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Abhiroop Mukherjee - Roads and Loans

The document discusses the relationship between road infrastructure and financing in rural India, emphasizing that improved roads are expected to boost productivity by enabling access to markets and opportunities. It questions whether private financing will respond effectively to these productivity changes, noting that many rural areas lack formal financial services. The study highlights the implications of financing availability for rural households and the potential impact on inequality in access to opportunities created by new roads.

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1/38 Roads and Loans Sumit Agarwal, Abhiroop Mukherjee and S. Lakshmi Naaraayanan March 7, 2018 Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 1 / 38
2/38 Roadmap 1 Overview 2 Background and Data 3 Main Results 4 Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 2 / 38
3/38 Motivation: Finance and Productivity Changes When productive opportunities improve, financing should flow to those who see gains Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 3 / 38
3/38 Motivation: Finance and Productivity Changes When productive opportunities improve, financing should flow to those who see gains But does private, profit-motivated financing really respond to productivity changes? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 3 / 38
3/38 Motivation: Finance and Productivity Changes When productive opportunities improve, financing should flow to those who see gains But does private, profit-motivated financing really respond to productivity changes? not just for the large corporations or households in countries with developed financial markets – Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 3 / 38
3/38 Motivation: Finance and Productivity Changes When productive opportunities improve, financing should flow to those who see gains But does private, profit-motivated financing really respond to productivity changes? not just for the large corporations or households in countries with developed financial markets – but also in the day-to-day lives of the world’s poor? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 3 / 38
4/38 Motivation: Finance and Productivity Changes We shed new light on this issue by focusing on a large rural road-building initiative in India Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 4 / 38
5/38 New Roads Everywhere In many parts of the world, infrastructure projects are thought to be key to unlocking productivity increases Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
5/38 New Roads Everywhere In many parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
5/38 New Roads Everywhere In many parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Roads are particularly topical Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
5/38 New Roads Everywhere In many parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Roads are particularly topical Tremendous growth in roads in Asia, Africa, South America, and Eastern Europe in the past 20 years alone Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
5/38 New Roads Everywhere In many parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Roads are particularly topical Tremendous growth in roads in Asia, Africa, South America, and Eastern Europe in the past 20 years alone China’s trillion dollar ‘Belt and Road Initiative’ – “the biggest investment project in history” Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
5/38 New Roads Everywhere In many parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Roads are particularly topical Tremendous growth in roads in Asia, Africa, South America, and Eastern Europe in the past 20 years alone China’s trillion dollar ‘Belt and Road Initiative’ – “the biggest investment project in history” India built 1.96 million kilometers of rural roads between 2000-2016 connecting 100s of millions Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
6/38 Roads to Growth? How are roads meant to create productive opportunities for people connected? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 6 / 38
6/38 Roads to Growth? How are roads meant to create productive opportunities for people connected? opening or expansion of small businesses, like village grocery shops Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 6 / 38
6/38 Roads to Growth? How are roads meant to create productive opportunities for people connected? opening or expansion of small businesses, like village grocery shops allowing surplus agricultural laborers to commute to nearby towns to access more productive jobs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 6 / 38
6/38 Roads to Growth? How are roads meant to create productive opportunities for people connected? opening or expansion of small businesses, like village grocery shops allowing surplus agricultural laborers to commute to nearby towns to access more productive jobs changing crop patterns from subsistence cereal farming to more profitable market-based crops Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 6 / 38
7/38 Roads to Growth? Many of these channels, however, require availability of financing Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
7/38 Roads to Growth? Many of these channels, however, require availability of financing Typically assumed that such financing to households will automatically follow once roads are built Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
7/38 Roads to Growth? Many of these channels, however, require availability of financing Typically assumed that such financing to households will automatically follow once roads are built But many rural economies suffer from chronic problems of financing Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
7/38 Roads to Growth? Many of these channels, however, require availability of financing Typically assumed that such financing to households will automatically follow once roads are built But many rural economies suffer from chronic problems of financing Formal finance is largely absent in many parts of the world Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
7/38 Roads to Growth? Many of these channels, however, require availability of financing Typically assumed that such financing to households will automatically follow once roads are built But many rural economies suffer from chronic problems of financing Formal finance is largely absent in many parts of the world Informal money lenders charge usurious interest rates, tying down laborers to dismal conditions Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
8/38 Roads and Finance Central question today in finance for emerging markets Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 8 / 38
8/38 Roads and Finance Central question today in finance for emerging markets Will traditional private sector financing respond to changing productive opportunities created by these mega infrastructure projects? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 8 / 38
8/38 Roads and Finance Central question today in finance for emerging markets Will traditional private sector financing respond to changing productive opportunities created by these mega infrastructure projects? Outside of very limited microfinance wings, private banks typically do not lend to rural households, ticket sizes are small Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 8 / 38
8/38 Roads and Finance Central question today in finance for emerging markets Will traditional private sector financing respond to changing productive opportunities created by these mega infrastructure projects? Outside of very limited microfinance wings, private banks typically do not lend to rural households, ticket sizes are small But massive market sizes and growth rates of the rural sector in emerging economies has piqued interest recently Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 8 / 38
9/38 Roads and Finance Why do we care? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
9/38 Roads and Finance Why do we care? If private financing does NOT respond: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
9/38 Roads and Finance Why do we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
9/38 Roads and Finance Why do we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads If private financing DOES respond: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
9/38 Roads and Finance Why do we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads If private financing DOES respond: room for private sector financing can mean less fiscal pressure, easier path to benefits percolating down Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
