Buffer Stock Savings by Portfolio Adjustment: Evidence from Rural India

The empirical literature on household savings tends to treat savings simply as the residual of income minus consumption. This paper takes a unique approach to reconstruct the cash and asset balances using detailed household transaction data on farm households in rural India and generates monthly and seasonal ICRISAT panel data for the period 1976-1983. We have found that households - irrespective of their landholding status - cope with temporary shocks quite well by using crop inventory, currency and capital assets, rather than livestock, as buffer assets. The importance of portfolio adjustments in smoothing consumption is also confirmed by the use of a system of equations in which both portfolio and production decisions are made endogenous. It is concluded that not only the level but also the diversification of household assets are important for buffering consumption. As an extension, we have explored the monthly ICRISAT panel data for the period 2009-2012 in the same villages and have found a similar pattern in household portfolio responses to income shocks.