February , 2018
Challenges to the Indian econom y: Rural sector development, employment generation and low ering inequality
00:35 am

Kishore Kumar Biswas

A few days ago, two reports found prominence in most of the national newspapers. One way the IMFs forecast on Indias bullish GDP growth performance (7.4%) in 2018 and the other was Indias abjectly poor performance in the Inclusive Development Index (IDI)). The Index shows that India stands 62nd out of 74 countries. The IDI is released by the World Economic Forum and it has been considered by a section of observers as an alternative to GDP as it represents a better criterion by which people evaluate their countries economic progress.

Too much emphasis on GDP performance has not been fruitful for economies like India. It is the growth rate of GDP that dominates others indicators to judge the performance of an economy. Many mainstream economists consider the growth rate of GDP as the predominant indicator of success of an economy. Even in this respect the Indian economy has been moving downwards for the last consecutive five quarters. The forecast of the CSO about the GDP of the current FY is 6.5%. A section of the economists is not comfortable even with this number. They think the expected GDP might be 6.2% to 6.3% in the current FY. But if one is interested in considering the deeper factors for the low prosperity of the Indian economy, the first sector to target is the rural sector.

Addressing the stressed agricultural sector  

Slowdown of consumption is one of the most important factors affecting the Indian economy. The estimated 6.5% growth in private consumption in the Q2 of the present FY is known to be the lowest in the last consecutive five quarters. There are many reasons for this. The lack of job opportunity, low growth of rural wage rate, not bright performance of agriculture production, pricing ofagro products etc. are some of the important reasons for slowdown in consumption spending. Over- production in agro products, however low it might be, hurt a huge section of farmers very deeply. The recent sharp fall in prices of onion and potatoes, oil seeds and some other crops can be cited as the current examples in favour of this argument. So it is a great challenge to build up infrastructure for marketing of agricultural products where traders have little control over them, is necessary. At the same time, suitable storage facility, broader based crop insurance and provision for minimum support prices are also preconditions to the removal of rural stress.

PMs plan to double farmersincome in 5 years

Government of India seems to have targeted reviving agriculture. This is why Prime Minister, Narendra Modi, has taken a plan for doubling farmersincome in 5 years. Distribution ofsoil health cards to about 10 crore farmers, enhancement of crop insurance scheme, completion of 99 projects under PMKSY by 2019, encouragement of FDI in food processing, supplying inputs to marketing ofoutputs, etc are worth mentioning have been the programmes for development of agricultural sector of  the present NDA government. Ashoke Gulati, agriculture economist and former Agriculture Secretary, GoI, and Siraj Hussain wrote an important article on this topic in a national daily a few months back. They mentioned governments three policies like productivity gain, reduction in cost of cultivation and remunerative prices are welcome. But one thing is completely absent in any discussion of the doubling farmersincome (DFI) project. Gulati and Hussain pointed out the lack of clarity on the sources of funds. The investment requirement in development of agriculture, irrigation, rural roads, and rural energy to attain 10.41% annual growth of real income to achieve DFI by 2022-23 is huge. This is about 3 times higher resource is needed compared to earlier allocation of the continuing NDA government. The estimated 6, 40,000 crore at 2011-12 prices (without logistics or cold chain expenditure) are required. For this purpose there is a need to have a 22% rise in annual growth of financial investment in this sector in real terms. So the financing for the projects seems to be impossible, according to Gulati and Hussain as the government budget is engrossed substantially with agriculture loan waive, subsidies and different social welfare measures.

Economists like Gulati, Hussain and others think that price incentives are the mostimportant factor for sustaining agricultural sector in our economy. This is supported by the Chinese experience. Gulati and Hussain pointed out that Chine achieved to reduce poverty by half in 6 years (1978-84) by DFI policy. That was possible mainly due to due to ensured higher pricing system (with much higher MSP) of a lot of agro products. But India took as many as 18 years (1993-2011) to achieve the similar target. Therefore the achievement of DFI may remain a distant dream but the targeted policyimplementation will remain a must.   

Development of rural sector as a whole is a great challenge

Actually agriculture sector is only a part in rural sector as a whole. Some observers think the Indian government should emphasis more on to provide ease of living condition in rural areas than to provide ease of doing business in our country. It has been more and more difficult to live better lives in the rural areas. This is because more and more focus of development is put on developing urbansector.