9/38 Roads and Finance Why do we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads If private financing DOES respond: room for private sector financing can mean less fiscal pressure, easier path to benefits percolating down Relates to literature on the role of financing in development Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
9/38 Roads and Finance Why do we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads If private financing DOES respond: room for private sector financing can mean less fiscal pressure, easier path to benefits percolating down Relates to literature on the role of financing in development King and Levine (1993), Black and Strahan (2002), Burgess and Pande (2004), Levine (2005), Beck, Demirguc-Kunt and Peria (2007), Demirguc-Kunt and Levine (2008), Beck (2012), Demirguc-Kunt, Feyen, and Levine (2013) Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
10/38 Roads and Finance Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
10/38 Roads and Finance Distributional Effects If private financing does respond, who does it benefit more? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
10/38 Roads and Finance Distributional Effects If private financing does respond, who does it benefit more? Richer villagers who had access to finance before roads, and might be in a better position to exploit new opportunities? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
10/38 Roads and Finance Distributional Effects If private financing does respond, who does it benefit more? Richer villagers who had access to finance before roads, and might be in a better position to exploit new opportunities? Or the poor – people who were excluded from formal finance, but can now find a way in? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
10/38 Roads and Finance Distributional Effects If private financing does respond, who does it benefit more? Richer villagers who had access to finance before roads, and might be in a better position to exploit new opportunities? Or the poor – people who were excluded from formal finance, but can now find a way in? Will roads increase – or reduce – inequality? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
11/38 Main Challenge Difficult to accurately identify the impact of new infrastructure Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
11/38 Main Challenge Difficult to accurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
11/38 Main Challenge Difficult to accurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group What would have happened if roads were not built where they got built? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
11/38 Main Challenge Difficult to accurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group What would have happened if roads were not built where they got built? We can observe what happens before and after new infrastructure is constructed in ‘treated’ areas Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
11/38 Main Challenge Difficult to accurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group What would have happened if roads were not built where they got built? We can observe what happens before and after new infrastructure is constructed in ‘treated’ areas But incorrect to attribute the change exclusively to roads – maybe policy is to help a region: roads and financing are both a result of that Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
11/38 Main Challenge Difficult to accurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group What would have happened if roads were not built where they got built? We can observe what happens before and after new infrastructure is constructed in ‘treated’ areas But incorrect to attribute the change exclusively to roads – maybe policy is to help a region: roads and financing are both a result of that Could be solved if we could find 2 identical villages, one that – randomly – gets a road, the other does not Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
12/38 How we progress Exploit conditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
12/38 How we progress Exploit conditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
12/38 How we progress Exploit conditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
12/38 How we progress Exploit conditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Program explicitly prioritized building new roads to connect all villages above explicit population thresholds Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
12/38 How we progress Exploit conditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Program explicitly prioritized building new roads to connect all villages above explicit population thresholds E.g., villages with populations just above key round figures, 1000 and 500, were to be prioritized under the program. Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
12/38 How we progress Exploit conditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Program explicitly prioritized building new roads to connect all villages above explicit population thresholds E.g., villages with populations just above key round figures, 1000 and 500, were to be prioritized under the program. Assuming a village with populations just below the threshold, say population 480, is very similar to one just above, say population 520 – if one has a road and the other does not, this is almost random Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
12/38 How we progress Exploit conditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Program explicitly prioritized building new roads to connect all villages above explicit population thresholds E.g., villages with populations just above key round figures, 1000 and 500, were to be prioritized under the program. Assuming a village with populations just below the threshold, say population 480, is very similar to one just above, say population 520 – if one has a road and the other does not, this is almost random Allows us to identify the effect of roads better Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
13/38 Population-based Cutoffs for Road Building Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 13 / 38
14/38 Summary Results We find large financing responses to rural road connectivity Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
14/38 Summary Results We find large financing responses to rural road connectivity In villages right above the population cutoff Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
14/38 Summary Results We find large financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
14/38 Summary Results We find large financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans average amount lent to them is 20-40% higher Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
14/38 Summary Results We find large financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans average amount lent to them is 20-40% higher Roads seem to disproportionately benefit Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
14/38 Summary Results We find large financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans average amount lent to them is 20-40% higher Roads seem to disproportionately benefit villagers who lack collateralizable assets Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
14/38 Summary Results We find large financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans average amount lent to them is 20-40% higher Roads seem to disproportionately benefit villagers who lack collateralizable assets lower caste villagers with basic education Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
15/38 Roadmap 1 Overview 2 Background and Data 3 Main Results 4 Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 15 / 38
16/38 Does being above the population cutoff really predict road construction? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 16 / 38
17/38 Does being above the population cutoff really predict road construction? An average Ganjam village right above the population cutoff is 23-28% more likely to get a road than one right below Even higher differences in our bank loan sample Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 17 / 38
18/38 No evidence of population manipulation Population figures from 2001 census – before PMGSY policy cutoffs announced Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 18 / 38
19/38 No differences in other village characteristics around cutoff Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 19 / 38
20/38 Financing: Data Proprietary loan-level dataset from one of India’s largest private lenders Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 20 / 38
20/38 Financing: Data Proprietary loan-level dataset from one of India’s largest private lenders loans made to villagers in the largely rural district of Ganjam in the eastern state of Odisha Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 20 / 38
