Indore News: Bank Accounts 8 Times More Effective Than Wage Hikes, IIM
· Free Press Journal
Indore (Madhya Pradesh): A study by researchers at the Indian Institute of Management (IIM) Indore has found that giving low-income families access to bank accounts and insurance is far more effective at preventing poverty than raising the minimum wage, a finding that could have implications for India’s social protection policies.
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Indrajit Thakurata and Dipayan Datta Chaudhuri of IIM Indore used a simulation model to track the financial life of a minimum-wage worker over 50 years.
The research shifts attention from people already living in poverty to millions of households hovering just above the poverty line, families that are one medical emergency, job loss or climate shock away from slipping below it. Researchers describe this condition as “vulnerability”, arguing that it has often been overlooked in mainstream policy discussions.
The inflation trap
The model assumed a single worker with one dependent, no bank account and savings kept entirely in cash. Over time, inflation gradually eroded the value of those savings. By retirement, the household lacked enough funds to maintain basic consumption and eventually fell below the poverty line, not due to a sudden crisis but because of the gradual impact of rising prices.
The finding highlight a structural risk affecting a large share of India’s working poor. Exclusion from the formal financial system not only limits opportunities today but can also create poverty in the future.
A bank account changes everything
When researchers introduced access to an interest-bearing bank account into the model, the results were significant. The intervention proved to be 7.92 times more cost-effective at preventing poverty than a comparable increase in the minimum wage. When the model added access to small emergency loans, the impact rose to 8.33 times more cost-effective.
Interest helps protect savings from inflation, while access to microcredit enables families to cope with short-term shocks such as illness, crop loss or sudden unemployment without permanently damaging their finances.
Insurance as a safety net
Subsidised insurance schemes also emerged as an effective tool. The study found them to be 2.33 times more cost-effective than minimum wage increases in reducing vulnerability.
While insurance does not raise income, it protects households from catastrophic events that could wipe out years of savings.
The study also found that one-time cash transfers to young families, used to stabilise consumption in early years, delivered 1.29 times the poverty-prevention benefit per rupee compared with wage increases.
Wages still matter
The researchers said minimum wage policy remains important. Higher wages can improve consumption over time and provide benefits throughout a worker’s life.
However, they argued that in a resource-constrained environment, investments in financial inclusion may deliver greater returns.
The study recommends a combined strategy of raising minimum wages while expanding access to bank accounts, microcredit and insurance coverage to reduce long-term vulnerability to poverty.
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