DO EXPENDITURES ON SOCIAL OBLIGATIONS PUSH INDIAN HOUSEHOLDS TOWARD DEBT CYCLING? EVIDENCE FROM A CORRELATED RANDOM EFFECTS ANALYSIS

Abstract

The practice of debt cycling is incurring new debt to pay back existing debt obligations which has emerged as a pervasive and structurally embedded feature of Indian household finance, yet the role of culturally mandated social obligation expenditure in initiating and perpetuating this debt cycle remains scarcely understood. While existing literature documents the scale of ceremonial and social expenditure among Indian households and its association with indebtedness, the empirical evidence of causality using rigorous panel data econometrics is less. Using the longitudinal data from the Centre for Monitoring Indian Economy’s Consumer Pyramids Household Survey (CPHS) spanning 2020 to 2024, covering more than 1,80,000 households, we examine the effect of social obligation expenditure on the probability of debt cycling by estimating a Correlated Random Effects Probit model with the Mundlak device, which controls for the time-invariant unobserved household heterogeneity while retaining the full sample and all the time-invariant regressors. The study finds that social obligation expenditure significantly and robustly increases the probability of household debt cycling, with the effect operating primarily through a delayed repayment stress mechanism. Thus, expenditure on social obligations create large and unavoidable liquidity shocks that are structurally incompatible with fixed loan repayment schedules, particularly for households with volatile incomes, triggering new borrowing to service existing debt in the following period. This calls for community level interventions to reduce the arms race in social obligation spending and broader income stabilisation schemes targeting the high income-volatility that the study identifies as the dominant proximate driver of household debt cycling in India.