Does Urban Development Drive Rural Growth in India?

A topic that is often discussed in India across political corridors, corporate boardrooms and households is the rural-urban divide and how the country's two economies -- the rural and the urban -- are increasingly growing apart. The popular notion is that growth not only has been skewed towards urban India but also has been gained at the expense of the countryside.

Rural India has diversified significantly into non-farm activities — and this has brought India’s cities much closer to their hinterlands than people might imagine.

Most of the discussions on the rural-urban divide are based on anecdotes about rural India, but if we look at the data, the story in rural India is a lot more dynamic that it gets credit for.

A 10% increase in urban expenditure is associated with a 4.8% increase in rural non-farm employment.

A Rs. 100 ($2.50) increase in urban consumption expenditure leads to an increase of Rs. 39 (just under $1) in rural household incomes.

A sustained urban household consumption growth rate, similar to that seen over the last decade, could lead to 6.3 million non-farm jobs in rural areas and $91 billion in real rural household incomes over the next decade.

Three urban myths about contemporary rural India

1. Faster economic growth in urban India — as compared to rural areas — is driving rapid urbanization.
2. Rural India is still an agricultural economy
3. Rural-urban inequality is on the rise.
   

During the past decade alone, the rural economy is estimated to have grown on average by 7.3% as compared to 5.4% in the urban economy. The latest Central Statistical Organisation figures show that the rural economy accounted for 49% of India’s GDP in 2000. This is a significant increase from 41% in 1981-82 and 46% in 1993-94.

With agriculture only growing at 3.2% on average, much of this growth is driven by the rural non-farm sector. As of 2000, agriculture accounted for 51.8% of rural economic activity. This represents a significant decline from 64% in the early 1980s and 72% in early 1970s. Moreover, services — which accounted for 21% of rural activity in 1981 — now account for 28%. In addition, manufacturing, utilities and construction have nearly doubled their share in the rural economy, from just under 10% in 1971 to 18% in 2000.

According to Census data, while rural-urban migration as a share of total rural population was 6.5% in 1981, in 2001 it fell to 2.8%. “The slow rates of rural-urban migration along with declining rates of natural increase in urban areas” indicate that the process of urbanization in India is actually slowing down as a result of economic growth.

The urban-rural income gap (or the ratio of mean urban to rural incomes) has decreased since the early 1990s. “Though this [change] is not very dramatic, it is happening in a very different way from what we see in other economies. In China, for instance, rural and urban inequality has increased as a result of growth.”

Between 2000 and 2005, rural agricultural employment growth was as low as 1%. This indicates that growth in the agricultural sector has not really resulted in a significant increase in jobs in the countryside. In contrast, during the same period, non-farm jobs have gone up by 20%.

India’s average yield per hectare today is roughly half that of China, although the agricultural sector in India employs roughly six million more people.

In contrast, India employs just seven million people in the formal manufacturing sector compared with more than 100 million in China. “In a situation where agricultural capacity is limited and the urban economy is not fully able to absorb a growing labor force, the rural non-farm sector could act as an outlet for surplus semi-skilled labor. Urban demand, therefore, could be an important and largely overlooked engine helping to drive this shift from farm to non-farm employment in rural India.”

India’s retail sector has a market size of some $300 billion, of which barely 2% to 4% is in the organized sector. The industry, however, is going through a massive transformation and the share of the organized sector is likely to increase to 20% to 25% by 2010. “India is all set for a retail revolution. As rural supply chains are integrated with those of organized urban retailers, this will be a critical driver of rural growth.”

The recent violent protests by the associations of middlemen, and traders supported by the unscrupulous politicians can spoil the retail sector party of the big corporate houses that wishes to enter retail sector. A real smart marketing among farmers and consumers will be essential to bring them on its side. But the objective of the corporate houses must be genuinely helping of farmers in rural India. And that can make a lot of difference in making their life better.Thrust must be on creating non-farming employment in rural India.