Indebtedness among Rural Labour Households: Evidence from a Field Survey in Punjab and Bihar

Abstract

This paper examines the indebtedness among rural labour households in Punjab and Bihar. Rural labour households are often engaged in seasonal, low-paid wage employment, resulting in an irregular income stream and making them financially vulnerable. Due to a lack of collateral to offer, they usually avail debt from non-institutional financial sources at a high rate of interest, which further perpetuates their financial vulnerability and debt trap. Therefore, this paper examines the incidence and extent of indebtedness, the sources and purposes of debt, and the rate of interest. The paper also attempts to compare the variations and contrasts in indebtedness among rural labour households in Punjab and Bihar. This study is based on the primary data collected from 300 rural labour households from Punjab and Bihar. The analysis revealed that most of rural labour households are in debt, and the incidence and extent of indebtedness are significantly higher in Bihar. Among socially and economically disadvantaged groups, SC and OBC labour households have a higher incidence and burden of debt across both states. The majority of RLHs in Bihar incurred debt from non-institutional sources. About 93 per cent of RLHs from Punjab and Bihar used debt for unproductive purposes. The greater reliance of RLHs on non-institutional financial sources at exorbitant interest rates results in exploitation through surplus extraction, making RLHs more vulnerable, especially in Bihar. Therefore, strengthening access to rural banking and financial literacy is crucial to reducing indebtedness among rural labour households and curbing high dependence on high-interest non-institutional sources of finance.