The Mirage of Affordability: How Credit-Driven Consumption Shapes Our Lives

In a recent financial awareness workshop for a group of startup employees, I encountered an intriguing yet concerning trend. While some individuals were diligently investing a portion of their income for future security, a surprising majority were entangled in lifestyle loans. Not home loans or education loans, but EMIs for laptops, phones, watches, and even holidays. This trend underscores the dual-edged sword of India's burgeoning middle class—a potent force for economic growth but also a breeding ground for credit dependency.

India's middle class is poised to become the largest in the world over the next decade, presenting a golden opportunity for investors. The consumption story in India is compelling, driven by a population eager to improve their standard of living. This narrative is not just about numbers; it is about aspirations and the desire for a better life. However, the increasing reliance on credit for personal consumption raises red flags.

The Allure of Easy Payments

Retail giants like Amazon have tapped into this psyche, making high-value items appear more affordable by highlighting EMI options. For instance, when you browse for an iPhone on Amazon, the EMI price is prominently displayed, often overshadowing the total cost. This clever marketing tactic makes consumers perceive high-cost items as affordable because the payments are spread over time. But is this really the case?

Imagine a life lived in instalments, constantly paying off for the latest gadget, vacation, or luxury item. The illusion of affordability can quickly turn into a cycle of debt, where managing wants becomes increasingly difficult. Once accustomed to the convenience of EMIs, breaking free from this pattern can be challenging.

A Rising Tide of Debt

The data paints a stark picture. From February 2020 to July 2021, the number of EMIs in India surged by 220%, driven primarily by debit card EMIs and no-cost EMI offers from banks. In December 2011, there were 2 crore active credit cards in India; by January 2024, this number had ballooned to over 10 crore—a fivefold increase. This rapid growth in credit card usage is indicative of a broader trend towards credit-fueled consumption.

Zero-cost EMIs, reward points, and the allure of instant gratification have ensnared many in a web of debt. The fantasy of luxury spending, often encouraged by aggressive marketing, leads to credit card debts and pending personal loans. As of now, credit card debt in India stands at a staggering 2.5 trillion rupees, an all-time high with no signs of slowing down.

The Hidden Costs of Easy Credit

The convenience of credit can obscure the long-term financial health of individuals. The "buy now, pay later" culture fosters a mindset where immediate wants overshadow future needs. This shift can have significant implications for financial stability, particularly for those who do not have a robust understanding of financial management.

As financial advisors and educators, it is crucial to highlight the risks of excessive reliance on credit. Promoting financial literacy and encouraging prudent spending habits are essential steps in mitigating the potential downsides of this trend. Understanding the true cost of credit and the long-term impact of debt can empower individuals to make more informed financial decisions.

The Impact on Savings and Investment

One of the most concerning aspects of the shift towards credit-driven consumption is its impact on savings and investment. Traditionally, the Indian middle class has been known for its prudent saving habits, often prioritising long-term financial security over short-term gratification. However, the easy availability of credit has altered this mindset. Instead of saving for future purchases, many are opting to buy now and pay later, which can erode their savings over time. This shift not only affects individual financial health but also has broader economic implications. 

Psychological and Social Implications

Beyond the financial impact, the rise of credit-fueled consumption has significant psychological and social implications. The pressure to keep up with peers and maintain a certain lifestyle can lead to stress and anxiety. This phenomenon, often referred to as "keeping up with the Joneses," is exacerbated by social media, where people are constantly exposed to curated images of luxury and success. The reliance on credit to fund such lifestyles can create a vicious cycle of debt and mental health issues. Moreover, the stigma associated with financial struggles can prevent individuals from seeking help, further deepening their problems. Addressing these issues requires a holistic approach, combining financial education with mental health support to help individuals make more balanced and informed decisions.

Conclusion

The rise of credit-driven consumption in India is a testament to the country's economic growth and the aspirations of its middle class. However, this trend also brings to light the risks associated with easy credit and the potential for financial instability. As investors, the consumption story remains a compelling opportunity, but it is imperative to approach it with an awareness of the underlying credit dynamics.

By fostering financial literacy and promoting responsible consumption, we can help individuals navigate the allure of easy credit and build a more secure financial future. After all, the true value of wealth lies not in the ability to acquire immediately but in the wisdom to sustain and grow it over time.