Poverty, Access to Credit and Absorption of Income Shocks: Evidence from SHGs in India

Studying the role of SHGs in helping the poor cope with climatic shocks, this article analyses the strength of informal microfinance groups in absorbing adverse shocks.

Introduction

I t is well documented that poor households in rural areas of developing countries often experience extremely variable incomes because of the combined effect of a large exposure to climatic, economic and policy shocks and a lack of appropriate insurance devices. Coping with climatic shocks, in particular, is becoming ever more crucial, given that climate change is expected to result in warmer temperatures as well as increasingly irregular and extreme precipitation patterns, with severe consequences for rain-fed agriculture in developing countries. In India, agriculture, which employs more than 60 per cent of the population, is extremely dependent on erratic monsoon precipitation, especially given that only a small fraction of land used for agriculture is irrigated. For instance, around 90 per cent of variation in Indian crop-production levels is due to rainfall volatility. Using macro data from 1951 to 2003, despite substantial decreases in the contribution of agriculture to the Indian GDP, severe droughts have resulted in decreases between 2 and 5 per cent of the GDP throughout the period. Rainfall shocks have been documented to affect agricultural profits, wages and ultimately the welfare of rural households significantly. Informal risk-sharing arrangements with neighbours, friends or family have often been shown to be largely imperfect in smoothing income shocks. This is especially true for rainfall variation, because a bad monsoon affects virtually every household in a local rural geographic area.

In this paper, long-term panel data measuring the evolution of living standards of SHG member households in rural India have been analysed to (i) quantify the impact of climatic shocks on different aspects of the welfare of households and (ii) measure the role of informal village microfinance groups to insure their members. The original panel household database about members of Self-Help Groups (SHGs) and meteorological data have been used to quantify and characterize the differential reaction of member and non-member households in the face of rainfall shocks. Given that most households in the sample depend principally on the cultivation of rain-fed rice, rainfall variation is expected to be an important determinant of the transitory swings in consumption and income. Although average rainfall is predictably different from place to place, the deviation of each year’s rainfall from its local mean is unpredictable. On the other hand, SHGs present very interesting characteristics, combining savings, credit and linkages with formal banks, which open the possibility of helping members absorb adverse shocks, even when those are largely covariate. Farmers in Jharkhand, it is found, are extremely vulnerable to shocks in the monsoon intensity. Rice yields can decrease by more than 50 per cent following a monsoon that is one standard deviation below average.