20/38 Financing: Data Proprietary loan-level dataset from one of India’s largest private lenders loans made to villagers in the largely rural district of Ganjam in the eastern state of Odisha Detailed information on loans made, purpose of loan, maturity, repayment behavior, and borrower characteristics Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 20 / 38
20/38 Financing: Data Proprietary loan-level dataset from one of India’s largest private lenders loans made to villagers in the largely rural district of Ganjam in the eastern state of Odisha Detailed information on loans made, purpose of loan, maturity, repayment behavior, and borrower characteristics Supplemented by data from PMGSY and Census websites, carefully hand-matched Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 20 / 38
21/38 Bank presence in Ganjam Sample villages within population range (+/-200) in very close proximity Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 21 / 38
22/38 Data Summary Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 22 / 38
23/38 Empirical Methodology Compare various financing-related outcomes for villagers in above cutoff villages, relative to below Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
23/38 Empirical Methodology Compare various financing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
23/38 Empirical Methodology Compare various financing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
23/38 Empirical Methodology Compare various financing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Key idea: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
23/38 Empirical Methodology Compare various financing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Key idea: Villagers in above cutoff villages are very similar to those below Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
23/38 Empirical Methodology Compare various financing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Key idea: Villagers in above cutoff villages are very similar to those below EXCEPT that they are much more likely to have received a road in the recent past Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
23/38 Empirical Methodology Compare various financing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Key idea: Villagers in above cutoff villages are very similar to those below EXCEPT that they are much more likely to have received a road in the recent past Note that we will not exploit the exact timing of road construction, since that is still likely endogenous Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
24/38 Roadmap 1 Overview 2 Background and Data 3 Main Results 4 Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 24 / 38
25/38 Extensive Margin Number of people who get loans substantially higher above population cutoff Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 25 / 38
26/38 Intensive Margin: Loan Amounts Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 26 / 38
27/38 Intensive Margin: Loan Amounts Loan amounts substantially higher as well Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 27 / 38
27/38 Intensive Margin: Loan Amounts Loan amounts substantially higher as well loans made to villagers in above-cutoff villages about 20% higher Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 27 / 38
27/38 Intensive Margin: Loan Amounts Loan amounts substantially higher as well loans made to villagers in above-cutoff villages about 20% higher As a percentage of borrower income, magnitude of this difference close to 40% Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 27 / 38
27/38 Intensive Margin: Loan Amounts Loan amounts substantially higher as well loans made to villagers in above-cutoff villages about 20% higher As a percentage of borrower income, magnitude of this difference close to 40% Note that since we have bank data, we can control for all borrower characteristics that the bank cares about and collects information on Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 27 / 38
28/38 Other Loan Characteristics No substantial difference in other loan features: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
28/38 Other Loan Characteristics No substantial difference in other loan features: Maturity Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
28/38 Other Loan Characteristics No substantial difference in other loan features: Maturity Interest rates Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
28/38 Other Loan Characteristics No substantial difference in other loan features: Maturity Interest rates Default behavior Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
28/38 Other Loan Characteristics No substantial difference in other loan features: Maturity Interest rates Default behavior Indicates loans not riskier or less profitable – consistent with connectivity expanding profitable lending opportunities Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
29/38 Loan Types We can differentiate between types of loans made, based on use Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 29 / 38
29/38 Loan Types We can differentiate between types of loans made, based on use Productive loans are crop loans, micro-enterprise loans for village shops, or those that are meant for business expansion, asset acquisition, and working capital needs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 29 / 38
29/38 Loan Types We can differentiate between types of loans made, based on use Productive loans are crop loans, micro-enterprise loans for village shops, or those that are meant for business expansion, asset acquisition, and working capital needs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 29 / 38
29/38 Loan Types We can differentiate between types of loans made, based on use Productive loans are crop loans, micro-enterprise loans for village shops, or those that are meant for business expansion, asset acquisition, and working capital needs Non-productive loans are those meant for consumption needs, marriage and festival expenses Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 29 / 38
30/38 Loan Types Difference comes entirely from productive loans Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
30/38 Loan Types Difference comes entirely from productive loans Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
30/38 Loan Types Difference comes entirely from productive loans Within productive loans, crop and micro-enterprise loans account for the largest differences Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
30/38 Loan Types Difference comes entirely from productive loans Within productive loans, crop and micro-enterprise loans account for the largest differences Non-productive Loans are actually lower in above cut-off villages Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
30/38 Loan Types Difference comes entirely from productive loans Within productive loans, crop and micro-enterprise loans account for the largest differences Non-productive Loans are actually lower in above cut-off villages Consistent with reallocation from consumption-oriented to production-orientation lending Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
30/38 Loan Types Difference comes entirely from productive loans Within productive loans, crop and micro-enterprise loans account for the largest differences Non-productive Loans are actually lower in above cut-off villages Consistent with reallocation from consumption-oriented to production-orientation lending Not consistent with wealth effects driving lending Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
31/38 Demand or Supply? Demand-side story Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 31 / 38
31/38 Demand or Supply? Demand-side story Higher demand for bank loans in above-cutoff villages to utilize new opportunities Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 31 / 38
31/38 Demand or Supply? Demand-side story Higher demand for bank loans in above-cutoff villages to utilize new opportunities Supply-side story Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 31 / 38
31/38 Demand or Supply? Demand-side story Higher demand for bank loans in above-cutoff villages to utilize new opportunities Supply-side story Easier to provide and travel to monitor bank loans in above-cutoff villages Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 31 / 38
32/38 Demand or Supply? Evidence mostly supports a demand-side story Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 32 / 38
32/38 Demand or Supply? Evidence mostly supports a demand-side story Loan amounts are higher in above-cutoff villages, conditional on borrower having been reached by bank Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 32 / 38
