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What does debt relief do for development ? evidence from India's bailout program for highly-indebted rural households

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  • Kanz, Martin
Abstract
This paper studies the impact of a large debt relief program, intended to attenuate investment constraints among highly-indebted households in rural India. It isolates the causal effect of bankruptcy-like debt relief settlements using a natural experiment arising from India's Debt Relief Program for Small and Marginal Farmers -- one of the largest debt relief initiatives in history. The analysis shows that debt relief has a persistent effect on the level of household debt, but does not increase investment and productivity as predicted by theories of debt overhang. Instead, the anticipation of future credit constraints leads to a greater reliance on informal financing, lower investment and a decline in productivity among bailout recipients. The results suggest that one-time settlements may be insufficient to incentivize new investment, but can have significant real effects through their impact on borrower expectations.

Suggested Citation

  • Kanz, Martin, 2012. "What does debt relief do for development ? evidence from India's bailout program for highly-indebted rural households," Policy Research Working Paper Series 6258, The World Bank.
    • Handle: RePEc:wbk:wbrwps:6258
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    References listed on IDEAS

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    Cited by:

    1. Sudha Narayanan, 2016. "The productivity of agricultural credit in India," Agricultural Economics, International Association of Agricultural Economists, vol. 47(4), pages 399-409, July.
    2. Renuka Sane, 2019. "The Way Forward for Personal Insolvency in the Indian Insolvency and Bankruptcy Code," Working Papers id:12987, eSocialSciences.
    3. Xavier Giné & Martin Kanz, 2018. "The Economic Effects of a Borrower Bailout: Evidence from an Emerging Market," The Review of Financial Studies, Society for Financial Studies, vol. 31(5), pages 1752-1783.
    4. Sudha Narayanan, 2016. "Productivity of Agricultural Credit in India: Assessing the Recent Role of Institutional Credit to Agriculture in India using State Level Data," Working Papers id:11195, eSocialSciences.
    5. Elisabeth Beckmann, 2017. "How does foreign currency debt relief affect households’ loan demand? Evidence from the OeNB Euro Survey in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-32.
    6. Tekeste Berhanu Lakew & Hossein Azadi, 2020. "Financial Inclusion in Ethiopia: Is It on the Right Track?," IJFS, MDPI, vol. 8(2), pages 1-13, May.

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    Keywords

    Access to Finance; Debt Markets; Bankruptcy and Resolution of Financial Distress; Banks&Banking Reform; External Debt;
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