Six years ago, 24-year-old Munna Kumar Singh and his family migrated to Delhi from a small town in Bihar, where he worked in a denim factory in the city’s Udyog Vihar for a monthly salary of Rs 9,000. He is the sole breadwinner in the family of four. He also tries to send a small remittance to those at home in Bihar. When he lost his job with last year’s lockdown to curtain the spread of Covid-19, Singh struggled to make ends meet. He ended up borrowing extensively from informal channels. He is now over Rs 50,000 in debt with no stable income to repay his loans.

Singh’s experience echoes that of many low-income households across India. Even though household debt in India had been on the rise from 2013, debt has surged since mid-last-year, driven by the catastrophic economic impact of pandemic, the lack of institutional access to credit or income support, and the uncertainties-anxieties making most people to borrow and save for the future.

As per Reserve Bank of India data, household-debt-to-GDP ratio increased to 37.1% in the second quarter of 2020 from 35.4% in the first quarter. Overall debt held by Indian households roughly valued at Rs 43.5 trillion, as of March 2021.

Government and corporate debt levels were exacerbated too. As India’s national debt level touched around 89.56% of GDP in 2020-’21, the government debt-to-GDP level touched 70%, while corporate debt levels went up to 47%.

Source: CEIC Data

Two studies recently undertaken by our Centre for New Economics Studies in migrant-residential settlements located near Delhi, Lucknow, Surat and Pune analysed key microtrends in borrowing patterns for households since the pandemic began.

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 essentials. Recent data shows a rise in savings rate up to 21% during first quarter of 2020-’21.

The Permanent Income Hypothesis in basic economics suggests how spending habits in households maybe inclined towards consumption smoothing 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 context to some low-income to middle-income households (in Delhi and Pune) whose borrowing patterns can be explained by this “consumption smoothing” hypothesis.

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

A loss of daily-wage employment and living in an environment of growing uncertainty did motivate many low-income households to “save” more by keeping more disposable cash and selling gold, while borrowing money in cash for the future. But many households such as Munna Kumar Singh’s resorted to borrowings as a last resort finance option for meeting 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.

A study conducted in seven cities by Home Credit India shows that “46% 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”.

Source: Home Credit India

The drastic change in defining motivation to borrow from affording a “lifestyle upgrade” in 2019 to managing survival in 2020 speaks volumes about the crisis being experienced by India’s low-income working classes.

In an ethnographic survey of over 200 daily wage workers from Lucknow, Surat and Pune, we saw most households borrowing to spend more money on medical expenses. On average, these increased from Rs 1,900 per month before the Covid-19 pandemic to Rs 4,700 per month during the pandemic.

This sudden increase in medical costs, many said, was due to an increase in dependency on private care. The absence of public healthcare available for non-Covid related treatment and diagnostics (including for pregnant women) led many families to borrow excessively to meet the high costs.

Further, most respondents expressed serious concerns about having to make borrowings through non-institutional, unorganised channels, and the lack of income support from the government.

Under the financial policy for priority sector bank lending, domestic commercial banks have a target of lending 10% per cent of Adjusted Bank Net Credit to Financially Weaker Sections. But in a recent paper, Pallavi Chavan discussed how as many as 52.4% of all private sector banks failed to meet this 10% target.

Despite the advances made in financial inclusion, access to formal institutional credit still remains a problem for the urban poor.

Informal lending sources

It is true that India’s unbanked workers in both urban and rural areas usually borrow from risky sources. However, many, even those with access to a bank account, said they were unable to take personal bank loans. In Delhi’s Kapashera too, survey results indicated how more than 24% of all residents borrowed money from family and 35%-40% from informal intra-community sources during the pandemic.

Munna Kumar Singh’s wife said that their parents and her brother were supporting the family. “It is with their support we are able to make it through this,” she said. “Our bank refused to provide any line of credit.”

As per a recent study by the Household Finance Committee, switching to institutional borrowing has significant economic benefits: “For the median Indian household, shifting from non-institutional debt to institutional debt can lead to gains equivalent to between 1.9%-4.2% of annual income on an ongoing basis, or equivalently when capitalised, to upward moves along the current Indian wealth distribution.”

The rising debt problem of India’s households foreshadows of a major crisis in the near future. Creating better access to institutional credit, incorporating the use of tech-based mobile financing options and offering direct income support channelised through the government for low-income groups (such as daily-wage earners) are immediate measures needed to blunt the economic impact of this colossal crisis-in-the-making.

Deepanshu Mohan is Associate Professor of Economics and Director, Centre for New Economics Studies at OP Jindal Global University.

Advaita Singh is a Senior Research Analyst with Centre for New Economics Studies.