India's burgeoning middle class, fueled by rising aspirations and increased access to digital platforms, is increasingly drawn to the allure of Buy Now, Pay Later (BNPL) services. While seemingly offering financial flexibility and empowerment, this trend carries the risk of overleveraging, potentially leading the middle class into a debt crisis, a situation exacerbated by factors such as stagnant wages and automation-driven job losses. This echoes the "Diderot Effect," a phenomenon where acquiring a new possession leads to a cascade of purchases, creating a cycle of consumption that can be difficult to break.
The Diderot Effect, named after the 18th-century French philosopher Denis Diderot, illustrates how obtaining a new item can trigger a chain reaction of further purchases. Diderot, who lived much of his life in relative poverty, unexpectedly came into a large sum of money. He acquired a beautiful new dressing gown, which then made all his other possessions seem inadequate. This led him to replace them one by one, ultimately plunging him into debt and dissatisfaction. This parable serves as a warning about how consumption can spiral out of control.
In today's India, the Diderot Effect manifests itself through the easy availability of credit via BNPL platforms. These services, which allow consumers to make purchases and pay for them in installments, have exploded in popularity, particularly among the middle class. The BNPL market in India is projected to reach a staggering $45-50 billion by 2026. This growth is fueled by increasing smartphone penetration, rising digital literacy, and the expansion of e-commerce. BNPL's appeal lies in its convenience and accessibility, especially for those new to credit or underserved by traditional banking systems. Many BNPL users are low to middle-income individuals, and a significant portion are first-time borrowers.
However, this ease of access comes with inherent risks. One major concern is the potential for overspending and debt accumulation. BNPL platforms often have proprietary models to assess creditworthiness, but a lax attitude toward lending could lead to over-leveraging and increased default rates. Furthermore, the "no-cost EMI" illusion can be deceptive, as sellers may inflate product prices to cover the interest they must pay to banks. Late fees, penalties, and high-interest rates can also add to the overall cost, particularly if consumers fail to adhere to repayment deadlines.
Several factors are contributing to the vulnerability of India's middle class to this debt trap. Stagnant incomes, coupled with rising inflation, are eroding their financial stability. Data indicates that middle-class earnings have stagnated around ₹10.5 lakh per year for the last decade, effectively halving in real terms due to inflation. To maintain their living standards, many are resorting to debt. Additionally, automation-driven job losses pose a significant threat to middle-class employment. As machines and AI-powered systems replace traditional roles across various sectors, many individuals may find themselves without a stable income source to repay their debts.
The Reserve Bank of India (RBI) has expressed concerns about the rapid rise in household debt and has taken some measures to address the issue, such as increasing risk weights on unsecured retail loans. However, more comprehensive financial literacy programs and credit regulation frameworks are needed to protect vulnerable consumers.
To mitigate the risks associated with BNPL, consumers should exercise caution and financial prudence. Saving up for purchases, opting for low-interest traditional EMIs, and carefully evaluating the terms and conditions of BNPL agreements can help avoid over-leveraging. It is crucial to be aware of hidden costs, potential penalties, and the impact of late payments on credit scores. By making informed financial decisions and resisting the allure of instant gratification, India's middle class can navigate the BNPL landscape responsibly and avoid falling into a debt crisis.
