Rational Exuberance – Round 2 Case Study

Debt Trap is a situation in which a debt is difficult or impossible to repay, typically because high interest
payments prevent repayment of the principal. For a country, it enters into a debt trap when its savings keep
falling and to push investments, it is forced to borrow. Many developing economies have faced this issue,
including Brazil, Mongolia etc. The major issue for all developing economies come in form of low/falling GDP
to domestic savings rate.

India is a country which is expected to be amongst the fastest growing economy of the world. A large part of
the credit goes to the young population of the country. In India, about 70 per cent of the working age
population falls in the 20-40 years category. The median age of India’s population is expected to be 29 in
year 2020 and it is expected to have a dependency ratio of .4 by the year 2030. But in recent years, we
observe that the young population has started spending much more as compared to what the previous
generations used to do. This has led to an increase in consumption fuelled largely by cheap loans, easily
available EMI options and a gradual change in the savings habit of the youth, and thereby leading to a
reduction in savings (as a percentage of GDP).

This changing scenario is leading to an increase in the total debt take, a lower savings and a high interest
burden. And thereby there is a possibility of India getting into a debt trap.

Main reason and Exception

1. Households are becoming consumption centric, which can we seen through the increased liabilities and
the increase in the retail loans which now accounts to 17% and is the fastest growing form of loan.

2. This fall in household savings rate is also corroborated by a sharp fall in household saving elasticity (the
proportional change in savings to a change in income) since the beginning of this decade. This is largely
because youthful population typically tends to consume more than what they earn.

Though the private corporate sector savings bucked this trend, surging to 11.6 per cent of the GDP in fiscal
2018 from 7.4 per cent about a decade ago. Part of this is the result of a change in the base year to 2011-12,
which led to physical assets of quasi-corporations being excluded from households and included in private
corporations.

With the government posing for growth, we will need more investments in the private sector, and if India's
savings does not rise as per the requirement, it will put pressure on the current account deficit.

Case Questions
Participants are required to provide solution to the following questions:
1. What are the factors leading to a change in the savings habit of the youth.
2. What are the possible solutions to this problem of low savings?
3. Which side of the policy should be focused more on, Monetary or Fiscal and how it can help ease
the situation?
4. Do you think there is any role of Corporate India in this? If Yes, then how?
5. You may draw comparisons between India and other developing economies.
➢ Participants are required to submit a ppt of not more than 5 slides.
➢ You have been provided with a sample survey conducted from a diverse population from across India
to help you understand what the Indian consumer thinks, you may refer to the dataset for your
analysis. (Its usage is not mandatory)
➢ Participants can predict the trend using any statistical model/tool.
➢ We have also provided you with the few more data points from World Bank’s website.