In 2004-05 to 2011-12 India experienced forthe first time a reduction in agricultural labour force. The rate of decline had been 2.04% per year. In spite of that agriculture employs about 64% of total workforce but produce only 39% of the total rural output in 2012-12 (Chand, Srivastava and Singh (CSS), EPW, December 30, 2017). CSS have estimated that to bring convergence between the share agriculture in total output and employment, 84 million agricultural workers are already required to be shifted to non-farm sector which required about 70% increase in non-farm employment. The challenge is to reduce already over dependence on farm sector which is the reason behind the difference of productivity in farm and non-farm sector. CSS mentioned that per worker average productivity was only rs 30,912 in farm sector whereas it had been rs1, 19,512 in non-farm sector.

Rural manufacturing and employment generation

In rural manufacturing the employment generation increased quite substantially. CSS observed that between 1972-73 to 2003-04 manufacturing sector added 10.29 million jobs, that is, 29% incremental non-farm jobs. But during the next decade, job creation growth in that sector came down to only 1%. Again in 2003-04 to 2011-2012, that is, in the period of highest growth of GDP IN Indian economic history had been only 1.2 million. The fall of growth of job creation in rural non-farm sector was mainly due to the change in technology. During that period the rural industry also became more and more capital intensive. Again within the manufacturing most of the sub sectors witnessed either stagnation or fall in employment generation between 2003-04 to 2011-2012. What is the reason behind this? CSS observed that lack of technical skill and educations among the labour force were also responsible for low employment. Therefore the improvement in rural infrastructure alone is insufficient. That must be accompanied by human resource development to achieve the desired results.

Even the service sector also experienced fall in employment generation. So despite huge output growth in manufacturing and services in rural sector employment generation in non-farm sector has not been growing.

Challenges in the industrial front

Industrial growth has long been problem in India. A large number of units have beeb suffering from over burdened credit from banks and other sources. The problem is known as twin balance sheet problem. That is, both the debtor and creditor have been suffering from crisis. The excess capacity in sectors like power, steel, cement, mining, etc. are huge. the telecom sector has been entering into deeper and deeper crisis. This may create higher non performing assets in the banking industry.

The gross fixed capital formation (GFCF) which is known as a key indicator of an economy’s ability to grow has been declining. In India the GFCF as percentages of GDP has now come down to 29% from 34.3% in 2011. This means that the rate of growth of GDP in the economy can not be as high as that in the period 2003-04 to 2011-2012.

Lowering corruption and inequality

High level of corruption and inequality are to be lowered to sustain the economy properly. How can black money really affect an economy? A few days ago Arun Kumar, a former professor JNU, New Delhi and a specialist in public finance expressed his view in a national media. He thinks the black economy reduces the potential for growth in an economy. “If you construct a road without putting enough tar in it and it gets washed away your investment has not paid off”, said Kumar. On Indian economy Kumar also commented, “This has led to a 5% loss of growth annually on an average, over the last 30-40 years….Going by that calculation, today the Indian economy would have been 8 times larger. Today, instead of being USD 2.2 trillion economy we would have been an USD 18 trillion economy, roughly the size of the USA”.

Inequality has been a growing concern through out the world as there has never been in history such an extreme inequality. How does it affect the Indian economy? Very simply one basic idea is like this. If a larger and larger of economic benefits concentrates under the control of a fewer and fewer people the spending ability of the vast majority will go on decreasing. This naturally keeps the economy at a low level of GDP as the participation of the consumers in the market gets squeezed. This situation has again been surfaced by the World Economic Forum a few days ago.


Indian economy is not doing well if people- orientated development is considered. The main weakness lies in the rural sector. This has been a result of growing neglect of this sector for long. The neglect has been accentuated in the NDA regime. The NDA government is reported to have understood this. The big-bang moves like demonetisation and unprepared implementation of the GST will not give any fruitful results. Emphasis should be on creating rural infrastructure, investment in agriculture, rural employment generation, emphasis on overall health and education. Government needs to revive private investment and demand in unorganised sector. The political class has to take leadership by bringing business class and bureaucracy in this issue to reach a consensus in lowering corruption.

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