Using household data from the 2009 General Household Survey, this paper examines the role of natural resource scarcity in rural development in South Africa, with a particular focus on water scarcity. It seeks to examine whether there is a direct link between household water and economic poverty of rural households, with households’ total monthly income used as an indicator of economic poverty. An adaptation of a comprehensive water poverty index, which considers water access, quality, use, and water-related environmental aspects is used to measure household-level water poverty. The empirical analysis uses an instrumental variable estimation framework in order to deal with the potential endogeneity between water and economic poverty. Results support the existence of a direct link between water and economic poverty, with water-poor households likely to be economically poor. In particular, the results suggest that access to good quality water from a reliable source significantly enhances rural households’ economic status. Also, access to water determines the realized impact of overall water poverty on a household’s economic status. The paper thus cautions development policy not to treat water and economic poverty in isolation; there is need for development policy in South Africa to streamline water use in rural development. In addition, development policies need to take into account the role of household heterogeneity in conditioning both household water and economic poverty levels.