India’s Economy May Be More Resilient – and More Fragile – Than GDP Suggests

How can both be true at the same time? Please bear with me and read on. This article is based on my personal observations and interpretations. I am no economist. I have been struggling with the question of what next for financial services for vulnerable low income informal sector households in India given the recent portfolio quality concerns. This is a series of 2 articles on how financial services can continue serving vulnerable low income and informal sector households in India.

India’s headline macroeconomic indicators continue to show resilience. GDP growth remains relatively strong, consumption has held up, and systemic stress is not yet visible in the way many slowdown forecasts predicted over the last few years.

But beneath the surface, the economy may be undergoing a more subtle transition – one where macro stability coexists with rising stress in household balance sheets, MSME cash flows and lower-ticket credit ecosystems. This is not necessarily a contradiction. The economy can become more resilient at the macro level even as financial resilience weakens at the borrower level.

The key issue is therefore not whether India is heading toward an imminent macroeconomic crisis. It is whether traditional macro indicators are capturing underlying stress transmission slowly and unevenly.

The Slowdown Predictions Failed but Were Not Entirely Wrong

Repeated predictions of an Indian slowdown have largely failed. But the nature of failure itself is important to note. India’s economy has developed unusually strong stabilisation mechanisms at the household and informal-sector level through direct cash transfers, welfare expansion, flexible labour participation, rapid digitisation and aggressive retail credit growth. These mechanisms have sustained consumption far longer than many traditional macro models anticipated. But this does not necessarily mean stress was absent. It may simply mean the transmission mechanism changed compared to what the models were meant to measure.

Instead of appearing immediately through collapsing GDP growth, stress has surfaced in more fragmented ways – repeated NBFC stress cycles, rising unsecured delinquencies, refinancing dependence, weaker borrower quality and periodic policy intervention to sustain credit flow.

Consumption Has Remained Strong – But Its Drivers Matter

Importantly, India’s consumption data does not point to a collapse in demand. Aggregate consumption metrics have remained relatively resilient over the last several years, with private consumption’s share of GDP rising materially after the pandemic recovery. Premium consumption and organised-sector spending have remained especially strong.

This resilience should not be dismissed as statistical illusion. Part of it reflects genuine structural improvements through better digital infrastructure, expanding formalisation, welfare delivery efficiency, financial inclusion and rising economic participation. At the same time, the composition of consumption appears to be changing. Part of post-pandemic resilience may also have been financed through rapid retail credit expansion. Credit growth helped smooth consumption volatility and sustain discretionary spending, particularly after COVID. But this also increased sensitivity to repayment stress once income growth began slowing.

Consumption resilience increasingly appears supported by a combination of welfare transfers, retail credit expansion, household income diversification and adaptive labour participation rather than broad-based real income acceleration alone. That distinction matters because economies can sustain stable aggregate consumption for extended periods even while borrower-level financial stress rises underneath.

This may partly explain why macro consumption indicators have remained stable even as stress has surfaced repeatedly in NBFCs, unsecured retail lending, microfinance and lower-ticket MSME credit.

Formalisation Is Strengthening the Economy – But Also Creating Divergence

Part of the resilience in India’s aggregate macro data likely reflects genuine formalisation and productivity gains within organised sectors. Larger businesses continue gaining market share through digital payments, GST-linked formalisation, logistics improvements and stronger operating efficiency. This is a real structural improvement in the economy.

However, it also creates divergence. Listed companies, formal tax collections and organised-sector profitability can remain resilient even as stress accumulates within smaller informal enterprises and lower-ticket borrower segments that are less visible in official data.

That divergence is important for investors because it allows strong formal-sector performance and rising borrower stress to coexist simultaneously.

NBFCs May Be Acting as Early Stress Indicators

In many ways, the NBFC sector has already been acting as the earliest stress sensor for the informal economy. Over the last few years, several NBFCs and fintech-led lenders have seen rising stress across unsecured retail credit, microfinance and small business lending. Initially, this was viewed largely as post-COVID normalization after an unusually aggressive retail credit expansion cycle. That interpretation is partly valid.

India’s banking system today is significantly healthier than during previous credit cycles. Corporate balance sheets are stronger, bank capitalisation remains healthy and large banks continue to benefit from exposure to formal salaried borrowers and secured retail credit. This is one reason systemic banking stress remains limited despite pockets of borrower deterioration.