32/38 Demand or Supply? Evidence mostly supports a demand-side story Loan amounts are higher in above-cutoff villages, conditional on borrower having been reached by bank Productive loans higher at the expense of non-productive loans Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 32 / 38
32/38 Demand or Supply? Evidence mostly supports a demand-side story Loan amounts are higher in above-cutoff villages, conditional on borrower having been reached by bank Productive loans higher at the expense of non-productive loans Bank operates on a nodal branch model – villagers come to the branch to seek loans, bank officers typically do not travel to villages to generate interest Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 32 / 38
33/38 A Placebo Test Comparing similar villages across the population cutoff Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 33 / 38
33/38 A Placebo Test Comparing similar villages across the population cutoff Difference: already had roads under a different program that had nothing to do with population-based cutoffs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 33 / 38
33/38 A Placebo Test Comparing similar villages across the population cutoff Difference: already had roads under a different program that had nothing to do with population-based cutoffs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 33 / 38
33/38 A Placebo Test Comparing similar villages across the population cutoff Difference: already had roads under a different program that had nothing to do with population-based cutoffs None of our results obtain, in spite of more statistical power in tests Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 33 / 38
34/38 Roadmap 1 Overview 2 Background and Data 3 Main Results 4 Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 34 / 38
35/38 Who Benefits More? Results stronger for Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
35/38 Who Benefits More? Results stronger for Households that have low assets – especially those without significant cultivable land ownership Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
35/38 Who Benefits More? Results stronger for Households that have low assets – especially those without significant cultivable land ownership Lower caste villagers – SCs, STs and OBCs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
35/38 Who Benefits More? Results stronger for Households that have low assets – especially those without significant cultivable land ownership Lower caste villagers – SCs, STs and OBCs Villagers with basic education Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
35/38 Who Benefits More? Results stronger for Households that have low assets – especially those without significant cultivable land ownership Lower caste villagers – SCs, STs and OBCs Villagers with basic education No differential effect for women, or the young Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
36/38 Who Benefits More? Some possibilities why: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 36 / 38
36/38 Who Benefits More? Some possibilities why: Opportunities to work in higher paying jobs outside neighboring villages might alleviate collateral constraints: income less dependent on local crop yields, so less risky Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 36 / 38
36/38 Who Benefits More? Some possibilities why: Opportunities to work in higher paying jobs outside neighboring villages might alleviate collateral constraints: income less dependent on local crop yields, so less risky Or, opportunities to move into more profitable cash crops: given similar riskiness of income, expected returns on lending higher Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 36 / 38
37/38 Who Benefits More? None of this is due to any government mandate or rule – this is a private sector lender Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 37 / 38
37/38 Who Benefits More? None of this is due to any government mandate or rule – this is a private sector lender Giving access to financial markets to landless peasants and socially under-priviledged castes – some of the poorest sections of village society in India – has long been a focus of policy Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 37 / 38
37/38 Who Benefits More? None of this is due to any government mandate or rule – this is a private sector lender Giving access to financial markets to landless peasants and socially under-priviledged castes – some of the poorest sections of village society in India – has long been a focus of policy Rules out connectivity driving our effects through increases in land value Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 37 / 38
37/38 Who Benefits More? None of this is due to any government mandate or rule – this is a private sector lender Giving access to financial markets to landless peasants and socially under-priviledged castes – some of the poorest sections of village society in India – has long been a focus of policy Rules out connectivity driving our effects through increases in land value Can geographic mobility beget socio-economic mobility in India? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 37 / 38
38/38 Conclusion We find that private financing does indeed respond to changes in productive opportunities resulting from road connectivity Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 38 / 38
38/38 Conclusion We find that private financing does indeed respond to changes in productive opportunities resulting from road connectivity In spite of private-sector rural banking being a relatively new phenomenon Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 38 / 38
38/38 Conclusion We find that private financing does indeed respond to changes in productive opportunities resulting from road connectivity In spite of private-sector rural banking being a relatively new phenomenon Financing productivity increases might see a lot more interest among private lenders going forward Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 38 / 38
38/38 Conclusion We find that private financing does indeed respond to changes in productive opportunities resulting from road connectivity In spite of private-sector rural banking being a relatively new phenomenon Financing productivity increases might see a lot more interest among private lenders going forward Lending related to connectivity can have distributional effects, but no evidence to suggest that it worsened inequality Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 38 / 38

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Abhiroop Mukherjee - Roads and Loans

  • 1.
    1/38 Roads and Loans SumitAgarwal, Abhiroop Mukherjee and S. Lakshmi Naaraayanan March 7, 2018 Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 1 / 38
  • 2.
    2/38 Roadmap 1 Overview 2 Backgroundand Data 3 Main Results 4 Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 2 / 38
  • 3.
    3/38 Motivation: Finance andProductivity Changes When productive opportunities improve, financing should flow to those who see gains Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 3 / 38
  • 4.
    3/38 Motivation: Finance andProductivity Changes When productive opportunities improve, financing should flow to those who see gains But does private, profit-motivated financing really respond to productivity changes? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 3 / 38
  • 5.
    3/38 Motivation: Finance andProductivity Changes When productive opportunities improve, financing should flow to those who see gains But does private, profit-motivated financing really respond to productivity changes? not just for the large corporations or households in countries with developed financial markets – Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 3 / 38
  • 6.
    3/38 Motivation: Finance andProductivity Changes When productive opportunities improve, financing should flow to those who see gains But does private, profit-motivated financing really respond to productivity changes? not just for the large corporations or households in countries with developed financial markets – but also in the day-to-day lives of the world’s poor? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 3 / 38
  • 7.
    4/38 Motivation: Finance andProductivity Changes We shed new light on this issue by focusing on a large rural road-building initiative in India Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 4 / 38
  • 8.
    5/38 New Roads Everywhere Inmany parts of the world, infrastructure projects are thought to be key to unlocking productivity increases Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
  • 9.
    5/38 New Roads Everywhere Inmany parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
  • 10.
    5/38 New Roads Everywhere Inmany parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Roads are particularly topical Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
  • 11.
