Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Household Financial Leverage in India

Buried inside the Global
Financial Stability Report
of the IMF
(September 2006) is a graph showing India and New Zealand as the
outliers in terms of high financial leverage in the household sector,
but the data does not seem right. Figure 2.10 on page 55 shows Indian
household leverage (ratio of financial liabilities to financial
assets) as about 60%, exceeded only by New Zealand’s 80%. India
does not publish sectoral balance sheets, but the flow of funds data
is grossly at variance with this number of 60%. If we cumulate the
last several years’ change in financial assets, liabilities and
physical assets from Tables 10 and 11 of the RBI’s Handbook of
Statistics, 2005, the following picture emerges. Cumulative household
financial savings are about 100% of GDP, cumulative household
financial liabilities are about 20% of GDP and cumulative household
physical savings are about 80% of GDP. This would imply household
leverage of 20/180 or about 11%. This broad picture does not change
whether I cumulate the last 35 years of data or just the last 10. I am
struggling to understand how the IMF gets a number more than 5 times
this estimate of about 11%. If one considers that most household
assets (equities, real estate or gold) would have appreciated in value
over the years while most liabilities would be fixed in nominal terms,
the financial leverage evaluated at market prices must be even lower
than the above estimate of 11%. Of course, the IMF says that it got
the number from national authorities. So does the RBI/MOF/CSO see some
household leverage out there that we are not seeing? Or is it all a
mistake?

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