Consumption Smoothing and Income Seasonality in Rural India

Rural households in many developing countries have incomes that vary seasonally. :This paper explores whether and to what extent rural Indian households are able to use saving and borrowing to smooth consumption across months, despite seasonal income variation] The paper has two sections. The first section examines whether seasonal income and consumption patterns are linked. We provide evidence that consumption does not track income over the course of • the year. However, it also appears that transactions in financial markets and markets for physical assets are not used to accomplish seasonal consumption smoothing. Instead, the data support the idea that farm households accumulate and draw down stocks of cash and grains over the course of the year. The second section of the paper explores whether a simple buffering model of saving behavior (in which households can accumulate assets but cannot borrow) is • consistent with the degree of seasonal consumption smoothing actually observed in the data. Simulations of the model indicate that the complete absence of credit markets is consistent with very little consumption seasonality. The lesson is that even if consumption displays little seasonal variation, one cannot infer that credit markets are well-functioning.