According to an Arabian fable, once a farmer, in search of diamonds, sets off on a trip to unknown and far-flung places, leaving his home and family behind. Years later, after he loses everything including the members of his family, he chances upon a diamond, then another, and then another—in fact, loads of them—in his own backyard. The moral of the fable, an obvious one, can work in a situation such as the current economic slowdown. It is simple: To keep the growth wheel of our economy moving we need to focus on domestic demand, especially from the rural economy close to the real sector.
Photograph: Madhu Kapparath / Mint
An economic slowdown is a part of a business cycle, and not all slowdowns turn into a recession. Only prolonged negative growth rates can pull an economy down into a recessionary spiral. Several studies and data confirm that the Indian economy is currently in an economic slowdown. No doubt the situation is worrisome, but the Indian economy has certain advantages over that of other nations, and if precautions are taken in earnest, the slide can be arrested.
A slowdown anywhere has its roots in a chain of actions and reactions: depressed demand due to reduced money supply resulting from losses in markets, leading to reduced investments in economic activity, reduced employment, low wages and, therefore, low demand for goods and services. The only likely solution to this is an increase in investment, which largely depends on the willingness to do so. Keeping this in mind, the Union government had already taken fiscal and monetary measures to stimulate demand for goods and services.
Although these efforts have been partly able to keep things under control, one can’t be sure if these would be sufficient to lessen the likely impact of the slowdown on domestic demand and that of the global meltdown on export demand. In fact, export demand can improve only when importing nations find solutions to their economic problems.
As long as people’s purchasing power remains low, demand for credit or goods and services cannot pick up. The situation can be improved by enhancing the purchasing power of people in rural areas. Here it is important to point to the disconnect between the rural economy and the financial markets: This can be handy in giving a push to the economy and efforts to boost demand cannot ignore this fact. Seventy per cent of the country’s population in rural areas should be strong enough to impart the necessary push to the growth engine of our economy. But this cannot happen automatically— the need of the hour is massive investment in rural areas by both public and private entities to generate greater employment opportunities and enhance income levels both in the farm and non-farm segments.
Increased demand for goods and services from rural India will also strengthen the rural-urban linkage. Post-liberalization, as the Indian economy embarked upon its journey from being an underdeveloped economy towards a developed economy, what remained the policymakers’ primary objective was to achieve “inclusive growth”. Accordingly, the government commissioned various rural welfare programmes. The National Rural Employment Guarantee Scheme (NREGS), for example, succeeded in generating/increasing job opportunities in rural India. In fact, there is vast scope for rural India to expand with the development of infrastructure such as roads, schools, irrigation canals, drinking water supply and electricity projects. If schemes such as NREGS are linked with rural infrastructure projects and if private-public partnerships are strengthened, India would be able to take a big leap towards achieving sustainable inclusive growth.
Interestingly, according to the latest Central Statistical Organization economic census data, the number of establishments in rural areas rose by 5.37% between 1998 and 2005, against 4.69% in urban areas. No doubt the rise in establishments in rural areas pushed up rural employment growth to 3.88% between 1998 and 2005 from 2.2% during 1990 and 1998, indicating an increase in non-farm job opportunities, which would have reduced the migration pressure. As a result, there was a decent rise in non-farm job opportunities in rural India; hence, the livelihood-driven migration to cities, during a slack period between crops, fell to 2.8% in 2001 from 6.5% in 1981. Rural India’s share in the country’s gross domestic product has also grown significantly, to 51% in 2005-06 from 46% in 1993-94. It goes a long way to illustrate that efforts of our policymakers to promote infrastructure and employment creation in the rural economy are now paying off.
The government’s concentrated efforts have empowered rural India significantly by increasing its disposable incomes. It is time the private sector focused on rural market segments to tide over the downturn in both the urban and global markets. The major organized economic activity of rural India—agriculture—has, no doubt, remained unaffected so far, thanks to the current and traditional protective measures which, this time around, are working in favour of our farming community. This proves that the fortunes of the stakeholders in the rural economy have not really tumbled with the financial crisis. Given that public investment in rural employment and infrastructure missions would continue, it is the focused efforts of our entrepreneurs to make products which will help them tide over the current slump in global and urban demand.
V. Shunmugam and Ritambhara Singh are chief economist and senior analyst, respectively, of MCX, Mumbai. Their views are personal. Comment at email@example.com