Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis
In October 2010, the state government of Andhra Pradesh, India issued an emergency ordinance, bringing microfinance activities in the state to a complete halt and causing a nation-wide shock to the liquidity of lenders, especially those with loans in the affected state. We use this massive dislocation in the microfinance market to identify the causal impacts of a reduction in credit supply on consumption, earnings, and employment in general equilibrium. Using a proprietary, hand-collected district-level data set from 25 separate, for-profit microlenders matched with household data from the National Sample Survey, we find that district-level reductions in credit supply are associated with significant decreases in casual daily wages, household wage earnings and consumption. We also find that wages in the non-tradable sector fall more than in the tradable sector (agriculture), suggesting that one important impact of the microfinance contraction was transmitted through its effect on aggregate demand. We present a simple two period, two-sector model of the rural economy illustrating this channel and show that our wage results are consistent with a simple calibration of the model.
We thank Patricia Anghel, Connie Dang, Paul Friedrich, Sumit Gupta, Sang Kim, Cecilia Peluffo, Osman Siddiqi, Gabriel Tourek, and especially Bruno Barsanetti for excellent research assistance. All mistakes are are own. We thank Abhijit Banerjee, Paco Buera, Clement Imbert, Seema Jayachandran, Dean Karlan, Asim Khwaja, Marti Mestieri, Rohini Pande, and Eric Verhoogen for their helpful contributions. We also thank the Microfinance Institutions Network (MFIN) for coordinating the collection of the data and Parul Agarwal and the Centre for Microfinance (CMF) for their help in researching the AP crisis. Anthony D’Agostino generously shared the RBI data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.