Effect of employment guarantee on access to credit: Evidence from rural India

Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is the largest and most ambitious public works program for poverty alleviation, adopted by Government of India since independence. It was implemented in year 2006, starting with the first phase of 200 most backward districts in India. Two more consecutive phases were implemented to cover all rural regions in India but, even after almost 6 years of its implementation, it has not been adequately analyzed for its effect on various development indicators. This paper aims to study, whether participating in a typical employment guarantee program like MGNREGA, increases access to financial services and in particular, credit. Results provide evidence that, MGNREGA has been successful in self-selecting rural poor into participation and households participating longer in the program have been able to borrow more from formal sources. This paper also provides evidence that, increase in productivity of economic activities for participants, due to work in MGNREGA acts as a link between longer participation and increased access to formal credit.