Page 14 - Issue 01

GET BY WITH A LITTLE HELP FROM MY

FRIENDS (AND SHOPKEEPERS): HOUSEHOLD

BORROWING IN RESPONSE TO COVID 19

AJAY SHAH & RENUKA SANE

The lockdown in the early days of the Covid 19 pandemic in India impacted on on economic activity.
Between April and August 2020, 18.9 million salaried people lost their jobs, difficulties were faced by
migrant labourers, and small and medium businesses. Deshpande (2020) shows that overall employment
dropped sharply post-lockdown, with larger drops for women than men. Household incomes were

adversely affected. As an example, survey work by Lee, Sahai, Baylis and Greenstone (2020) shows that two
months into the lockdown poor and non-migrant workers in Delhi saw a drop of 57% in their incomes, with
9 out of 10 workers reporting that their weekly income had fallen to zero. Bertrand, Krishnan and Schofield
(2020) measure the fraction of households who say they are able to survive on their own for a week, and in
April that value was 34% in the overall population and 50% or more for below-median household income.

How would households cope with such a shock? Economic theory suggests that households desire
consumption smoothing. One mechanism for consumption smoothing is borrowing. For example, there was
an increase in household borrowing after demonetisation (Karmarkar and Narayan, 2020; Wadhwa, 2019;
Chakraborty and Sane, 2019). This connects to the working of the financial system. While India has made a
lot of progress in ownership of a bank account, and increased electronic payments, access to formal credit
remains low.

What do we expect about household borrowings?

Borrowing during the Covid crisis is shaped by three factors:

1. Income transfers: The government of India announced a stimulus package worth Rs.1.7 trillion after the
lockdown. This included food security measures as well as direct cash transfers to poor households. This

may have helped households deal with the immediate crisis.

2. Low demand: As people were at home owing to the lockdown, demand may have been affected. It is also
possible that households saw this job loss as permanent, and hence cut back on expenditures in a way they
would not have had they seen this as a temporary disruption. This also fits with the view that precautionary
savings increase after a deep crisis (Rajadhyaksha, 2020). However, this may be true for households in the
higher income distributions, but is unlikely to be the case for those below median income.

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