than formal debt relief programs. However, similarly to ad hoc debt relief policies, allowing higher inflation in the present may increase expectations of future inflation. Such expectations discourage lending in the present, reducing credit access.

Moreover, attempts to provide debt relief through inflation have severe distributional implications. Inflation is a regressive tax that places a disproportionate burden on low-income households that spend a larger share of their income on consumption. The benefits of inflation as a form of debt relief are similarly regressive and accrue primarily to debtors with larger loans that have longer maturities. Given that access to finance is limited and long-term financing is scarce and only available to households at the top of the income distribution in most developing economies, inflation is an extremely unattractive instrument to provide debt relief in these settings.

# **4 Debt Relief and Borrower Expectations: Survey Evidence**

The effect of debt relief on borrower expectations is an important channel through which relief programs can affect credit market outcomes. However, there is still little empirical evidence on how beneficiaries update their expectations in response to debt relief.

To shed light on the link between debt relief and borrower expectations, this section presents evidence from a survey of microfinance and agricultural credit borrowers in India. Our survey takes advantage of a unique policy setting that exposed borrowers in two Indian states to both debt forbearance and forgiveness programs. Specifically, borrowers across India were eligible for a sixmonth _debt forbearance_ program covering both microfinance and bank loans as a result of the Covid-19 crisis. Additionally, the Indian states of Assam and Maharashtra enacted _debt forgiveness_ programs for microfinance and agricultural credit borrowers, respectively, after the end of the national Covid-19 debt moratorium.<sup>9</sup> We surveyed a total of 1,630 borrowers who had either benefited from debt forbearance, debt forgiveness, or neither of these programs. The sample consists of 810 microfinance borrowers and 820 agricultural loan borrowers residing in states of India that had offered debt forgiveness for microfinance and agricultural loans, respectively. The survey was administered after the conclusion of these debt relief programs and asked beneficiaries and non-beneficiaries how they would expect debt relief to change their own credit market behavior as well as the credit market behavior of the average borrower. The survey elicits first and second order beliefs about the effects of debt relief. We compare beliefs regarding debt forbearance and forgiveness, as well as the beliefs reported by beneficiaries and nonbeneficiaries.<sup>10</sup> We emphasize that all results we present are descriptive and should not be given a causal interpretation, given that exposure to debt relief was not randomly assigned.

We begin by describing borrowers’ overall beliefs about the impact of debt relief, pooling across all types of debt relief. We first asked respondents whether they thought debt relief would damage or improve credit discipline. Only 23% of borrowers believe that debt relief will have a negative

> 9 Specifically, we interviewed borrowers who could have qualified for the _Mahatma Jyotirao Phule Loan Waiver Scheme_ , which offered debt forgiveness of up to Rs 200,000 to rural households in Maharashtra and the _Government of Assam Micro Finance Incentive and Relief Scheme (AMFIRS)_ , which offered debt forgiveness of up to Rs 25,000 to microfinance borrowers. 10 We report additional descriptive statistics and results in the supplementary online appendix.

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