Myth of the Rural-Urban divide

Step into any corporate or policymaking discussion about contemporary

India, and the odds are that you will come across a reference to “Two
Indias”: the idea that the country’s rapidly growing cities are leaving rural
areas to languish(lose energy) in poverty. Despite the near-devotional
sentiment of its adherents to this theory, very little is understood about how
the rural and urban economies in modern India actually interact with one
another—and help each other grow.

Thanks to recent research we have conducted using national data spanning

the past 26 years, we can finally put some common myths behind us.

Myth 1: Faster economic growth in urban India, rather than in rural India, is
driving rapid migration to the cities. In reality, India’s rural economy has
grown on average by 7.3% year-over-year over the past decade, against
5.4% in the urban sector. Per capita rural income growth has been more
than double that of urban India (though admittedly starting from a
significantly lower base). Our calculations using the latest Central Statistic
Organization figures suggest that the rural economy accounted for 51% of
India’s national domestic product in 2005-06, up from 49% in 2000 and
46% in 1993-94.

The process of urbanization is actually slowing down as economic growth is

taking off—a peculiar trend for a developing country. For that, thank federal
and state government policies which have discouraged urban industrial
employment—rigid labor laws that govern hiring and firing in larger
organizations, lengthy bureaucratic notifications, restrictions on overtime—
and a critical lack of urban infrastructure investment. On a more local level,
city governments haven’t managed their books prudently, and don’t have
capital to invest.
The effect of India’s slowing urbanization isn’t yet known. But if the cities
aren’t able to absorb and employ unskilled workers, then rural economies
may have to play an even more significant role in transitioning workers from
agriculture into more productive parts of the economy. And for them to do
so, they’ll need more tax breaks, more simplified regulations and less
corruption at the state level—all issues that policymakers rarely address.

Myth 2: Rural India is still an agricultural economy. As of 2000, agriculture

accounted for just over half of rural economic activity, down from 64% in
the early 1980s and 72% in 1971. Services, on the other hand, now account
for 28% of rural activity, up from 21% in 1981, while manufacturing, utilities
and construction have nearly doubled their share in the rural economy to
18% in 2000 from just under 10% in 1971. The growth has been led, in
large part, by three industries: manufacturing; construction; and trade,
hotels and restaurants.

The manufacturing trend is especially encouraging, as many of India’s rural

workers don’t have the skills to win jobs in the country’s fast-growing
services sector. Since 1971, real manufacturing output in rural India has
grown by five times, against two times for urban India. The rural economy
accounts for 42% of total manufacturing output and 27% of services as of
2000—and it is likely that its share has since grown.

While it’s clear that the government can’t leave farmers in the lurch, Delhi
has done comparatively little to encourage the growth of the manufacturing
sector, whether through tax breaks or other economic incentives.

Myth 3: Rural-urban inequality is on the rise. India’s urban-rural income

gap, the ratio of mean urban to rural incomes, diminished to 2.8 in 2000
from 3.3 in the early 1990s. Of course, absolute levels of spending are still
dramatically skewed, because urban households are far richer than their
rural counterparts. At the margin, however, that’s changing. Between 2000
and 2005, real rural household consumption expenditure grew by 8%
against 4% in urban India.

Unfortunately, Delhi still focuses mainly on rural inequality— and is enacting

policies that could only worsen the situation. Policies like the Rural
Employment Guarantee Act (which provides 100 days of work in a year to
any rural household)—leaving aside the shortfalls in implementation—move
in a more interventionist direction in the face of strengthening market
forces. At the same time, urban infrastructure investment needs a heavier
policy push. The rural poor already receive almost twice as much housing
assistance per capita as the urban poor. At 0.6% of GDP, total urban
spending in India as a share of GDP has remained stagnant for the past 15
years.

If there’s a lesson to be learnt from all of this, it’s that urban growth and
rural growth aren’t distinct and separate phenomena. Our study suggests
that Rs100 increase in urban consumption could lead to an increase in rural
household incomes of up to Rs39—no small feedback and a strong counter
to the popular perception of “two Indias”. If India’s cities keep growing at
their current pace, in aggregate 6.3 million non-farm jobs in rural areas
(more than the total number of new professional services jobs projected
over the next 10 years) and $91 billion in real rural household income could
be created over the next decade.

Urban consumption also generates non-farm employment. A 10% increase in

urban expenditure is associated with a 4.8% increase in rural non-farm
employment.

Agricultural growth—even envisaging improved productivity—will not sustain

the rural economy on its own. It’s the urban-rural linkages—if understood
properly—that could provide a way to solve India’s semi-skilled employment
crisis. It’s time to stop talking about “two Indias” and to start framing an
economic policy for one country.