Can workforce serve as a substitute for weather insurance? The case of NREGA in Andhra Pradesh

Principal Investigators: Doug Johnson
Research Team: Doug Johnson
LEAD Centre: Centre for Microfinance (CMF)
Focus Area: Livelihoods
Project Geography: Andhra Pradesh, India
Partner: N/A
Status: Completed

Background:

The income of rural households can be volatile, likely due to the fact that many are so dependent on agricultural revenue. Income shocks, caused by erratic or adverse weather, prevent families from maintaining steady consumption levels and threaten gains that accrue to them during successful harvest seasons. What are the risk-coping mechanisms available to rural households in face of such weather fluctuations? Affected households generally use informal measures, such as selling income-generating assets or working on other agricultural plots, to cope with risk. But in case of a shock which affects an entire region, like bad rainfall, such informal coping strategies are not effective because a household’s entire risk-sharing network may be suffering from the same event (aggregate shock). In India, one formal risk mitigation measure that has been championed by state governments is yield-based crop insurance. However, due to measurement problems, noncompliance and cost these programs have not been a huge success.

Workfare programs are typically seen as a way of providing income stability and gainful employment to people in rural areas. However, policymakers rarely think of participation in workfare as a risk management tool for families in distress. This study attempts to find whether such programs can help rural households find other sources of income after a negative income shock and hence increase their ability to cope with weather risks. The workfare program analyzed in this study is NREGA (National Rural Employment Guarantee Act). The act guarantees 100 days of work in a year at minimum wage to all households willing to engage in manual labour. The crucial question in this study is that whether NREGA serves as a risk-coping mechanism by providing households work when they need it most.

Methodology
This study used secondary data provided by the Andhra Pradesh government to estimate the responsiveness of program participation to changes in rainfall. Andhra Pradesh was chosen as the study location for two reasons: a) the state government there has made NREGA data publicly available b) the NREGA program in AP was administered transparently relative to other states in India.

One of the main methodological challenges that the author faced was to isolate the impact of income shocks caused by rainfall fluctuation on NREGA participation from the other channels through which weather might impact NREGA participation. In order to control for other potential direct impacts of rainfall on participation, the author analyses the impact of rainfall in each agricultural season on NREGA participation in the following non-agricultural (lean) season, the assumption being that NREGA participation in the lean season would rise after a particularly bad agricultural season.

Regression analysis is then conducted to estimate the impact of rainfall (as measured by different weather indicators) on wages per working age adult, a variable that is considered to be the best indicator of overall NREGA participation. Further specifications intend to disentangle the channels through which wages per working age adult might be impacted and look at the effect of rainfall on population engaged in NREGA, number of days worked, and daily wage.

Findings

The findings of the study indicate that rainfall during the agricultural season significantly impacts NREGA participation levels. Adverse weather during the agricultural season leads to higher overall participation in NREGA programs during the following lean season, and vice versa, good weather leads to lower participation levels.

To test for the policy effectiveness of NREGA, the author compares its responsiveness to adverse income shocks with other aid programs. He examines a Jayachandran (2006) study, which found that access to banking services can be a very effective risk coping mechanism for households who had suffered an adverse shock to agricultural productivity. The author also compares his findings to those of the Indiramma program, a scheme that provides beneficiaries with materials and cash payments to help them build or improve their homes. Both comparisons seem to indicate that NREGA acts as at least an efficient risk-coping mechanism as the other programs.
Policy Implications

  • Since participation in NREGA may help families supplement their income after a bad agricultural season, policymakers could scale-up NREGA in areas that are more vulnerable to weather risk to help agricultural households hedge against weather risks.
  • NREGA, if implemented transparently, could improve household welfare in the long-run by reducing vulnerability to risk.

Related Resources
WORKING PAPER – Can Workfare Serve as a Substitute for Weather Insurance? The Case of NREGA in Andhra Pradesh