Research

This paper investigates the prevalence and characteristics of poor hand-to-mouth (P-HtM) and wealthy hand-to-mouth (W-HtM) households in India — an emerging economy where high household savings coexist with limited liquidity and weak credit access. Using a harmonized dataset that combines two nationally representative surveys, we construct household-level balance sheets including income, consumption, and liquid and illiquid assets. We classify households into poor and wealthy HtM categories following the methodology of Kaplan et al. (2014), and use a range of machine learning models to impute missing income data. Our findings indicate that while P-HtM households account for 2–5% of the population, W-HtM households comprise a much larger share — 15–27%, with total HtM prevalence ranging from 17–32%. Classifications based solely on net worth substantially understate this share. We also find that average propensities to consume are similar across HtM and non-HtM groups, highlighting the broader financial constraints facing Indian households. These results underscore the importance of distinguishing between liquidity and net worth when evaluating consumption behavior and the transmission of fiscal and monetary policy in developing economies.

Indian households pay substantially higher interest rates on informal loans than on formal loans. We use loan-level data from the 2019 All-India Debt and Investment Survey to measure this gap and examine how it varies across borrowers, loan purposes, and locations. The average annual interest rate is 20.08 percent for informal credit and 11.78 percent for formal credit, a gap of 8.29 percentage points, or about 70 percent of the formal rate. Controlling for loan terms, household characteristics, and district fixed effects yields an informal premium of 15.7 percentage points. The premium ranges from 13.7 to 20.0 percentage points across loan purposes and is largest for medical treatment. Collateral is associated with lower rates in both markets, but the estimated discount does not differ significantly by lender type. Rural borrowers face a larger informal premium within the same state. Moreover, 9.8 percent of households hold both formal and informal debt, showing that access to formal credit can coexist with reliance on informal borrowing. These findings point to loan purpose and rural credit markets as central considerations in efforts to reduce household borrowing costs.