stable long-term relationship between credit and consumption growth based on their compound annual growth rates (CAGR) between May 2015 and May 2022. According to the report, the CAGR of total retail credit was 15.4%, and the median CAGR of household consumption expenditure during the same period was 5.2%. Therefore, while there was a positive correlation between the two variables, it was less than 1, meaning that a percentage-point increase in credit is associated with less than a percentage-point increase in consumption expenditure.

Is the correlation valid for bank credit as well as loans from non-banks?

Cafral said in the report that there is a stronger relationship between bank-credit growth and consumption expenditure growth than between NBFC credit growth and consumption expenditure. However, shocks to NBFC credit supply produce a stronger consumption response compared to bank credit. This, it said, was because NBFCs lend more to distressed or risky borrowers than banks do.