4 min read.Updated: 20 May 2021, 10:07 PM ISTDeepanshu Mohan,Advaita Singh
Rising expenses and income losses in pandemic times have pushed low-income households to borrow money in their struggle to get by, as several surveys across India have revealed.
Munna Kumar Singh, a 24-year-old man, migrated with his family six years ago from a rural town in Bihar to work at a denim factory for ₹9,000 a month in Delhi’s Udyog Vihar. He is the sole breadwinner in his family of four and also tries to send a small remittance to those at home in Bihar. When he lost his job to the lockdown, Munna struggled to make ends meet, borrowing extensively from informal channels. He has over ₹50,000 in debt and no stable income to help pay it off.
Munna’s story resonates with the narratives of many low-income households across India. Even though household debt in India has been on the rise from 2013, it has surged since mid-2020, driven by the catastrophic economic impact of the covid pandemic, lack of institutional access to credit or income support, and the uncertainties and anxieties that are making people borrow and save for the future.
As per Reserve Bank of India (RBI) data, Indian household debt rose to 37.1% of gross domestic product (GDP) in the second quarter of 2020. Overall debt held by households was roughly valued at ₹43.5 trillion, as of March 2021. Government and corporate debt levels also worsened. As India’s national debt hit almost 89.6% of GDP in 2020-21, government debt touched 70% of GDP. Corporate debt levels went up to 47%.
Two studies recently undertaken by our Centre for New Economics Studies (CNES) in migrant-residential settlements located near Delhi, Lucknow, Surat and Pune analyse key micro-trends in borrowing patterns for households since the pandemic began.
In Delhi’s Kapashera area, one of its largest migrant colonies, we observed many households borrowing to ‘save’ more for the future, and not just to spend on essentials. Recent data too saw a rise in the savings rate to 21% during the first quarter of 2020-21.
The ‘permanent income hypothesis’ in economics suggests how household spending habits may be inclined towards consumption that smoothens over fluctuations. Economic agents may prefer to maintain their consumption levels during economic shocks if they have positive expectations of the future. Confident households would choose to do this by borrowing even if their income is falling. We observed this in context of some low- to middle-income households in Delhi and Pune, whose borrowing patterns can be explained by that hypothesis. Still, it would be a mistake to generalize its application.
A loss of daily-wage employment, in an environment of growing uncertainty and anxiety, did motivate many low-income households to ‘save’ more by keeping more disposable cash and selling gold, while borrowing cash for the future, even though many homes like Munna’s resorted to debt as a last resort to meet essential expenses.
It was interesting to see how the basic motivation to borrow had changed over the span of a year for low-income borrowers. A study conducted in seven cities by Home Credit India reported that “46% respondents borrowed money primarily to run their households". This was in contrast with the motivational factors cited for borrowing by low-income households in 2019 (and before). The popular reason for it back then was the purchase of consumer durables and two-wheelers for “lifestyle upgrades". The drastic shift in the self-reported motivation to borrow from upward mobility in 2019 to managing one’s “survival" in 2020 speaks volumes of the impending crisis faced by India’s working classes.
In an ethnographic survey of over 200 daily wage workers from Lucknow in Uttar Pradesh, Surat in Gujarat and Pune in Maharashtra, we saw most households borrowing to spend more money on medical expenses, which had on average increased from ₹1,900 per month pre-covid to ₹4,700 per month during the pandemic.
Many traced this sudden increase in medical costs to an increase in dependency on private healthcare, given the unavailability of public healthcare for non-covid related treatment and diagnostics (including for pregnancies), which led many families to borrow excessively to meet these expenses.
Further, most respondents shared serious concerns on borrowings made through unorganized channels, and the lack of income support provided by the government.
It is true that India’s ‘unbanked’ workers usually borrow from ‘risky’ sources across India’s urban and rural segments. However, many, even those with access to bank accounts, couldn’t take ‘personal bank loans’. In Delhi’s Kapashera, too, survey results indicated that more than 24% of all residents borrowed money from relatives and 35-40% from informal intra-community sources after the pandemic struck.
Munna’s wife, a resident of Kapashera, said, “We had our parents and my brother here (in Kapashera), and they are financially supporting us to help us right now. It is with their support that we are able to make it through this. Our bank refused to provide any line of credit."
The rising debt burden of Indian households points to a crisis among large numbers in the near future. Creating better access to institutional credit, incorporating the use of tech-based online financing options, and channelling direct transfers from government coffers to low-income groups (especially daily-wagers) are some of the immediate measures needed to blunt the impact of this crisis to come.
Deepanshu Mohan & Advaita Singh are, respectively, director and senior research analyst at the Centre for New Economics Studies, OP Jindal Global University.
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