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.

Some of this thinking can be traced back to economic decisions made soon after India won independence from Britain in 1947. At that time, policy makers emphasized capital-intensive industrialisation and urban infrastructure rather than agricultural investment and rural land reform, leading to the urban-rural imbalance. Often overlooked in discussions of this issue, however, is the fact that the rural economy is no longer limited to agriculture. During the past two decades, 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.

Those insights into the changing relationship between rural and urban India come from Roopa Purushothaman, a U.S.-trained economist who first gained prominence as a co-author of the famed BRIC report published in 2003 by Goldman Sachs. (That report predicted that four economies — Brazil, Russia, India and China, or “BRIC” — would drive the growth of the world economy over the next 50 years.) Purushothaman has now moved to India and is the chief economist for Future Capital Research, part of Future Group, a fast-growing Indian retailer.

Speaking at the recent Global Supply Chain Summit 2007, organized by the Indian School of Business in Hyderabad, Purushothaman maintained that despite the “near devotional status” of the rural-urban divide, fundamental misconceptions exist about how these two economies in India interact with one another. “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,” she said.

Purushothaman and two colleagues — Saurabh Bandopadhyay and Anindya Roy — have written a paper titled, “Is Urban Growth Good for Rural India?” which addresses these questions. “Our studies show that a 10% increase in urban expenditure is associated with a 4.8% increase in rural non-farm employment,” Purushothaman says. “As supply chains strengthen across the country, growing urban demand could provide a significant boost to the rural economy.” 

In their research, Purushothaman and her colleagues uncovered four links between rural and urban economies: Production relationships, consumption relationships, financial linkages and migration. Their study explores the consumption connection and highlights the impact of growing urban consumption expenditure on rural employment and incomes. The categories of consumption expenditure the researchers studied include food, housing, health, transport, education, clothing and footwear, consumer durables, automobiles, entertainment, household appliances, toiletries and cosmetics. Using an econometric approach spanning the past 26 years, their study shows that a Rs. 100 ($2.50) increase in urban consumption expenditure leads to an increase of Rs. 39 (just under $1) in rural household incomes. The channel through which this takes place is increased employment in the rural non-farm sector. “Our interpretation of the data suggests that 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,” she notes.  

Rural India: Myths and Reality

Purushothaman emphasizes that rapid changes in the country’s consumption and production patterns require a more nuanced understanding of the integration between urban and rural India rather than falling back on traditional myths about the rural-urban divide. She lists three urban myths about contemporary rural India. The first is that faster economic growth in urban India — as compared to rural areas — is driving rapid urbanization; second, that rural India is still an agricultural economy; and third, that rural-urban inequality is on the rise.

The reality, Purushothaman points out, is very different. During the past two decades, the rural economy in India has grown significantly faster than the urban economy. 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.

Purushothaman points out that 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. “It is the growth in the non-farm sector that has been really crucial for rural India. A lot of the drivers for the rise in the non-farm sector have come from manufacturing, construction and trade, hotels and restaurants,” she said.

Purushothaman also debunked the popular notion that India’s economic growth is driving rapid urbanization. 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 study points out that “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.

According to Purushothaman, policies that inhibit the growth of labor-intensive industries and a lack of urban infrastructure investment have slowed the process of urbanization. “There is a lot of demand to move into urban India, but the infrastructure and labor policy initiatives don’t support it,” she says. Purushothaman adds that the slow process of urbanization in India, despite the growing economy, is a different scenario than what exists in the rest of Asia. She claims urban growth in India has been too slow during the past 20 years and it needs to accelerate further.

On the issue of rural-urban inequality, research by Purushothaman and her colleagues indicates that 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.”

Rural employment figures also reveal interesting insights. 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%.  

Purushothaman emphasizes that agricultural growth will not sustain the rural economy. Her research shows that 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,” Purushothaman notes.

Role of Retail

Other Indian economists agree with Purushothaman’s findings. N. Viswanadham, executive director of the Centre for Global Logistics and Manufacturing Strategies at the Indian School of Business, says it is true that “urbanization has slowed in India.” He also believes, like Purushothaman, that for rural India to grow, urban spending must increase. “As supply chains strengthen, urban demand will definitely boost the rural economy,” he says. He adds, however, that in addition to urban consumption, retail will be a major driver of growth in rural India. 

“Worldwide, retail is among the biggest drivers of growth and employment,” Viswanadham notes. “In India, unfortunately, the retail revolution has come rather late in the day. But going forward, I believe that urban retailing will fuel rural growth in a very significant manner, and this will be both agricultural and non-agricultural growth.” He argues that as urban retail expands, it will necessarily move a lot of action to the villages. As a result, rural and urban supply chains will be integrated.

In his book titled, Achieving Rural and Global Supply Chain Excellence: The Indian Way, Viswanadham points out that rural supply chains lack sophisticated infrastructure, and they mostly deal with food and other agricultural products, handicrafts, toys and apparel. Though these supply chains are underdeveloped, they are still extremely important because they provide food and clothing to urban India. Moreover, 70% of India’s population depends on the production and distribution activities of these networks for its livelihood, he adds.

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,” says Viswanadham. “As rural supply chains are integrated with those of organized urban retailers, this will be a critical driver of rural growth.”

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