Financial distress in Indian Households

Financial distress, a growing concern among families in India. Irrespective of their class, income, business financial distress is badly affecting the standards of living. In a developing country like India the expenditure on basic essentials are continuously growing while the income levels hardly see any rise . Adding, covid 19 and lockdown further deteriorated the situation and led severe distress in families. With lost work and income the pandemic has traumatized the living. The chief bread earner bears the most burden on managing finances in family.

For the year 2018-2019. India’s per capita income was ₹1,25,408 and for the year 2019-20 the per capita income is estimated to be Rs 1,35,050. Per capita income is a measure of the amount of money earned per person in a nation or geographic region. and in India it remains low as compared to many other countries. The Indian HouseHold Finance committee report 2017 details some important reasons for financial distress are as mentioned below.

Self-reported financial goals of households are often driven by “life events,” such as marriage, which disproportionately affect the household budgets of the poor & middle because of the high fixed costs of such events. Notably, such life events appear to be more important to households than goals such as financing education.

The loss of crops or livestock due to bad weather, medical emergencies associated with hospitalisation, and damage to properties, farm equipment or other business capital, due to a natural disaster. Cumulatively, these events account for the major financial losses in more than 60% of cases.

The next three sources in order of financial vulnerability concern reductions of the income generating capacity of the household, due to job loss, an increase in the costs of agricultural inputs, or a deterioration in overall market conditions. Cumulatively, they account for the major financial losses of around 25% of households.

Finally, life events such as theft/burglary, family separation, or the death of the main income earner are also important sources of financial risk, which may affect a considerable part of the population, but their overall financial impact seems to be much smaller than the other sources discussed above.

India is still largely an informal economy. Only a quarter of households are able to deal with emergency expenses by drawing upon accumulated wealth. Instead, half of the population counts on
help from family, friends and moneylenders. The problem seems particularly acute when we look at medical expenses. 69% of households deal with medical expenses by drawing upon informal sources of funding, 26% of which are loans from moneylenders.

The debt from non-institutional sources,which is likely to be persistent, and to lead to a chain of indebtedness that quickly exhausts the financial resources of the household. While loans from formal financial institutions fails to achieve one of its most important goals of helping households smooth cash flows and consumption patterns. Households shifting from non-institutional to institutional debt can move between 2.5 pp(percentage points) and 5.5 pp up the wealth distribution because the shift from non-institutional to institutional debt results in small losses due to low interest rates

Te coverage and penetration of insurance policies is very poor in India. According to the report 51% claimed that they can not afford it while some 16% said that they had never heard of such policies. The insurance however act as a backup plan and gives much relief from being debt, need for emergency funds and financial stress. For instance, Households can move up between 0.4 pp and 1.6 pp by taking on insurance to avoid the burden of emergency credit associated with medical costs. Nonetheless, managing the household finances sometimes remain complex as expenditure and emergency requirements are on continues rise with time being.

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