Perilous Path Of The Rural Economy

Written by Subhash Agrawal | Updated: May 9 2002, 05:30am hrs
India lives in the villages. An unremarkable cliche, mentioned frequently at seminars but rarely understood in totality. As true today as it was in 1959 when Arthur Bonner, then the CBS correspondent in Delhi, wrote a seminal essay in The Atlantic Monthly on Indias emerging realities and how 20 per cent of villagers surveyed across the nation had never even heard of the name Bharat. But then the Green Revolution happened, Nehrus obsession with materials over men seemed the right choice, rural India prospered, the country became self-sufficient in food and everybody agreed that it was a great thing. It was, up to a point.

But the Green Revolution is now running out of steam, and agriculture is becoming increasingly unprofitable for both farmers and the country as a whole. The rural economy may constitute only 30 per cent of the countrys GDP, but it still holds over 70 per cent of the population and remains a crucial determinant of overall growth and political fortune, in addition to being an important demand base for industry. It already comprises about 15 per cent of total exports, and if the government could ease up on its fixation with food security and allow the export of our embarrassing food reserves, or minimise horticultural wastage, the country could earn another $ 5 billion annually. Further, inclusive of all subsidies, entitlements, exemptions and development funds, the rural economy very probably gets in excess of 50 per cent of budgetary allocations, perhaps even as high as 60 per cent. And that is not even taking into account the fact that farm income is totally tax-exempt, or that the government mandates concessional bank credit to farmers, slated to cross $ 15 bn this year, a large part of which is never returned.

As can be expected, much of this largesse comes at the expense of other national priorities, but the most insidious aspect of rural subsidies has been on Indias power sector: the rural economy accounts for a third of total electricity consumption in the country and almost $ 5 bn of annual subsidy. That is about five times what the government spends on education. Subsidised power and lop-sided tariff structures are the reason why almost all state-owned power utilities are so badly broke, why no foreign investor is willing to put up a power project in India without watertight sovereign guarantees of payment, and why much of the country has to go without power for hours daily through most of the year.

Despite these entitlements, the rural sector is headed for a big crisis. First, bureaucratic corruption and duplication of all manner of wasteful expenditure have ensured that many of these entitlements have never reached the average villager. Second, real investment in agriculture has declined from 1.6 per cent of GDP in 1993 to 1.3 per cent in 1999, and in fact ground reports from many states show how much of the irrigation infrastructure from the days of the Green Revolution is now under severe disrepair. Third, rapid rural population growth has led to greater fragmentation of land and economically unviable operations: one indicator is that small holdings, that is less than 2 hectare, have increased from 70 per cent of total farmland in 1970-71 to over 80 per cent currently. Next, across much of India, there is now an extreme water crisis in terms of rapidly dropping underground water tables. Finally, the rural economy remains vulnerable to inflation because of high dependence on informal credit, has few safety nets or opportunities for expansion, and a deadly mix of illiteracy, government largesse and stifling controls that has led to a vicious cycle of dependency and demoralisation.

All of these problems in large part explain the rise of caste-based political parties in India, since the only sure thing an average villager has going for him is a larger caste-based network. Rural voter turnout has increased rapidly over the past twenty years in contrast to the urban elite which has become more cynical and detached from the political process crossing over 65 per cent in 1999, perhaps a world record of sorts. And the percentage of members of parliament belonging to the farming class has more than doubled in the last thirty years.

India is on a dangerous double track, with the rural-urban linkage being extremely uneasy and artificial. Rural-to-urban migration is becoming a sociological and economic problem of huge proportions, and is the reason why so many cities are becoming shanty towns if not outright slums. The rural economy needs urgent re-conceptualisation and integration within the mainstream. This is especially true if we want to achieve over seven per cent growth for the next decade, an oft-repeated goal and the minimum prerequisite to eradicating poverty in one generation.

Despite substantial shifts in national output, India will not be able to achieve any of its goals by leaving 70 per cent of its population virtually untouched, which is precisely what is happening. However, the positive side is that most future growth industries and opportunities, the real big ideas, revolve around the rural sector, in areas such as food processing, healthcare and inland waterways. But no amount of change, even if it is positive, will be without immediate pain. Considering the enormous electoral clout of rural voters, India will need some very capable and bold leadership to steer the rural economy away from isolation and populist measures which have proven to be the main cause of this unfolding crisis.

Subhash Agrawal is an analyst of Indian political and business trends and the editor of India Focus, a political risk report for international investors