The role of sources of income and investment opportunities in rural savings

This paper investigates the effect that sources of income and investment opportunities have on the savings behavior of farm households in rural India. The panel nature of the data (agricultural years 1968–1969, 1969–1970 and 1970–1971) allows for the identification of the permanent and transitory components of a household's income. It is shown that income variability (rather than investment opportunities) can account for observed differences in the propensity to save out of different sources (agricultural/non-agricultural). A direct test of the effect of investment opportunities on savings is offered in the second part of the paper. It is observed that capital market conditions have an important effect on this relationship; poor households save more, and rich households save less, in response to an increase in investment opportunities.