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the amount is variable depending on the periodic income- that is, it increases and
decreases proportionally as income increases and decreases or if there is both a fixed and
a variable component. In a dual component model, the fixed component does not vary
with the income level whereas the variable component comes wholly from the transitory
income; the income that accrues to a household over and above the monthly average. In
a study conducted in Thailand, it was found that farmers, in times of weather variability,
saved a higher fraction of transitory income (Paxson, 1992). Literature from the Indian
context also showed that these savings were used to buffer consumption from income
shocks (Kumbhare, Koshy, & Darad, 2010).
2.4 Savings from the Consumption smoothing angle
It is also crucial to understand the importance of savings in consumption smoothing.
When formal channels of consumption smoothing do not exist, household decisions are
based on risk aversion. That is, a household tends to under produce or not venture into
newer production techniques in the absence of savings available to mitigate any risk that
might arise due to deviation from known patterns of cultivation or known businesses. In
South India, an ICRISAT study found that farming households altered labour and
fertilizer use to overcome income shortage due to weather variability. What the literature
points to is that farmers cope using physical instead of financial means to smoothen
income and consumption (Morduch, Income Smoothing and Consumption Smoothing,
1995). However, as Anjini Kochar demonstrates, there are limits to such measures of
income smoothing due to restrictions arising from lack of substitutability between farm
and non-farm labour. Thus arises the need for a corpus fund in the form of household
savings to help maintain consumption level (Kochar, 1999).
