In the context of bankruptcy, many important studies have examined the implications of debt relief on different real outcomes. However, the decision to file for bankruptcy could be endogenous. In this regard, examining the implications of a debt relief granted by the government does overcome the endogeneity problem.
We study the impact of the Indian Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) of 2008 on the savings and consumption behaviour of the beneficiary households. A total of 30.4% of the households that depended on agriculture benefited from the program. The exchequer had to ultimately shell out US$ 14.4 billion which was equivalent to approximately 1.2% of India’s GDP and 7.6% of total tax receipts at that time, making this one of the largest debt relief programs in history. As per the debt waiver scheme, defaulting agricultural borrowers having landholding of less than or equal to two hectares were eligible for a full waiver. Other defaulting borrowers were eligible only for a partial waiver of 25% of the outstanding loan.
We use the method developed by Calonico, Cattaneo, and Titiunik (2014) in our regression discontinuity design. We also use the method designed by Lee and Lemieux (2010) in order to take into account the impact of district level factors other than the running variable i.e land. In short we run the specification designed by Calonico et al. (2014) after using the residuals from a regression of consumption on covariates excluding the running variable. We call this the residualized and robust regression discontinuity design. We obtain household consumption data from the Ministry of Statistics and Program Implementation, Government of India. The National Sample Survey Organization (NSSO) conducts regular national level consumption surveys. The dataset encompasses consumption choices of 48049, 100794 and 95087 households from the 64th, 66th and 68th NSSO rounds respectively.
Our research contributes to the literature on ex-post real impact of debt relief programs as well as to the literature that empirically examines the implications of the permanent income hypothesis in the presence of precautionary savings. The extant studies on this program based on either district level aggregate data or local survey data have found no impact of the program on real outcomes. We, on the other hand, carry out preliminary tests to refute this hypothesis. It is observed that a debt relief leads to a one time jump in investment in precautionary savings, reflecting an anticipation of either decreased earnings or increased volatility in earnings.
The above aspects of our study will make our results generalisable to similar settings and can be used by policy makers in the future to evaluate the impact of proposed debt relief schemes.