India’s central government is facing growing criticism for failing to acknowledge or adequately respond to the country’s escalating middle-class debt crisis, which economists warn is undermining consumer demand and threatening the nation’s broader economic growth.
The crisis is particularly visible among urban, salaried workers who make up India’s aspirational middle class. A Financial Times investigation published this week found that unsecured borrowing among these households has surged dramatically in recent years, with many individuals now struggling to repay multiple loans. The average middle-income borrower, according to debt resolution firms, carries upwards of six loans with repayments consuming more than 30 percent of their income.
Anurag, a former travel agent from Mumbai, described the intense psychological toll of being caught in the debt trap after losing his job in 2023. He said repeated calls and visits from debt collectors, including to his wife’s workplace, left his family humiliated and socially ostracized. “This financial struggle has caused a lot of depression that I won’t discuss with anybody,” he told the Financial Times.
The report comes amid growing alarm from financial analysts and policy experts who say the boom in easy credit, accelerated by digital lending apps, limited financial oversight and aggressive marketing, has exposed deep economic fragilities. Retail lending grew more than 30 percent in 2023, and India’s household debt as a percentage of GDP has climbed from just over 35 percent in March 2020 to 43 percent by mid-2023.
Despite these warning signs, critics argue that Prime Minister Narendra Modi’s administration has done little to address the root causes or mitigate the fallout. “There’s no recognition that there is a crisis,” said Anirban Bhattacharya of the Centre for Financial Accountability in New Delhi, which is conducting a study on household debt distress. “This is a time bomb ticking away.”
The central government’s silence stands in contrast to regional responses. Karnataka, a southern state governed by the opposition Congress party, recently passed legislation to curb aggressive and coercive debt collection practices. “Their ability to service the debt is not there,” said state revenue minister Krishna Byre Gowda. “This is leading to unsustainable debt.” He criticized the Modi government for “keeping very quiet on this,” suggesting a broader unwillingness to confront economic pressures faced by India’s lower- and middle-income groups.
While Finance Minister Nirmala Sitharaman announced tax relief measures in February aimed at easing financial pressure on middle-class families, many analysts view the move as a delayed and limited response. “The measures acknowledge the stress,” said Société Générale economist Kunal Kundu, “but they fall short of offering a structural solution.”
The Reserve Bank of India has taken some regulatory steps, including raising the risk weight on unsecured personal loans in late 2023 to slow the lending spree. But observers say these interventions came after the damage was already done. Late payments on personal loans more than 90 days overdue rose to 5.2 percent by September 2024, up from 2 percent in 2019. Delinquency rates among microfinance borrowers, who often have little or no collateral, have soared to 13 percent.
Many of these loans were offered by non-banking financial companies and microfinance institutions with minimal oversight. In some cases, borrowers reported receiving up to 20 different top-up loans from over a dozen lenders. With official avenues exhausted, many are now turning to debt settlement agencies to negotiate with banks and fend off harassment from collectors.
Ritesh Srivastava, CEO of Freed, a debt resolution firm, said loan stacking has become a common coping mechanism for middle-class families with stagnant incomes and rising expenses. “They are robbing Peter to pay Paul,” he said.
India’s household savings as a percentage of GDP have dropped to their lowest point in five decades, while food inflation and education costs continue to rise. Economists warn that falling consumption among this economically vital segment could drag on the country’s growth ambitions. GDP expansion slowed to 6.5 percent in the fiscal year ending in March, well below the 8 percent benchmark that experts say is needed for India to achieve developed status by 2047.
“Only a small part of the population is driving growth,” said Kundu. “The divide has widened through the last few years. That is a huge obstacle to realizing the 2047 dreams.”
Despite the central bank’s claim that recent credit curbs are having the intended effect, many in the financial sector believe the worst of the crisis has not yet been addressed. Loan recovery practices remain aggressive, and there is little policy momentum toward enacting consumer protections or systemic debt relief.
“There seems to be no active solution on the table,” said Harish Parmar, founder of SingleDebt, a firm that helps indebted borrowers manage collection pressure. “Whatever little respect I had, they ruined that,” said one of his clients, a former salesman who lost his job during the pandemic and now owes more than double his annual household income.
As India continues to tout its growth story to global investors, the silence from the central government on this debt crisis raises questions about the inclusiveness and sustainability of that narrative. Without meaningful intervention, experts warn that the growing financial strain on India’s middle class could erode both economic stability and social cohesion.