What Does Debt Relief Do for Development? Evidence from India's Bailout for Rural Households

Abstract

This paper studies the impact of debt relief, using a natural experiment arising from India's “Agricultural Debt Waiver and Debt Relief Scheme,” one of the largest household-level debt relief initiatives in history. I find that debt relief has a substantial impact on household balance sheets, but does not affect savings, consumption and investment, as predicted by theories of debt overhang or balance sheet distress. Instead, debt relief leads to greater reliance on informal credit, reduced investment, and lower agricultural productivity. Consistent with moral hazard generated by the bailout, beneficiaries are significantly less concerned about the reputational consequences of future default. (JEL D14, G28, O12, O16, O18, Q14, Q18)

Borrowers’ Distress and Debt Relief: Evidence from a Natural Experiment

“…To the best of our knowledge, ours is the first empirical study to examine the causal effect of debt relief on distressed and nondistressed borrowers (in the same program). Our study relates closely to Kanz (2016) and Giné and Kanz (2018), who also study the Indian debt waiver program of 2008. Kanz (2016) and Giné and Kanz (2018) document the costs associated with the debt waiver program.…”

“…Our study relates closely to Kanz (2016) and Giné and Kanz (2018), who also study the Indian debt waiver program of 2008. Kanz (2016) and Giné and Kanz (2018) document the costs associated with the debt waiver program. Kanz (2016) uses household surveys to show that the debt waiver program reduced the investment and agricultural productivity of the benefiting households.…”

“…Kanz (2016) and Giné and Kanz (2018) document the costs associated with the debt waiver program. Kanz (2016) uses household surveys to show that the debt waiver program reduced the investment and agricultural productivity of the benefiting households. Giné and Kanz (2018) use aggregate data at the district-bank level to show that the debt waiver program decreased the loan performance of all beneficiaries, especially in districts where the level of exposure to the program was high.…”

Loan Waivers and Bank Credit: Reflections on the Evidence and the Way Forward

“…However, some find that this impact is short-lived and the differences even out as the credit flow recovers. Raj and Edwin (2018) use transaction level data of agricultural credit given to all farmers for 3 years 2015-2016, 2016(up to 15 December 2017 from 22 Primary Agricultural Cooperative Credit Societies (PACCS) in seven districts of Tamil Nadu to study the loan waiver of 2016. They find that in the short term, the probability of obtaining credit post-waiver is higher for non-beneficiary farmers relative to beneficiary farmers around the eligibility cut-off of 5 hectares.…”

Could/should Jubilee debt cancellations be reintroduced today? If not, what alternative measures of debt relief and redistribution might be possible?

“…11 Some forms of direct debt relief may still be possible, especially in emerging economies, see Kanz (2016) and Dobbie and Song (2015). Now, as then, powerful underlying forces seem to be conspiring to hollow out the middle of our societies, benefiting the rich, skilled and powerful while the Welfare State partially protects those at the bottom.…”