September 9, 2007EconomyPublic Policy

Blowing the two Indias” myth

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

This is an archived blog post from The Acorn.

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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