Slowdown expected in residential investments could unsettle credit growth: Report

An expected slowdown in private consumption and/or residential real estate in financial year 2024 (FY24) could unsettle credit growth in the country, according to a report by Motilal Oswal Financial Services (MOFSL). The slowdown in consumption is expected to be more severe than the consensus projections, which could mean the deterioration in real estate will be less intense. Considering non-mortgage personal loans are the fastest-growing category within household debt, this scenario could also be equally forceful in disrupting the retail lending boom, the report said.

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Private consumption trends

The report stated that private consumption accounts for about 60% of India’s GDP. After dropping to an all-time low of 56.2% of GDP in FY12, the share of private consumption rose to 59% of GDP in the pre-Covid period (FY16-FY19), it further rose to 61.3% of GDP in FY21 and stood at 60.6% of GDP in FY23, mainly due to very slow growth in H2 FY23. Although consumption is the primary economic activity for households, they also invest in residential properties (known as physical savings) and save in financial assets. Investments by households account for 35-40% of total investments in the country, totalling 11-12% of GDP.

In the recent two years, despite higher inflation, the consumption and real estate sectors performed well. According to MOFSL, the net financial savings (NFS) dropped to a three-decade low of 6% of GDP in FY23, while physical savings jumped to around 13% of GDP, the highest in the decade. However, in 2HFY23, the growth in private consumption and residential investments weakened substantially, boosting financial savings, the report said.

Prediction of a slowdown in consumption and real estate in FY24

Based on the estimates, MOFSL hints that NFS could have bottomed out and may rise soon. Thus, household spending trends in FY24 will match H2 FY23 instead of H1 FY23. The report mentioned that in H1 FY23, consumption growth was robust and physical savings also grew sharply while financial savings fell. It said that owing to weaker income growth in FY24, growth is expected to subside significantly in either private consumption or real estate investments or both this year.

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