Under the Influence: A Quasi-Experimental Panel Data Analysis of Alcohol Consumption and Indebtedness in India

We examine the causal effect of alcohol consumption on household indebtedness in India by using nationally representative panel data for 2004-05 and 2011-12. To our knowledge, this is the first study in the literature that examines the adverse impact of alcohol consumption on economic outcomes. Much of the previous studies on adverse effects of alcohol consumption focused on physical and psychological health and traffic-related outcomes. To overcome potential endogeneity bias associated with alcohol consumption, we employ an instrumental variable quasi-experimental approach. Specifically, we exploit exogenous variation in alcohol price to identify the causal effect of alcohol consumption on indebtedness. Our results reveal an unequivocal negative impact of alcohol consumption on a range of indebtedness outcomes in the states where alcohol sale is not prohibited by law, that is, where market mechanisms determine alcohol demand. Increased indebtedness appears to transmit through lower working hours and higher medical costs incurred by the drinkers. The negative relationship between alcohol consumption on indebtedness is more pronounced in rural than urban areas.