Indias Rural Economy

Presentation to Cornell Students

Vijay Mahajan August 2005

Outline

Introduction Growth Prospects is the growth sustainable?

Agriculture Non-farm sector

Equity

India: A Nation of a Billion Plus People

The Numbers are Numbing

In purchasing power parity (PPP) terms, India is the worlds fourth largest economy, but Over 25% live below the spartan (calorie intake based) poverty line and over 40% below the $1/day poverty line. Total workforce in India in 2001 was 403 million; By now close to 440 million, growing at 1.8% pa About three-quarters of this is rural and about twothird of the workforce is engaged in the primary sector, of which 80 % is in agriculture.

India: a nation of 440 million workers

The formal/organised sector accounts for only 7% of all employment. The rest work in 116 million farms with average land size of 3 acres, and in 35 million non-agricultural enterprises, employing an average of 1-2 persons. But access to credit, even for the economically active poor, is low and access to savings, insurance and other financial services, even less. Unemployment is about 7% but under-employment is a far bigger problem, and the main cause of poverty.

Most of the poor are the landless in low rainfall areas

Non-farm activity: Limestone Kiln

Non-farm activity: Brick Making

Services petty trade, vending, etc.

Growth Rate

From 1947 (Independence) to 1980, the economy, the economy grew at about 3.5% pa The growth rate accelerated to about 5.5% in the 1981-91 period, but was rife with instability and high inflation, ending in the 1991 crisis Post 1991, the growth rate has been around 6% pa, not much higher, but much more stable and maintained in that range in spite of different political parties in power.

Growth Rate - Components

Agriculture growth slowed down from 3.8% pa, pre 1980 to below 3%, with number of rainfall linked swings in between. Industry growth slowed down from 7% pa pre 1980 to around 6% in the 1990s, with some pick up in the last few years. Services growth rate increased from 6.7% pa pre 1980 to nearly 8% in 1990s and even higher more recently.

Growth Rate Other features

Inflation was in double digits in the mid 1980s and stabilised to 7-8% in 1990s and is lower now at 5%+ Fiscal deficit of the central plus state governments, increased from about 6.5% of GDP in the pre-1980s to 9.4% in 1980s to 9.8% in 1990s. Savings rate increased from 21% pa pre 1980 to nearly 24% more recently. Trade (Imports + Exports) increased from 14.8% of GDP in 1991 to 23.8% of the GDP in 2003 Forex reserves have gone up from near zero in 1991 to nearly $150 billion.

Prospects is the growth sustainable?

The Xth Five Year Plan adopted a growth rate target of 8% pa. India Vision 2020 adopted by the Planning Commission in 2004 says India should aspire for an upper middle income status. Growth rate in the past three years has been good, inching towards an 8% pa average. However, unless, agriculture and industry growth rates go up, the economy cannot sustain an 8% growth rate.

Prospects is the growth sustainable? Agriculture

Agricultural growth in the irrigated areas has plateaued and large investments are needed in the dry land areas Elasticity of employment in agriculture is near zero, so while it will not lead to more jobs, agri growth will greatly reduce under-employment and thus poverty. Agricultural research and extension systems, inputs supply, procurement and marketing systems all need upgradation and institutional reforms. Investments are needed in land and water conservation, pasture and forest regeneration and in livestock development, and in agricultural diversification.

Soil And Water Conservation Works, Jhabua, MP

Community Water Harvesting Tanks, Jhabua, MP

Medicinal Herb Plantation in Bastar, Chattisgarh

Prospects: Rural Non-Farm Sector (RNFS)

As agriculture is over-crowded, additional livelihoods have to come from the rural non-farm sector (RNFS) and the urban informal sector. The RNFS accounts for nearly a quarter of all rural employment, and two-thirds of RNFS employment is in agro-processing and services. RNFS promotion requires skilled manpower, infrastructure and market linkages, and credit.

Agro-processing Unit

Rural Metal Workshop

Sectoral distribution of income versus employment (2001)

The skew in GDP/Empl ratio is the cause of poverty among primary sector workers.
Sector
Primary Secondary

GDP %
27 25

Employment % 65
15

GDP/ Employment 0.42

1.67

Tertiary

48

20

2.35

Sectoral distribution of income versus employment

The primary sector accounts for nearly two-thirds of the employment but only a quarter of the GDP The tertiary sector accounts for only about a fifth of the employment yet about half of the GDP Within the primary sector, there are severe income inequalities e.g. the landless vs. large farmers Those at the bottom of this pyramid are poor but have little chance of their children not being so. This structural inequity is unjust and unacceptable.

Inequity India vs Bharat

India is the English speaking: 10 million elite and perhaps another 100 million middle class Bharat is the other 1000 million, non-English speaking, both rural and its spillover into urban areas Not all of rural population is poor, in fact there is substantial purchasing power in rural India. Nearly a quarter of the population is BPL below poverty line over 280 million people. Vast majority of the poor are the rural landless, who also then migrate to cities as urban informal workers.

Inequity India vs Bharat

However, poverty has been declining steadily from 51% BPL in 1977 (two decades after independence) to 26% in 2001. Proportion of the poorest (with income less than 75% of the poverty line) has declined faster than total poverty. Regionally too, decline is widespread. However, the BIMARU states Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh still have high poverty, along with Orissa and Assam.

Social and Human Development Indicators

Nutrition is a big issue 48% of children were malnourished in 2001, though down from 63% in 1975, still unconscionable. Health is another big issue rural landless men lost 41 days per year, women 77 days pa, due to ill-health Education, with literacy rates around 60% and high school drop-out rates, is the next big issue. Women and children come out badly in comparison to men in terms of all social parameters. Scheduled castes, scheduled tribes and Muslims too.

Prospects is the growth sustainable? Equity

On the whole, while 8% growth may be possible, meeting the Millennium Development Goal of reducing poverty by half by 2015 may be difficult unless Investments are made in land, water, forests, human development and rural infrastructure. Redistributive policies are put in place, e.g. Employment Guarantee Act, and Social sector expenditure as well its productivity is enhanced.

Thank You vijaymahajan@basixindia.com