September 9, 2007 ☼ Economy ☼ Public Policy

The new two nation theory is just as wrong as the old one

Roopa Purushothaman deals a severe blow to the “there are two Indias” mantra, in an op-ed in the Wall Street Journal, reproduced in Mint (via Prashant Kothari). Here are some excerpts:

Myth 1: Faster economic growth in urban India, rather than in rural India, is driving rapid migration to the cities. In reality, India’s rural economy has grown on average by 7.3% year-over-year over the past decade, against 5.4% in the urban sector…

Myth 2: Rural India is still an agricultural economy. As of 2000, agriculture accounted for just over half of rural economic activity, down from 64% in the early 1980s and 72% in 1971. Services, on the other hand, now account for 28% of rural activity, up from 21% in 1981, while manufacturing, utilities and construction have nearly doubled their share in the rural economy to 18% in 2000 from just under 10% in 1971…

Myth 3: Rural-urban inequality is on the rise. India’s urban-rural income gap, the ratio of mean urban to rural incomes, diminished to 2.8 in 2000 from 3.3 in the early 1990s…

If there’s a lesson to be learnt from all of this, it’s that urban growth and rural growth aren’t distinct and separate phenomena. Our study suggests that a Rs 100 increase in urban consumption could lead to an increase in rural household incomes of up to Rs 39—no small feedback, and a strong counter to the popular perception of “two Indias”. If India’s cities keep growing at their current pace, in aggregate 6.3 million non-farm jobs in rural areas (more than the total number of new professional services jobs projected over the next 10 years) and $91 billion in real rural household income could be created over the next decade.

Urban consumption also generates non-farm employment. A 10% increase in urban expenditure is associated with a 4.8% increase in rural non-farm employment.

Agricultural growth—even envisaging improved productivity—will not sustain the rural economy on its own. It’s the urban-rural linkages—if understood properly—that could provide a way to solve India’s semi-skilled employment crisis. It’s time to stop talking about “two Indias” and to start framing an economic policy for one country. [Mint]

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