Does access to microfinance affect consumption inequality? :evidence from a randomized controlled trial in Andhra Pradesh, India

This paper examines the impact of access to microfinance on consumption inequality using panel data of 6080 households available from a randomized evaluation conducted by Banerjee et al. (2013) in 104 slums in Andhra Pradesh, India. We find that access to microcredit exacerbates consumption inequality both at the slum-level and the household-level. Further decomposition of inequality indices shows that this difference in consumption inequality is predominantly driven by expenditure on non-food items. However, once all households across treatment and control slums have equal access to microcredit in the long-run, the disparity in consumption inequality between treatment and control slums disappears. Our results also suggest that larger loan size and higher number of loan cycles completed by older microcredit borrowers do not cause any significant divergence in consumption inequality across treatment and control households. These results imply need for targeted livelihood support programmes for those who cannot participate in microcredit programmes.