How COVID Threw India’s Low-Income Households Into Debt Traps

COVID has pushed many to the brink of poverty. Now, they are borrowing not just for essentials, but for the future.

Image used for representational purposes.

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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 Rs 9000 a month in Udyog Vihar, New Delhi. He is the sole breadwinner in a family of four, who also tries to send a small remittance to those at home in Bihar.

When the pandemic-induced lockdown cost him his job in 2020, both Munna and his wife struggled to make ends meet for their kids, borrowing extensively from informal, intra-community channels. They now have over Rs 50,000 in debt.

The tale of Munna resonates with the narratives of many low-income households across India, who, due to lack of formal-institutional credit channels, have had to resort to higher borrowings to manage essential household expenses. Even though household debt in India has been on the rise since 2013, most debt surged since mid-2020, driven by the catastrophic economic impact of the COVID-19 pandemic, the lack of institutional access to credit or income support, and the uncertainties and anxieties that made most people borrow for the future.

Govt & Corporate Debts

As per Reserve Bank of India data, household-debt-to-GDP ratio increased to 37.1 percent in the second quarter of 2020. Overall debt held by Indian households roughly valued at Rs 43.5 trillion, as of March 2021. Government and corporate debt levels have been exacerbated. As India’s national debt level touched around 89.56 percent of the GDP in 2020-21, the government debt to GDP level touched 70 percent, while corporate debt levels went up to 47 percent.

Two studies recently undertaken by our Centre for New Economics Studies (CNES) in low-income migrant-residential settlements located near Delhi, Lucknow, Surat and Pune aimed to understand the micro-trends in borrowing patterns for low-income households since the pandemic. Some key observations from the work are discussed here.

In Delhi’s Kapashera area, one of the largest migrant residential colonies, we observed many households borrowing to ‘save’ more for the future — and not just to spend it all on immediate essentials. Recent data too saw a rise in savings rate up to 21 percent during the first quarter of 2020-21.

What Has Led Low-Income Groups to Fall Into Debt Traps?

The Permanent Income Hypothesis in basic economics suggests how spending habits in households may be inclined towards consumption smoothening over fluctuations. Economic agents may prefer to maintain their consumption levels during economic shocks when they have good expectations about the future. Confident households would choose to smoothen their consumption by borrowing even when income levels are falling. We observed this in the context of some low-income to middle-income households whose borrowing patterns can be explained by this ‘consumption smoothening’ hypothesis.

Still, it would be a mistake to universalise — or generalise — the application of this hypothesis.

A loss of daily-wage employment, living in an environment of growing uncertainty and anxiety, motivated many low-income households — those without access to any safety nets or direct income support by the State, to ‘save’ more by keeping more disposable cash, selling gold, and borrowing money in cash for the future.

While some saved in advance through borrowings, many households like Munna’s resorted to borrowings as a ‘last resort’ finance option to meet inelastic, essential expense needs.

It was also interesting to see how factors driving the motivation to borrow changed drastically for low-income borrowers since last year.

Motivations to Borrow Amid COVID Pandemic

A study conducted in seven cities by Home Credit India shows how ‘46 percent respondents borrowed money primarily to run their households’. This was in contrast to the motivational factors cited for borrowing by low-income households in (and before) 2019. The popular reason for borrowing then was purchasing ‘consumer durables’ and ‘two-wheelers’ for ‘lifestyle upgrades’.

The drastic change in defining one’s motivation to borrow, from affording a ‘lifestyle upgrade’ (in 2019) to managing one’s ‘survival’ (in 2020), speaks volumes about the impending crisis for India’s low-income working classes.

In a survey of over two hundred daily wage workers from Lucknow (UP), Surat (Gujarat), Pune (Maharashtra), we saw most households borrowing to spend more money on ‘medical expenses’ — which, on average, increased from Rs 1900 per month (pre-COVID) to Rs 4700 per month during the pandemic. This sudden increase in medical costs, according to many, was observed due to an increase in dependency on private care; because of the absence of public healthcare access available for non-COVID related treatment and diagnostics (including pregnant women), leading many families to borrow excessively to meet this high cost.

Further, most shared serious concerns on borrowings made through non-institutional, unorganised channels, and the lack of support provided in income by the government.

India’s ‘Unbanked’ Workers

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 a bank-account, mentioned that they couldn’t take ‘personal bank loans’. In Delhi’s Kapashera too, survey results indicated how more than 24 percent of all residents borrowed money from family, intra-community sources during the pandemic.

Most of those working-living here have less assets for collateralised borrowings, and banks aren’t willing to lend any money to clients with limited or no assets, even during emergencies.

Munna’s wife living in Kapashera said: “We had our parents and my brother here (in Kapashera), and they are financially supporting 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.”

Indian households’ rising debt-problem speaks of a major impending crisis in the near future. Creating better access to institutional credit; incorporating the use of tech-based mobile financing options and having direct income support channelised through the government for low-income groups (daily-wagers) are immediate measures needed to blunt the economic impact of this colossal ‘crisis-in-making’.

(Deepanshu Mohan is Associate Professor of Economics and Director, Centre for New Economics Studies (CNES) at OP Jindal Global University. He tweets @Deepanshu_1810. Advaita Singh is a Senior Research Analyst with Centre for New Economics Studies (CNES). This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses, nor is responsible for them.)