There have been hypotheses that the growth of the non-agricultural rural economy in the 1980s was the result of the growth of agricultural output and income, creating a demand for industrial goods and services. The other hypothesis is that in the distress caused to the poor by the commercialization of agriculture; landless labourers and poor peasants were forced to seek worse (casual, lower paid) alternative sources of livelihood outside agriculture. Another alternative thesis is that the growth of the rural non-agricultural sector has had ‘external’ stimuli, mainly the economic impetus created through government expenditure. In the 1980s, a larger proportion of this expenditure by the states and the centre got allocated to the rural areas.  According to Chandrasekhar and Ghosh, the public works employment of casual labour days as a proportional of all non-agricultural casual labour days increased, from 17.7% in 1977-78 to 22.3% in 1987-88. Maybe one can possibly conjecture that even though so-called distribution(al) coalitions grabbed the benefits of government expenditure, an increasing amount of this expenditure got allocated to rural areas, and a part of it trickled down to the poor from the additional casual labour days created. To an extent, this tightened the rural labour markets, improving the bargaining power for agricultural labourers, and thereby leading to an increase in real wages. The result was poverty reduction. So in explanations of the incidence of rural poverty, it is not enough to focus simply on agricultural output and inflation, or agricultural output and the real wage, with the real wage, determined by the rate of inflation, because money wages are not indexed.

The liberalization proponents have simply been arguing that stabilization reduces inflation and structural adjustment shifts resources toward agriculture and both are poverty reducing. In our view, the method of SAP is to induce, through a policy shift, a change in relative prices and profit rates favouring agriculture, leading to an increase in agricultural output, and thereby expecting a reduction in the incidence of poverty. A valid criticism is that the mechanism through which this is achieved is via a significant increase in agricultural prices, thereby increasing poverty. Abhijit Sen rightly points out that the proponents choose to ignore the fact that there is a trade off. It is expected that the SAP - (i) by reducing protection to Indian industry, (ii) through depreciation that reduces the relative price of non-traded goods vis-a-vis traded goods, and (iii) via liberalization of international trade in agricultural commodities - will raise the relative price of most agricultural commodities, including food-grains. Now, given the non-unionization of the bulk of rural labourers, agricultural and rural non-agricultural money wages may be expected to be  sticky in the upward direction, despite the increase in the relative and absolute price of food-grains. Further, given the fact that these wage earners’ consumption basket entails a large proportion of expense on food-grain, an increasing tendency in the incidence of rural poverty is to be expected. As Abhijit Sen rightly states, an increase in the relative price of food-grain is by conscious design in the SAP, and hence not like inflation which can be controlled. Indeed, even monetarist means employed to check inflation can have recessionary tendencies, especially on non-agricultural economic activity, that may adversely affect the poor. The organized section of workers, a minority of the total workforce, is in a position to protect themselves against job losses in times of recession, but not the unorganized workforce, especially that part of it which is rural based. The unorganized workers, especially the rural segment, are much more vulnerable to the adverse effects of severe declines in government expenditure financed through borrowing (or through additional taxation) or the adverse effects of  “monetarist” monetary policy.  This may increase the incidence of disguised unemployment in the rural areas. As Abhijit Sen puts it :


Thus, there are two possible stories that can be told about the impact of structural adjustment and stabilization on poverty. The first is a benign one: that by increasing agricultural output and controlling inflation, these act to reduce poverty. Alternatively, there is the less optimistic but no less possible outcome that structural adjustment acts adversely on the poor because ‘getting prices right’ leads invariably to a rise in the relative price of food, because greater reliance on market forces spurs inequalities  inherent in the commercialization process, and because these adverse effects are compounded by contracting  non-agricultural employment and falling wages in the unorganized sector if the government wishes to contain, through contractionary stabilization policies, the inflationary fallout of adjustment. Which of these actually transpires is an empirical  matter.

