India claims it is back to being the fastest growing major economy. GDP growth projections (constant prices) for FY22 (9.2%) and FY23 (7.8%) may paint a rosy picture but ground realities reflect worsening of financial wellbeing of households and small businesses.

Sharp rise in gold loan auctions

One big indication of this is an extraordinary spike in gold auctions by non-banking gold loan companies like Muthoot Finance and Manappuram Finance in recent times as defaults in payment of interest and principal amounts mount. These companies have issued public notices to auction one lakh gold loans. An English daily had carried a four-page auction notice earlier in the month.

Auction of gold loans surged manifold in the quarter ended December 2021 due to rising defaults by customers who had pawned their gold jewellery to borrow money to restart their businesses after the first wave of the pandemic. Muthoot Finance auctioned gold worth ₹2,800 crore in this quarter (Q3 of FY22), as against ₹300-400 crore a year earlier – a 600% rise.

Typically, a gold loan company auctions gold pledged as collateral security for (a) failure to repay the principal and interests within the stipulated period (generally for a period of 12 months) or (b) before the expiry of the period if the lender perceives a probable loss on account of shortfall in the value of gold security due to price fluctuation or any other reason after giving a 14 days' notice – as the Muthoot Finance's "auction policy" states.

These gold loan companies mostly serve small borrowers – households, small businesses and traders. A rise in auction of such pledged gold indicates failure of these small borrowers to repay the loans in time due to worsening of their financial health of these borrowers. Indian households pledge family gold for loan only in dire circumstances.

That gold loans are on a dramatic rise in recent years is borne out by the RBI data too.

A comparative growth in bank credits during the decade of FY12 and FY21 shows that a robust growth in "personal loan" has kept the overall credit growth positive – more than credit growth to agriculture, services and industry. The average annual growth in credit during this decade has been the highest for personal loans at 15.3%, as against 6.3% for industry, 10.3% for agriculture and 11.6% for services.

Within the personal loan segment, it is the gold loans which are the driving force. For example, as per the RBI's monthly credit outgo statements, the average growth in Q3 of FY22 (year-on-year growth for each month) for gold loans was 48.9%. In comparison, the average growth in personal loan was 12.5%; for non-food 7.8% and for large industry 0.6%. These growth numbers mirror long term patterns.

What all these data mean is that as the economy has been slowing down even before the pandemic, which worsened it because of which more and more households and small businesses are taking loans by pledging their gold. According to a bullion trader, gold loans are normally 70% of the true value of gold jewellery pledged and auctions are triggered if two to three instalments (interest plus capital) are missed.

This further means households and small businesses are taking gold loans at a heavy cost while cheap loans made available by the RBI to industries go abegging.

Sharp fall in household physical assets

There is further evidence of impoverishment of households.

The revised estimates of national accounts released last month by the National Statistical Office (NSO) confirms that households are rapidly losing their physical assets and gold and silver ornaments.

The data shows, savings in household physical assets (land, house, farm equipment etc.) declined from 15.9% of the GDP in FY12 to 10.35% of the GDP in FY21. It did improve during FY16-FY19, reaching a peak of 12.2% (which is surprise given that demonetisation and GST caused massive job and business losses during this period) and then started declining again.

Savings in gold and silver ornaments (different from physical assets mentioned above) also fell sharply from 0.39% of the GDP in FY12 to 0.19% in FY21. This decline has been secular after FY15.

However, financial savings have risen during the past decade – from 7.4% of the GDP in FY12 to 11.6% in FY21. Since the overall household savings (both physical and financial assets) have fallen from 23.6% in FY12 to 22.2% in FY21, the rise in financial assets means liquidation of physical assets to run household affairs.

Some free-market economists call for "monetisation" of physical assets (farm land in particular) to improve the financial wellbeing of poor and boost economic growth. However, this betrays poor understanding of rural economy and the sustenance land provides (howsoever small) for survival and once the meagre sell proceeds are exhausted, households are left to beg – as has happened with a large number of people ousted because of mega development projects across the country.

No household expenditure survey yet

Per capita GDP is not the right measure for the financial health of households since it reflects the combined incomes of households as well as corporate and non-corporate business entities and governments (centre and states). The only true reflection is household consumption survey – a proxy for household income since India doesn't carry out income surveys like the US does, for example.

The last consumption expenditure of 2017-18 showed growing impoverishment of households. For the first time in 40 years, the survey said 'real' monthly per capita consumption expenditure (MPCE) fell from ₹1,501 in 2011-12 to ₹1,446 in 2017-18. This report was withheld and then junked for revealing the ugly truth.

No fresh survey has been carried out since then even the demonetisation and GST wiped out jobs and business (hence, income) overnight. Then the pandemic hit in several waves.

The NSO's India Debt & Investment Survey (AIDIS) report for 2018, released in September 2021, confirmed the impoverishment of households in the pre-pandemic period. It showed household debts grew sharply by 84% in rural and 42% in urban areas in six years during 2012-2018. An SBI research paper showed the pandemic increased household debts even more sharply. Its estimates showed a rise of 95.6% in household debts in rural and 94% in urban areas in 2021 over the 2018 AIDIS. The far more devastating second wave hit in April-May 2021 (FY22) which would further spike the household debts.

There is, therefore, an urgent need to find out the real state of household finances through fresh consumption expenditure surveys at regular intervals to address the challenges, instead of hiding behind superficial talk of high GDP growth and claims about being fastest growing major economy.

The first advance estimates for FY22 clearly shows that the GDP growth would translate into just 1.3% over that of FY20 (which means two years of GDP growth has practically been lost). But, consumption expenditure, the main growth engine contributing 55% to the GDP, would be 2.9% lower than that of FY20.

This means, consumption demand is nowhere close to even the FY20 level. Unless the financial health of households improves, the consumption demand is unlikely to grow and so would production of goods and services and fresh investments to boost growth.

gold loan auction

Rise of gold loan auctions ominous! Household finances in deep distress