Does a Debt Relief Lead to Increased Precautionary Savings? : Evidence from A Policy Experiment

Using official national-level survey data, we investigate the impact of a large debt waiver program in India on beneficiaries savings and consumption. We find that the household consumption level and pattern are unaffected by the waiver. Plausibly anticipating higher credit constraints in the post-waiver period, the households increase precautionary savings as represented by increased investment in jewelry. The arbitrary program eligibility cut-off, defined in terms of landholdings, allows us to employ a robust regression discontinuity design. We perform several placebo and robustness tests in order to rule out alternative explanations