India’s path out of rural distress

December 25, 2020 6:15 AM

Mere agricultural pricing reforms won’t help. A structural transformation that will expand the manufacturing sector in the rural areas is what is needed

Solving India’s rural distress now may just unleash the next stage of India’s structural transformation that will enable it to become a $5 trillion economy by 2025.Solving India’s rural distress now may just unleash the next stage of India’s structural transformation that will enable it to become a $5 trillion economy by 2025.

By Ejaz Ghani

The stand-off between the farmers and the government, and rising rural protest, is not just a reflection of conflicting views on agricultural reforms or an expression of institutional discontent that farmers were not consulted on the reforms. It reflects a deeper concern on rural distress. People in the rural areas have raised their aspirations, and are now demanding more jobs, and a better quality of life. Although agricultural pricing reforms may be viewed by some as a way of dealing with the rural distress, this is not a substitute for unleashing a rural structural transformation. Solving India’s rural distress now may just unleash the next stage of India’s structural transformation that will enable it to become a $5 trillion economy by 2025.

Millions of people have been lifted out of poverty in the urban areas, but the rural areas in India still remain home to the largest concentration of poor people in the world. Most of them live with poor or no access to education, health, roads, electricity, or internet. Just reforming the price mechanisms will not work, if physical and human infrastructure remains weak and factor markets remain distorted that prevent rural structural transformation. A reform agenda just focused on pricing reform, in the absence of other reforms, will not succeed. It will only further escalate rising concerns on the urban-rural divide, and discontent of the rural population.

India’s growth trajectory, and expansion of the manufacturing sector, has been constrained by the lop-sided nature of industrialisation and urbanisation. India’s spatial and structural transformation—industrialisation and urbanisation—did grow together in the early 1990s. But the two trends have diverged in the last two decades (see Ejaz Ghani, Arti Grover Goswami and William R. Kerr, “Is India’s Manufacturing Sector Moving Away from Cities?”, World Bank and HBS).

Large manufacturing enterprises are moving out from mega cities to rural areas, in search of lower land costs, and to remain cost-competitive. The share of the manufacturing sector in employment, output, and the number of enterprises in the urban areas has declined and it is increasing in the rural areas. Although this process of spatial transformation has kept India’s large manufacturing houses to remain cost-competitive, the overall expansion of the manufacturing sector has been constrained by a poor physical and human infrastructure in the rural areas.

People in the rural areas have been expecting a shift from farm-to non-farm jobs. This has not happened in India, as more than 40% of total employment is still employed in the agricultural sector in India, compared to less than 20% in China, and less than 2% in the US. People in rural areas depend on agriculture, not because it is remunerative, but because there are few alternative employment opportunities. This problem will not be solved just through pricing reforms. Although there is room for improving agricultural productivity through pricing reforms, this is not a substitute for rural structural transformation that India now needs.

India’s rural distress is also a symptom of its twin balance sheet problem and banking distress. Large and less efficient manufacturing houses that are migrating from urban to rural areas, and have accessed more bank loans, has given rise to India’s twin-balance sheet problem. The twin-balance sheet problem has partly arisen from highly distorted land markets in the most land-scarce country in the world. Large manufacturing conglomerates manage to grab more land, and because the land is used as collateral for most bank loans, they also grab more bank credit. India is one of the most land scare countries in the world, and the land is also the biggest asset in rural areas. Reducing land misallocation will not only reduce rural distress but also enable India’s manufacturing sector to expand and be more efficient.

India’s rural distress also reflects the rising gender divide. Conventional wisdom suggests that economic growth should reduce gender discrimination. But this is not happening in India. The share of females in manufacturing employment has barely increased over the last two decades, but it has increased in agriculture, as men leave rural areas in search of better jobs in the cities. India’s increased feminisation of agriculture has worsened gender equality, due to the heavy work burden in rural areas, and lack of access to basic amenities, including drinking water, sanitation, and much more. More depressing is that while agriculture has become increasingly feminised, the ownership of agricultural assets by women has not increased.

India’s green growth has also worsened in the rural areas. Indian cities have become more energy-efficient, but it has deteriorated in the rural areas. These trends have been exacerbated by the de-urbanisation of the manufacturing sector. Although the installed capacity of India’s power system is the fifth-largest system in the world, it is still insufficient to meet India’s rapidly increasing rural demand. Integrating the climate change agenda, increased energy efficiency, with rural structural transformation is an important step towards reducing India’s rural distress, and also improving India’s Paris Climate Agreement

Rural structural transformation
India’s future growth is in where one would least expect it to be. It is in the rural areas that will continue to benefit from a young demographic dividend and greater land availability. India’s financing needs for rural structural transformation is huge. But, the potential for attracting more private investment in rural areas is also huge. The basic traits of rural infrastructure projects, such as market size, long-term steady revenue stream, and investment returns that exceed inflation, make them attractive for most institutional investors. The funds managed by private institutional investors exceed $100 trillion, but their allocation for India’s rural infrastructure projects is tiny.

Only by combining resources—Centre and state, international and domestic, public and private, corporate and philanthropic—will it be possible to achieve the necessary levels of financing to unleash rural structural transformation. The challenge is to increase both the scale and impact of financial resources, improve urban-rural linkages, and build on partnerships. Markets, institutional and administrative institutions are very weak in rural areas. Price reforms is not a substitute for bigger and bolder reforms to accelerate rural structural transformation.

India’s manufacturing sector is rapidly de-urbanising, and a rural structural transformation is needed to expand India’s manufacturing sector in the rural areas. Rural distress will not be resolved just through agricultural pricing reforms. A rural structural transformation that will expand the manufacturing sector, tap into a demographic dividend, expand the size of the middle class, promote gender equality, scale up the march towards Paris Climate Agreement, and create more jobs, is the path out of the rural distress.

The author is Former lead economist at the World Bank, and lecturer in Economics at the Oxford University Views are personal

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