    5/38 New Roads Everywhere Inmany parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Roads are particularly topical Tremendous growth in roads in Asia, Africa, South America, and Eastern Europe in the past 20 years alone Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
  • 12.
    5/38 New Roads Everywhere Inmany parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Roads are particularly topical Tremendous growth in roads in Asia, Africa, South America, and Eastern Europe in the past 20 years alone China’s trillion dollar ‘Belt and Road Initiative’ – “the biggest investment project in history” Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
  • 13.
    5/38 New Roads Everywhere Inmany parts of the world, infrastructure projects are thought to be key to unlocking productivity increases e.g., Storeygard(2014), Aggarwal (2015), Donaldson(2016), Shamdasani (2016), Asher and Novosad (2017) Roads are particularly topical Tremendous growth in roads in Asia, Africa, South America, and Eastern Europe in the past 20 years alone China’s trillion dollar ‘Belt and Road Initiative’ – “the biggest investment project in history” India built 1.96 million kilometers of rural roads between 2000-2016 connecting 100s of millions Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 5 / 38
  • 14.
    6/38 Roads to Growth? Howare roads meant to create productive opportunities for people connected? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 6 / 38
  • 15.
    6/38 Roads to Growth? Howare roads meant to create productive opportunities for people connected? opening or expansion of small businesses, like village grocery shops Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 6 / 38
  • 16.
    6/38 Roads to Growth? Howare roads meant to create productive opportunities for people connected? opening or expansion of small businesses, like village grocery shops allowing surplus agricultural laborers to commute to nearby towns to access more productive jobs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 6 / 38
  • 17.
    6/38 Roads to Growth? Howare roads meant to create productive opportunities for people connected? opening or expansion of small businesses, like village grocery shops allowing surplus agricultural laborers to commute to nearby towns to access more productive jobs changing crop patterns from subsistence cereal farming to more profitable market-based crops Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 6 / 38
  • 18.
    7/38 Roads to Growth? Manyof these channels, however, require availability of financing Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
  • 19.
    7/38 Roads to Growth? Manyof these channels, however, require availability of financing Typically assumed that such financing to households will automatically follow once roads are built Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
  • 20.
    7/38 Roads to Growth? Manyof these channels, however, require availability of financing Typically assumed that such financing to households will automatically follow once roads are built But many rural economies suffer from chronic problems of financing Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
  • 21.
    7/38 Roads to Growth? Manyof these channels, however, require availability of financing Typically assumed that such financing to households will automatically follow once roads are built But many rural economies suffer from chronic problems of financing Formal finance is largely absent in many parts of the world Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
  • 22.
    7/38 Roads to Growth? Manyof these channels, however, require availability of financing Typically assumed that such financing to households will automatically follow once roads are built But many rural economies suffer from chronic problems of financing Formal finance is largely absent in many parts of the world Informal money lenders charge usurious interest rates, tying down laborers to dismal conditions Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 7 / 38
  • 23.
    8/38 Roads and Finance Centralquestion today in finance for emerging markets Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 8 / 38
  • 24.
    8/38 Roads and Finance Centralquestion today in finance for emerging markets Will traditional private sector financing respond to changing productive opportunities created by these mega infrastructure projects? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 8 / 38
  • 25.
    8/38 Roads and Finance Centralquestion today in finance for emerging markets Will traditional private sector financing respond to changing productive opportunities created by these mega infrastructure projects? Outside of very limited microfinance wings, private banks typically do not lend to rural households, ticket sizes are small Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 8 / 38
  • 26.
    8/38 Roads and Finance Centralquestion today in finance for emerging markets Will traditional private sector financing respond to changing productive opportunities created by these mega infrastructure projects? Outside of very limited microfinance wings, private banks typically do not lend to rural households, ticket sizes are small But massive market sizes and growth rates of the rural sector in emerging economies has piqued interest recently Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 8 / 38
  • 27.
    9/38 Roads and Finance Whydo we care? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
  • 28.
    9/38 Roads and Finance Whydo we care? If private financing does NOT respond: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
  • 29.
    9/38 Roads and Finance Whydo we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
  • 30.
    9/38 Roads and Finance Whydo we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads If private financing DOES respond: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
  • 31.
    9/38 Roads and Finance Whydo we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads If private financing DOES respond: room for private sector financing can mean less fiscal pressure, easier path to benefits percolating down Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
  • 32.
    9/38 Roads and Finance Whydo we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads If private financing DOES respond: room for private sector financing can mean less fiscal pressure, easier path to benefits percolating down Relates to literature on the role of financing in development Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
  • 33.
    9/38 Roads and Finance Whydo we care? If private financing does NOT respond: governments will have to provide financing to rural households on top of financing roads If private financing DOES respond: room for private sector financing can mean less fiscal pressure, easier path to benefits percolating down Relates to literature on the role of financing in development King and Levine (1993), Black and Strahan (2002), Burgess and Pande (2004), Levine (2005), Beck, Demirguc-Kunt and Peria (2007), Demirguc-Kunt and Levine (2008), Beck (2012), Demirguc-Kunt, Feyen, and Levine (2013) Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 9 / 38
  • 34.
    10/38 Roads and Finance DistributionalEffects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
  • 35.
    10/38 Roads and Finance DistributionalEffects If private financing does respond, who does it benefit more? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
  • 36.
    10/38 Roads and Finance DistributionalEffects If private financing does respond, who does it benefit more? Richer villagers who had access to finance before roads, and might be in a better position to exploit new opportunities? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
  • 37.
    10/38 Roads and Finance DistributionalEffects If private financing does respond, who does it benefit more? Richer villagers who had access to finance before roads, and might be in a better position to exploit new opportunities? Or the poor – people who were excluded from formal finance, but can now find a way in? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
  • 38.
