India's rural poor climb the
economic ladder
By Siddharth Srivastava
According to the National
Council for Applied Economic Research (NCAER), the
official collector of data on rural India, the
country's urban growth and prosperity is
beginning to spread to the countryside. India's
rural majority today accounts for more than US$100
billion in consumer spending, making them by
far the biggest buyers in the country and
contributing significantly to India's gross domestic product -
which grew 9.2% in the three months to
September 30 from a year earlier.
While
in China, widening inequalities is a cause for
worry to the government, in India the gap has
narrowed. In 1990, for every $100
earned by a person residing
in a rural area, a person in an urban area earned
$82 more. Today, the gap has been reduced to $56.
"What we are observing is the impact of
liberalization, which started in 1992. The impact
in smaller towns and rural areas is happening
now," said the NCAER.
There is still a long way to
go given that more than 390 million people in
India, mostly landless laborers and peasants, continue to live on
less than $1 a day. Despite the
overwhelming dependence of 600 million people on agriculture, the sector
contributes less than 25% of the gross
domestic product (GDP). Building a strong manufacturing
base is essential to pulling up this section
of society. Meanwhile, health care and education facilities
continue to be abysmal in rural areas
According to the NCAER, a new
socioeconomic category, the rural rich, has
emerged in India, creating a divide within the
rural economy, as opposed to just the rural-urban
income disparity.
The rural rich are 1,000
times more likely than rural poor to own a
motorbike, 100 times more likely to own a color
television and 25 times more likely to own a
pressure cooker.
Investors looking at
India as a market containing 300 million
middle-class households, many employed in the
services sector, which contributes more than 50%
of the GDP, could do well to add another 200
million people residing (or with a base) in rural
locations.
The figures are critical to the
Indian economy's long-term growth as rising
inequality is one of the main arguments
opportunist politicians use against reforms. A
political consensus on reforms can emerge only
when the fruits of growth are spread to areas
previously thought to be unaffected by rising
incomes in urban islands of growth.
Addressing a seminar recently, Commerce
Minister Kamal Nath said: "Rural India today is
consuming more. Most 'tier II' cities are
witnessing large mixed-use projects in housing
[and] retail. This story of inclusive growth is
not just of domestic importance to us. It is
equally important to the foreign investor.''
Many observers have also said that the
reason China has progressed much faster is due to
state-led capitalism that makes decision-making
quicker. In India, democracy is seen to be a
stumbling block to higher growth. However, it
seems that the pulls and pressures of various vote
banks, social class and caste of voters - inherent
in a democracy - has ensured that the growth is
more equitable, which is a much more sustainable
trajectory.
Such democratic forces are
reflected in the differences in farm tax between
India and China. In a recent treatise, economist
Saubhik Chakrabarti of The Indian Express threw
light on the comparative situation in rural India
and China.
In India, farm income is not
taxed, and indulgent state governments dole out
subsidies in fertilizers, provide free electricity
and power, and write off loans, which is reflected
in the share of consumption in India's GDP- a
little over 60%. The same pattern exists in the UK
and the USA.
In China, farmers, who, like
in India, form the majority of the population, pay
300 different kinds of taxes. Between the mid- and
late 90s, rural citizens saw their taxes go up
800%, when farm incomes rose by 90%.
Thus
the consumption share in China has declined from
around 50% of GDP in the 1980s to below 40% in
2005, which is completely out of sync with the
high GDP growth due to large investments and
exports.
In China, rural incomes on
average have been a sixth of urban incomes, while
a villager usually pays three times more in taxes
than an urban-dweller. According to China's
National Bureau of Statistics, the reduction in
the tax burden due to reform/abolition of rural
income tax is more or less balanced by rises in
rural taxes on land, asset sales and inheritance.
There's been no net relief in the tax burden for
rural Chinese.
In India, rural taxes, even
on the very rich farmers, is a political hot
potato that no government dares to touch. Already,
mobile-phone makers, car manufacturers and
consumer durable companies have become aware of
the huge rural consumer segment and have extensive
marketing programs in place.
According to
Rajan Verma, chief financial officer of Dabur, a
fast-moving consumer goods (FMCG) company: "The
rural market for FMCG goods is growing faster than
the urban market, though the latter is doing
pretty well, too. Higher disposable income has
made a difference for the sale of products."
Cell-phone makers are eyeing the rural
market to push growth beyond the 6.5 million new
connections every month. According to T V
Ramachandran, director-general of the Cellular
Operators Association of India, a private industry
body, the construction of new cell towers is
widespread in rural areas, and India's coverage
area has increased three times in the past year.
He said young Indians (most are under age 35) and
rural people are driving cell phone growth.
Indeed, there is a definite trickle-down
due to India's consistent 8%+ growth. There are
other factors that have contributed to greater
economic equity including employment created by
large infrastructure development work undertaken
by the government in rural areas.
Good
monsoons and rising productivity have fattened
farmer incomes, while the rapid increase in rural
land prices due to spreading urbanization has
brought windfall gains. Food processing and
backward linkages established by many large
multinationals and Indian companies, as well as
access to good private education that has allowed
people to work in the rapidly growing services
sector (tourism, hospitality, banking, information
technology, retail and business outsourcing) and
send money back home, have also played an
important role.
According to NCAER, more
and more affluent farmers are investing in the
education of their children so that they can find
employment opportunities, which are readily
available now. Just as the state of Kerala has
benefited immensely from remittances from people
who have sought work in the Middle East, children
from rural areas migrating to urban employment
opportunities are contributing to the welfare of
their family's back home.
With many large
Indian and foreign corporations, such as Reliance,
Tata, Bharti, Birla's, Wal-Mart, Woolworths and
Carrefour aggressively stepping into food retail,
farmers may be in for another bonanza.
Siddharth Srivastava is a New
Delhi-based journalist.
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2006 Asia Times Online Ltd. All rights reserved.
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