Millions of Indians run into poverty after a crisis

Due to a lack of savings and insurance, sudden crises force Indians into poverty and greater indebtedness. Almost 66% of Indians live in rural areas, and two in five households see their lives, crops, and other assets harmed by bad weather and natural disasters, causing them extensive financial distress. Despite the risk of damage, less than 7% of agricultural households have crop insurance and only 2% possess livestock insurance.

The COVID-19 pandemic is an extreme example of a sudden, mass crisis. As a result, 75 million Indians have slipped into poverty, including 32 million from the middle class, a category that contains most Strivers (low-income households). Meanwhile, 46% of urban residents borrowed money primarily to run their households. The pandemic has exposed challenges in accessing quality and affordable healthcare, even in normal times. Sudden medical costs or hospitalizations place more than a fifth of Indian households — upward of 55 million families — in severe financial hardship. The average medical expenditure for hospitalization was INR 20,000 across rural and urban public and private hospitals, with even the most affordable government hospitals averaging INR 4,000.

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More than 80% of both rural and urban individuals are not covered by any form of health insurance, despite the existence of government-sponsored insurance schemes. Not surprisingly, more than 80% of hospitalization cases see financing from scarce household income and savings, and around 10% of cases involving borrowing. Apart from exceptional cases involving hospitalization, for medical expenses in general, households are driven into debt. About 69% of them draw upon informal sources of funding, 26% of which are loans from moneylenders.

The examples above highlight the important link between the lack of insurance and an emergency fund on one hand, and (deepening) reliance on debt on the other. Without the risk mitigation offered by insurance in anticipation of adverse events, households are often forced to rush to find cash at high rates of interest. One reason that low-income households use local moneylenders during normal times is to maintain relationships that could be used in emergencies — which is sadly understandable. It is not just the immediate crisis (for example, hospitalization) that requires cash but also the short- and medium-term recovery (medicines, follow-ups), which continue to stretch finances long after the trigger event. Indeed, across all households, more than two-thirds borrow from informal sources to keep up with medical expenses.

Historically, organizations formed the basis for the demand for health insurance in India, purchasing ‘group policies’ for their employees. The COVID-19 pandemic, however, has increased demand for health insurance, mostly on the part of individuals insuring against the high costs of hospitalization in case of infection. In fact, for the first time in twenty years, health insurance premiums exceeded those for auto insurance. Much of this demand surge came during and immediately following the major COVID-19 restrictions (April — September 2020), led by Aspirers and upper-income Risers. Still, more than 80% of Indians still do not have any health insurance cover, and once the risks of COVID-19 decline, it is unclear how much of the demand will persist.

Even life insurance, the most prevalent financial asset, eludes 988 million Indians. Although 50% of survey respondents blame the lack of uptake on expensive insurance products, the true figure for the 16% of people who cite lack of awareness of insurance is likely much higher. Many of the challenges related to the shift from the extensive to the intensive margins discussed before are exacerbated in the case of insurance, which involves more cumbersome processes, more uncertainty, and different distribution channels from those of simpler financial products.