    10/38 Roads and Finance DistributionalEffects If private financing does respond, who does it benefit more? Richer villagers who had access to finance before roads, and might be in a better position to exploit new opportunities? Or the poor – people who were excluded from formal finance, but can now find a way in? Will roads increase – or reduce – inequality? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 10 / 38
  • 39.
    11/38 Main Challenge Difficult toaccurately identify the impact of new infrastructure Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
  • 40.
    11/38 Main Challenge Difficult toaccurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
  • 41.
    11/38 Main Challenge Difficult toaccurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group What would have happened if roads were not built where they got built? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
  • 42.
    11/38 Main Challenge Difficult toaccurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group What would have happened if roads were not built where they got built? We can observe what happens before and after new infrastructure is constructed in ‘treated’ areas Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
  • 43.
    11/38 Main Challenge Difficult toaccurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group What would have happened if roads were not built where they got built? We can observe what happens before and after new infrastructure is constructed in ‘treated’ areas But incorrect to attribute the change exclusively to roads – maybe policy is to help a region: roads and financing are both a result of that Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
  • 44.
    11/38 Main Challenge Difficult toaccurately identify the impact of new infrastructure Hard to identify an appropriate counterfactual or comparison group What would have happened if roads were not built where they got built? We can observe what happens before and after new infrastructure is constructed in ‘treated’ areas But incorrect to attribute the change exclusively to roads – maybe policy is to help a region: roads and financing are both a result of that Could be solved if we could find 2 identical villages, one that – randomly – gets a road, the other does not Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 11 / 38
  • 45.
    12/38 How we progress Exploitconditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
  • 46.
    12/38 How we progress Exploitconditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
  • 47.
    12/38 How we progress Exploitconditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
  • 48.
    12/38 How we progress Exploitconditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Program explicitly prioritized building new roads to connect all villages above explicit population thresholds Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
  • 49.
    12/38 How we progress Exploitconditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Program explicitly prioritized building new roads to connect all villages above explicit population thresholds E.g., villages with populations just above key round figures, 1000 and 500, were to be prioritized under the program. Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
  • 50.
    12/38 How we progress Exploitconditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Program explicitly prioritized building new roads to connect all villages above explicit population thresholds E.g., villages with populations just above key round figures, 1000 and 500, were to be prioritized under the program. Assuming a village with populations just below the threshold, say population 480, is very similar to one just above, say population 520 – if one has a road and the other does not, this is almost random Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
  • 51.
    12/38 How we progress Exploitconditions surrounding India’s Pradhan Mantri Gram Sadak Yojna (PMGSY) Objective was to provide all-weather road connectivity to hitherto unconnected villages Aggarwal (2015) and Shamdasani (2016) Program explicitly prioritized building new roads to connect all villages above explicit population thresholds E.g., villages with populations just above key round figures, 1000 and 500, were to be prioritized under the program. Assuming a village with populations just below the threshold, say population 480, is very similar to one just above, say population 520 – if one has a road and the other does not, this is almost random Allows us to identify the effect of roads better Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 12 / 38
  • 52.
    13/38 Population-based Cutoffs forRoad Building Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 13 / 38
  • 53.
    14/38 Summary Results We findlarge financing responses to rural road connectivity Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
  • 54.
    14/38 Summary Results We findlarge financing responses to rural road connectivity In villages right above the population cutoff Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
  • 55.
    14/38 Summary Results We findlarge financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
  • 56.
    14/38 Summary Results We findlarge financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans average amount lent to them is 20-40% higher Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
  • 57.
    14/38 Summary Results We findlarge financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans average amount lent to them is 20-40% higher Roads seem to disproportionately benefit Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
  • 58.
    14/38 Summary Results We findlarge financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans average amount lent to them is 20-40% higher Roads seem to disproportionately benefit villagers who lack collateralizable assets Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
  • 59.
    14/38 Summary Results We findlarge financing responses to rural road connectivity In villages right above the population cutoff over 50% more villagers receive loans average amount lent to them is 20-40% higher Roads seem to disproportionately benefit villagers who lack collateralizable assets lower caste villagers with basic education Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 14 / 38
  • 60.
    15/38 Roadmap 1 Overview 2 Backgroundand Data 3 Main Results 4 Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 15 / 38
  • 61.
    16/38 Does being abovethe population cutoff really predict road construction? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 16 / 38
  • 62.
    17/38 Does being abovethe population cutoff really predict road construction? An average Ganjam village right above the population cutoff is 23-28% more likely to get a road than one right below Even higher differences in our bank loan sample Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 17 / 38
  • 63.
    18/38 No evidence ofpopulation manipulation Population figures from 2001 census – before PMGSY policy cutoffs announced Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 18 / 38
  • 64.
    19/38 No differences inother village characteristics around cutoff Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 19 / 38
  • 65.
    20/38 Financing: Data Proprietary loan-leveldataset from one of India’s largest private lenders Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 20 / 38
  • 66.
    20/38 Financing: Data Proprietary loan-leveldataset from one of India’s largest private lenders loans made to villagers in the largely rural district of Ganjam in the eastern state of Odisha Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 20 / 38
  • 67.
    20/38 Financing: Data Proprietary loan-leveldataset from one of India’s largest private lenders loans made to villagers in the largely rural district of Ganjam in the eastern state of Odisha Detailed information on loans made, purpose of loan, maturity, repayment behavior, and borrower characteristics Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 20 / 38
  • 68.
    20/38 Financing: Data Proprietary loan-leveldataset from one of India’s largest private lenders loans made to villagers in the largely rural district of Ganjam in the eastern state of Odisha Detailed information on loans made, purpose of loan, maturity, repayment behavior, and borrower characteristics Supplemented by data from PMGSY and Census websites, carefully hand-matched Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 20 / 38
  • 69.
