Is Income Diversification Welfare-Enhancing? Empirical Evidence on Smallholder Resilience to Climate Shocks in India
Reading Time: < 1 minuteAbstract:-
In developing economies, rural households are engaging in livelihood diversification as a strategy to stabilize income and manage risk. This study examines the relationship between climate shocks, income diversification, and household welfare in rural India, a nexus that remains underexplored in the existing literature. Using pooled panel data from the 2012–13 and 2018–19 rounds of the Situation Assessment Survey, the analysis identifies the determinants of income diversification and estimates its causal impact on household welfare, measured by monthly per capita income (MPCI) and consumption expenditure (MPCE). A tri-econometric strategy is adopted, including fixed effects estimation, Pearl’s front-door criterion (FDC) approach with seemingly unrelated regression (SUR) framework, and twostage least squares (2SLS). The FDC results indicate that non-farm income acts as a partial mediator in the income diversification–welfare pathway, though the estimated effects are weaker than those from 2SLS. Under the 2SLS framework, diversification is associated with a 56 to 63% increase in MPCI and a 7 to 10% increase in MPCE. However, the welfare benefits of diversification are attenuated for households exposed to climate shocks. Marginal landholders in India exhibit income specialization, contrasting with the diversification strategies of smallholders in developed countries. We test for both linear and non-linear effects of income diversification on MPCI and MPCE, finding support for a positive and linear relationship, with heterogeneous effects based on the intensity of diversification. Despite favoring wealthier households, income diversification remains essential for smallholders, warranting inclusive, region-specific strategies (such as MGNREGA support and targeted investment in local farming systems) to promote resilience and equitable rural transformation.