At the same time, developments within lower-ticket retail and MSME credit deserve attention. Many lenders reduced unsecured exposure and aggressively pivoted toward secured products such as micro-LAP (Loan Against Property) loans in the INR 2–10 lakh range, largely targeted at self-employed borrowers and MSMEs.

The assumption was that secured lending would behave more defensively. However, lower-ticket LAP lending within informal and rural borrower segments has not always behaved like a low-risk asset class, especially during stress periods. Repayment behaviour often remains driven by cash-flow volatility rather than collateral value. Collateral in such contexts are barely recoverable. That is why recent credit trends matter. A report from TransUnion CIBIL noted that delinquencies in micro-LAP portfolios rose by 45 basis points to 3.3%.

So, stress is now appearing in the very segment many lenders migrated toward for safety. This does not necessarily imply imminent systemic instability. But it does suggest that borrower-level stress may be spreading gradually through the broader informal credit ecosystem.

The Labour Market Is Adapting – Not Necessarily Weakening

Another reason India has avoided a sharp slowdown is the changing structure of employment itself. There has not been a collapse in employment in the conventional sense. But there are signs of pressure within segments that historically supported stable urban consumption – particularly parts of IT services, startup hiring and white-collar employment.

At the same time, India has seen rapid growth in gig work, contractual employment, informal self-employment, digital platform participation and female labour-force participation. Importantly, rising female labour participation should not be viewed purely as a distress signal. Much of this increase reflects genuine structural inclusion, improved mobility, welfare access and digital participation.

However, a significant portion of the increase also appears concentrated in self-employment, family enterprises and informal work rather than stable salaried employment. That is an important nuance.

Many households appear to be adapting to economic pressure through income diversification rather than through rising productivity-adjusted income alone. A household that once depended primarily on one salaried earner may now rely on multiple smaller income streams functioning simultaneously. This creates remarkable economic resilience.

But it may also reduce financial shock absorption at the household level because repayment capacity increasingly depends on multiple volatile cash flows rather than one stable surplus-generating income source. Imagine a migrant moving to another city to work in a metal fabrication unit with a low but fixed pay to send back home. Imagine a similar migrant now operating as a gig worker instead with fluctuating income and still sending money back home.

Consumption Resilience Is Not the Same as Financial Resilience

India’s households have shown extraordinary adaptability. They have managed to sustain consumption through multiple earners, gig work, welfare support, informal enterprise activity and credit expansion. But these mechanisms do not necessarily create durable household level balance-sheet strength.

Households may be preserving current consumption while operating with thinner savings buffers, more volatile income streams and greater dependence on continuous cash inflows.

This does not mean India is excessively leveraged by international standards. Household debt levels remain moderate relative to many emerging markets, and part of the rise in retail credit reflects healthy financial deepening within the economy. However, aggregate debt ratios may not fully capture the quality and distribution of borrower stress.

The more relevant issue may be concentration of leverage within lower-income borrower segments, volatility of informal income pools and rising dependence on short-cycle retail credit for consumption smoothing.

That affects lenders in multiple ways. Traditional underwriting models perform best when borrowers have predictable salaries or income, stable employment and surplus monthly cash flow. Increasingly, repayment capacity may depend on multiple unstable income streams functioning simultaneously which results in dramatic variations of repayment profile during the life of the loan.

That makes parts of the system more shock-sensitive even if aggregate macro indicators remain healthy.

This may explain why stress is surfacing earlier in unsecured retail lending, microfinance, small-ticket MSME finance and now parts of the micro-LAP market even while broader economic data remains stable.

The Real Question Is About the Nature of India’s Resilience

None of this necessarily points to an imminent macroeconomic crisis. India’s resilience is real and partly reflects genuine structural strengthening within the economy. But the nature of that resilience may also be changing.

India may be transitioning from a model driven primarily by stable formal income growth toward one increasingly supported by adaptive household-level mechanisms – multiple earners, flexible labour participation, informal enterprise activity, welfare transfers and credit-supported consumption smoothing. That transition can sustain macro stability for long periods.

But it can also create pockets of rising fragility within household balance sheets and lower-ticket credit ecosystems before stress becomes fully visible in aggregate macro data.

The key question now is whether lenders and investors are correctly identifying where stress is migrating next – and whether existing underwriting and risk management frameworks are calibrated for an economy whose resilience increasingly depends on adaptive but financially fragile mechanisms beneath an otherwise stable macro surface.

How should lenders react?