    21/38 Bank presence inGanjam Sample villages within population range (+/-200) in very close proximity Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 21 / 38
  • 70.
    22/38 Data Summary Agarwal, Mukherjeeand Naaraayanan Roads and Loans March 7, 2018 22 / 38
  • 71.
    23/38 Empirical Methodology Compare variousfinancing-related outcomes for villagers in above cutoff villages, relative to below Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
  • 72.
    23/38 Empirical Methodology Compare variousfinancing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
  • 73.
    23/38 Empirical Methodology Compare variousfinancing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
  • 74.
    23/38 Empirical Methodology Compare variousfinancing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Key idea: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
  • 75.
    23/38 Empirical Methodology Compare variousfinancing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Key idea: Villagers in above cutoff villages are very similar to those below Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
  • 76.
    23/38 Empirical Methodology Compare variousfinancing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Key idea: Villagers in above cutoff villages are very similar to those below EXCEPT that they are much more likely to have received a road in the recent past Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
  • 77.
    23/38 Empirical Methodology Compare variousfinancing-related outcomes for villagers in above cutoff villages, relative to below All villages were unconnected when the bank started operations in our district Most of the above-cutoff ones received roads before the end of our sample; most of the below-cutoff ones did not Key idea: Villagers in above cutoff villages are very similar to those below EXCEPT that they are much more likely to have received a road in the recent past Note that we will not exploit the exact timing of road construction, since that is still likely endogenous Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 23 / 38
  • 78.
    24/38 Roadmap 1 Overview 2 Backgroundand Data 3 Main Results 4 Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 24 / 38
  • 79.
    25/38 Extensive Margin Number ofpeople who get loans substantially higher above population cutoff Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 25 / 38
  • 80.
    26/38 Intensive Margin: LoanAmounts Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 26 / 38
  • 81.
    27/38 Intensive Margin: LoanAmounts Loan amounts substantially higher as well Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 27 / 38
  • 82.
    27/38 Intensive Margin: LoanAmounts Loan amounts substantially higher as well loans made to villagers in above-cutoff villages about 20% higher Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 27 / 38
  • 83.
    27/38 Intensive Margin: LoanAmounts Loan amounts substantially higher as well loans made to villagers in above-cutoff villages about 20% higher As a percentage of borrower income, magnitude of this difference close to 40% Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 27 / 38
  • 84.
    27/38 Intensive Margin: LoanAmounts Loan amounts substantially higher as well loans made to villagers in above-cutoff villages about 20% higher As a percentage of borrower income, magnitude of this difference close to 40% Note that since we have bank data, we can control for all borrower characteristics that the bank cares about and collects information on Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 27 / 38
  • 85.
    28/38 Other Loan Characteristics Nosubstantial difference in other loan features: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
  • 86.
    28/38 Other Loan Characteristics Nosubstantial difference in other loan features: Maturity Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
  • 87.
    28/38 Other Loan Characteristics Nosubstantial difference in other loan features: Maturity Interest rates Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
  • 88.
    28/38 Other Loan Characteristics Nosubstantial difference in other loan features: Maturity Interest rates Default behavior Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
  • 89.
    28/38 Other Loan Characteristics Nosubstantial difference in other loan features: Maturity Interest rates Default behavior Indicates loans not riskier or less profitable – consistent with connectivity expanding profitable lending opportunities Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 28 / 38
  • 90.
    29/38 Loan Types We candifferentiate between types of loans made, based on use Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 29 / 38
  • 91.
    29/38 Loan Types We candifferentiate between types of loans made, based on use Productive loans are crop loans, micro-enterprise loans for village shops, or those that are meant for business expansion, asset acquisition, and working capital needs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 29 / 38
  • 92.
    29/38 Loan Types We candifferentiate between types of loans made, based on use Productive loans are crop loans, micro-enterprise loans for village shops, or those that are meant for business expansion, asset acquisition, and working capital needs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 29 / 38
  • 93.
    29/38 Loan Types We candifferentiate between types of loans made, based on use Productive loans are crop loans, micro-enterprise loans for village shops, or those that are meant for business expansion, asset acquisition, and working capital needs Non-productive loans are those meant for consumption needs, marriage and festival expenses Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 29 / 38
  • 94.
    30/38 Loan Types Difference comesentirely from productive loans Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
  • 95.
    30/38 Loan Types Difference comesentirely from productive loans Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
  • 96.
    30/38 Loan Types Difference comesentirely from productive loans Within productive loans, crop and micro-enterprise loans account for the largest differences Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
  • 97.
    30/38 Loan Types Difference comesentirely from productive loans Within productive loans, crop and micro-enterprise loans account for the largest differences Non-productive Loans are actually lower in above cut-off villages Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
  • 98.
    30/38 Loan Types Difference comesentirely from productive loans Within productive loans, crop and micro-enterprise loans account for the largest differences Non-productive Loans are actually lower in above cut-off villages Consistent with reallocation from consumption-oriented to production-orientation lending Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
  • 99.
    30/38 Loan Types Difference comesentirely from productive loans Within productive loans, crop and micro-enterprise loans account for the largest differences Non-productive Loans are actually lower in above cut-off villages Consistent with reallocation from consumption-oriented to production-orientation lending Not consistent with wealth effects driving lending Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 30 / 38
  • 100.
    31/38 Demand or Supply? Demand-sidestory Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 31 / 38
  • 101.
    31/38 Demand or Supply? Demand-sidestory Higher demand for bank loans in above-cutoff villages to utilize new opportunities Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 31 / 38
  • 102.
