Has debt decoupled from development in India? | Number Theory

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A sustained revival of private investment is one of the biggest questions haunting economic growth in India. Even senior government functionaries have spoken about the issue now. What is the root of this problem? It could be explained if financial conditions in the Indian economy were too tight, thereby depriving demand of debt tailwinds. But that is hardly the case in India and personal credit has been gaining momentum rather than losing it. The answer, an HT analysis of credit

For representational purposes only. (Reuters)

Has debt decoupled from development in India?

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  Credit-GDP ratio of banks hit an all-time high in December 2025

  The Centre for Monitoring Indian Economy (CMIE) database has quarterly data on the credit-deposit ratio of scheduled commercial banks from March 1964 onwards. This number was 81.75 in the quarter ending December 2025, the highest it has ever been. The interpretation is simple: outstanding bank credit per unit of deposits was the highest ever at the end of the last quarter.
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  The recent rally in bank credit has been driven by personal loans…

  The CMIE database has industry-wise disaggregation of bank credit from 2007-08 onwards in India. The data is unambiguous. Personal credit has seen a large increase in its share of overall bank credit since 2014-15, and the number has stabilised at much higher levels in the last couple of years than in any other period for which we have data. What exactly has led to this increase in the share of personal loans in overall credit? Disaggregated data shows that it is primarily two things: an increase in the “other personal loans” category and housing credit.
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  …And there was a striking decoupling in the bank credit story a few years ago

  Historically, personal loans were not the mainstay of bank credit in India. Total outstanding personal loans were 70% of credit to industry in April 2007, the first month for which we have industry-wise credit data in the CMIE database. This number fell consistently to reach a minimum of around 39% in mid-2013 and then reversed its trend. It crossed 100% in November 2020 and reached its maximum value in May 2025. The latest (December 2025) value is not far from the maximum. The numbers tell a larger macroeconomic story: industry started losing credit share from a period seen as the beginning of the twin balance sheet crisis in the Indian economy where both banks and corporates had bad loans on their books thereby killing credit growth and investment. While bank balance sheets have more than recuperated, industry has continued to deleverage rather than increase credit or investment. The problem, essentially, is at the level of big industry and it is unlikely that bank credit has been replaced by other sources such as bond markets. A December 2025 NITI Aayog report on corporate bond markets in India confirms this. “Currently, Indian corporates remain heavily reliant on bank credit, which increases systemic risk and limits access for underserved sectors”, the report said while giving data which shows that growth of outstanding debt in corporate bonds had been falling between 2014-15 and 2023-24.
• Seen another way, low credit growth in industry is not surprising

  Industry will borrow money to spend only if it believes that existing capacity is inadequate to serve current or future demand. Economists often track capacity utilization levels to track this metric. These numbers, as seen in RBI’s surveys, have been mostly flat in India after they fell from their peak just after the global financial crisis of 2008, which also sowed the seeds of the twin balance sheet crisis in the Indian economy. Unless these numbers increase, it would be too optimistic to expect a sustained revival in private capex from industry.
• Inference

  The data given above raises an interesting and troubling question–if households are borrowing more than they used to in the past then why is it not showing in higher demand for domestic industry. Logically, there can only be two explanations for this decoupling: the demand from higher credit is either being used to compensate lack of income growth to sustain similar levels of consumption or it is being spent on imported goods or just services rather than domestic industry’s output. Both of these propositions should be a cause for concern as far as the economy’s long-term growth is concerned.