Can Workforce Serve as a Substitute for Weather Insurance? The Case of NREGA in Andhra Pradesh

This study examines whether workfare programs, such as NREGA, can provide coping mechanisms for low-income households, by stabilising income generation during economic shocks caused by weather risks.

Background
Rural households in India due to their dependence on agrarian practices for income, are highly vulnerable during erratic or adverse weather events. Even their informal coping strategies, such as selling income-generating assets or working on other agricultural plots, fail to provide respite as the entire risk-sharing network might be experiencing the same shock. Formal risk mitigation measures such as yield-based crop insurances suffer from measurement problems, non-compliance and lack of cost-effectiveness.
Workfare programs, which are typically seen as a way of providing income stability and gainful employment to people in rural areas, fly under the radar for policymakers 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.
Approach
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 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, an analysis of the impact of rainfall in each agricultural season on NREGA participation in the following non-agricultural (lean) season was done, the assumption being that NREGA participation in the lean season would rise after a particularly bad agricultural season.
This was followed by a regression analysis 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 disentangled the channels through which wages per working age adult might be impacted and examined the effect of rainfall on population engaged in NREGA, number of days worked, and daily wage.

Findings
Findings from the study indicate that rainfall during the agricultural season significantly impacts NREGA participation levels. Adverse weather during the agricultural season led to higher overall participation in NREGA programs during the following lean season, and vice versa, good weather led to lower participation levels. NREGA, if implemented transparently, could improve household welfare in the long-run by reducing vulnerability to risk.
To test for the policy effectiveness of NREGA, its responsiveness to adverse income shocks was compared with other aid programs. Findings from this study were also compared to the Indiramma program, a scheme that provides beneficiaries with materials and cash payments to help them build or improve their homes.

Implications

Findings from the study indicate that schemes such as NREGA can act as an efficient risk-coping mechanism for low-income households. Since participation in NREGA may help families supplement their income in poor agricultural seasons, the program can be scaled-up and targeted towards areas that are more vulnerable to weather-related shocks and risks. 

Thematic area

Financial Inclusion

Project Leads

Doug Johnson

Location

Andhra Pradesh

Status

Completed