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

Abstract

The rural poor in developing countries have great difficulty in coping with adverse weather. In theory, workfare programs may serve as an important mechanism for allowing households to deal with the effects of weather related shocks. If participation in a workfare program is sufficiently flexible households in a village which suffers bad weather may compensate for the loss of income by increasing their participation in the program. If participation in a workfare program is not sufficiently flexible due to, for example, caps on overall participation at the local level, then the program will not allow households to compensate for the effects of a weather shock. We evaluate whether India’s new workfare program for rural areas, the National Rural Employment Guarantee Act (NREGA), allowed households in one state to mitigate the effects of weather induced income shocks by looking at whether NREGA participation is responsive to changes in rainfall. We find that NREGA did allow households to mitigate the effects of weather induced income shocks. While we are unable to precisely identify the relationship between changes in income and participation in NREGA, we show that the relationship is strong enough to be practically significant.