    31/38 Demand or Supply? Demand-sidestory Higher demand for bank loans in above-cutoff villages to utilize new opportunities Supply-side story Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 31 / 38
  • 103.
    31/38 Demand or Supply? Demand-sidestory Higher demand for bank loans in above-cutoff villages to utilize new opportunities Supply-side story Easier to provide and travel to monitor bank loans in above-cutoff villages Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 31 / 38
  • 104.
    32/38 Demand or Supply? Evidencemostly supports a demand-side story Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 32 / 38
  • 105.
    32/38 Demand or Supply? Evidencemostly supports a demand-side story Loan amounts are higher in above-cutoff villages, conditional on borrower having been reached by bank Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 32 / 38
  • 106.
    32/38 Demand or Supply? Evidencemostly supports a demand-side story Loan amounts are higher in above-cutoff villages, conditional on borrower having been reached by bank Productive loans higher at the expense of non-productive loans Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 32 / 38
  • 107.
    32/38 Demand or Supply? Evidencemostly supports a demand-side story Loan amounts are higher in above-cutoff villages, conditional on borrower having been reached by bank Productive loans higher at the expense of non-productive loans Bank operates on a nodal branch model – villagers come to the branch to seek loans, bank officers typically do not travel to villages to generate interest Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 32 / 38
  • 108.
    33/38 A Placebo Test Comparingsimilar villages across the population cutoff Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 33 / 38
  • 109.
    33/38 A Placebo Test Comparingsimilar villages across the population cutoff Difference: already had roads under a different program that had nothing to do with population-based cutoffs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 33 / 38
  • 110.
    33/38 A Placebo Test Comparingsimilar villages across the population cutoff Difference: already had roads under a different program that had nothing to do with population-based cutoffs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 33 / 38
  • 111.
    33/38 A Placebo Test Comparingsimilar villages across the population cutoff Difference: already had roads under a different program that had nothing to do with population-based cutoffs None of our results obtain, in spite of more statistical power in tests Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 33 / 38
  • 112.
    34/38 Roadmap 1 Overview 2 Backgroundand Data 3 Main Results 4 Distributional Effects Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 34 / 38
  • 113.
    35/38 Who Benefits More? Resultsstronger for Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
  • 114.
    35/38 Who Benefits More? Resultsstronger for Households that have low assets – especially those without significant cultivable land ownership Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
  • 115.
    35/38 Who Benefits More? Resultsstronger for Households that have low assets – especially those without significant cultivable land ownership Lower caste villagers – SCs, STs and OBCs Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
  • 116.
    35/38 Who Benefits More? Resultsstronger for Households that have low assets – especially those without significant cultivable land ownership Lower caste villagers – SCs, STs and OBCs Villagers with basic education Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
  • 117.
    35/38 Who Benefits More? Resultsstronger for Households that have low assets – especially those without significant cultivable land ownership Lower caste villagers – SCs, STs and OBCs Villagers with basic education No differential effect for women, or the young Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 35 / 38
  • 118.
    36/38 Who Benefits More? Somepossibilities why: Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 36 / 38
  • 119.
    36/38 Who Benefits More? Somepossibilities why: Opportunities to work in higher paying jobs outside neighboring villages might alleviate collateral constraints: income less dependent on local crop yields, so less risky Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 36 / 38
  • 120.
    36/38 Who Benefits More? Somepossibilities why: Opportunities to work in higher paying jobs outside neighboring villages might alleviate collateral constraints: income less dependent on local crop yields, so less risky Or, opportunities to move into more profitable cash crops: given similar riskiness of income, expected returns on lending higher Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 36 / 38
  • 121.
    37/38 Who Benefits More? Noneof this is due to any government mandate or rule – this is a private sector lender Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 37 / 38
  • 122.
    37/38 Who Benefits More? Noneof this is due to any government mandate or rule – this is a private sector lender Giving access to financial markets to landless peasants and socially under-priviledged castes – some of the poorest sections of village society in India – has long been a focus of policy Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 37 / 38
  • 123.
    37/38 Who Benefits More? Noneof this is due to any government mandate or rule – this is a private sector lender Giving access to financial markets to landless peasants and socially under-priviledged castes – some of the poorest sections of village society in India – has long been a focus of policy Rules out connectivity driving our effects through increases in land value Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 37 / 38
  • 124.
    37/38 Who Benefits More? Noneof this is due to any government mandate or rule – this is a private sector lender Giving access to financial markets to landless peasants and socially under-priviledged castes – some of the poorest sections of village society in India – has long been a focus of policy Rules out connectivity driving our effects through increases in land value Can geographic mobility beget socio-economic mobility in India? Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 37 / 38
  • 125.
    38/38 Conclusion We find thatprivate financing does indeed respond to changes in productive opportunities resulting from road connectivity Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 38 / 38
  • 126.
    38/38 Conclusion We find thatprivate financing does indeed respond to changes in productive opportunities resulting from road connectivity In spite of private-sector rural banking being a relatively new phenomenon Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 38 / 38
  • 127.
    38/38 Conclusion We find thatprivate financing does indeed respond to changes in productive opportunities resulting from road connectivity In spite of private-sector rural banking being a relatively new phenomenon Financing productivity increases might see a lot more interest among private lenders going forward Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 38 / 38
  • 128.
    38/38 Conclusion We find thatprivate financing does indeed respond to changes in productive opportunities resulting from road connectivity In spite of private-sector rural banking being a relatively new phenomenon Financing productivity increases might see a lot more interest among private lenders going forward Lending related to connectivity can have distributional effects, but no evidence to suggest that it worsened inequality Agarwal, Mukherjee and Naaraayanan Roads and Loans March 7, 2018 38 / 38