Official data of the 1990s

Let us now come to the most recent data of the 1990s, which brings the story up to 1997, and even the first half of 1998. We rely heavily over here on Ghosh and Chandrasekhar. The 1990s have so far witnessed a robust annual average GDP growth rate of 5.65% between 1991-92 and 1997-98. This is marginally higher than the average annual GDP growth rate of 5.36% between 1981-82 and 1990-91. However, according to Gaurav Datt of the World Bank, the incidence of poverty has remained stagnant or even increased a bit in the 1990s. This lack of a positive correspondence between growth and poverty seems a reversal for the worse as far as the poor are concerned. What are the reasons for this reversal? Has inequality increased so much that the ‘trickle down’ effect has been neutralized? Or, has the growth of per capita real consumption failed to keep pace with rising incomes? Or, are there simply measurement problems? Datt’s estimates seem to suggest that mean per capita real consumption has increased, but the Gini coefficient has also increased, indicating an increase in inequality. Datt of course concludes very cautiously that the measured rural per capita consumption fails to reflect the growth in incomes as recorded by the National Accounts

Statistics (NAS), implying a problem of measurement. The position taken by an Expert Group in 1993, appointed by India’s Planning Commission, was that underestimation in the mean per capita consumption from the NSS data is mainly due to the fact that the rich do not reveal their true level (which is much higher) of consumption in NSS field-investigations. If this is indeed the case, which seems quite plausible, then the Gini coefficients recorded by Datt are highly underestimated. Thus one can conclude that inequality increased so much as to wipe out the positive effects of growth. Let us assume that the underestimation is uniform over time. Datt’s calculations show a decline in the Gini coefficient between 1973-74 and 1990-91. Since then, however, it seems to have fluctuated quite a bit, but seemingly assumed an increasing trend. Regarding urban India, poverty declined in the 1990s even as inequality increased. We may say then that the positive growth effects more than neutralized the negative inequality effects at least in urban India to record a decline in the incidence of urban poverty in the 1990s.

Regarding the relative price, if we take the ratio of the Consumer price Index for Agricultural Labourers (CPIAL) to the National Accounts Statistics (NAS) deflator, this declined in the 1970s and in the 1980s. However, the ratio increased in the 1990s. The weight of food-grains is very high in the CPIAL, and so we may say that the relative price of food-grains increased significantly in the 1990s. This increase in the 1990s of the relative price of food-grains could have been a major contributor to increasing rural poverty. Agricultural growth has been relatively sluggish in the 1990s compared with the 1980s, or even with the 1970s, except for non-food crops. However, in line with our proposition, we should look at per capita output and income, rural and urban. Because of the non-availability of the data, working with certain simplifying assumptions, Ghosh and Chandrasekhar compute rough figures of per capita output for rural, rural agricultural and non-agricultural, and for urban India. The average annual growth rate of per capita real rural income was 3.9% during 1981-82 to 1990-91 and 1.4% during 1991-92 to 1997-98 with the use of the CPIAL as the deflator. The same with the NAS deflator was 3.1% and 1.8% respectively. According to Ghosh and Chandrasekhar the former figures (i.e., using the CPIAL as the deflator) seem to be quite in line with the pattern of real rural per capita consumption from the NSSO figures.

Let us come to rural non-agricultural employment and incomes. There has been a decline in rural income as a share of total income. This is due to a fall in the share of agriculture in total income. But non-agricultural income increased as a share of total rural income between 1977-78 and 1990-91, but the increase thereafter was somewhat subdued . This implies that the income earning opportunities from rural non-agricultural activity have narrowed in the 1990s. Between 1977-78 and 1990-91, the proportion of rural workers employed in the primary sector (mainly agriculture) declined, especially for male workers. The 1990s witnessed a reversal, indeed, a slight increase in the share of rural workers in the primary sector. The shift in employment in the earlier period was to both the secondary and tertiary sectors, but the shift back to the primary sector in the 1990s was mainly at the cost of the secondary sector (a process of de-”proto-industrialization” in rural India in the 1990s?). This process of de-”proto-industrialization” in the rural areas in the 1990s implies that the process of economic development, identified in a very fundamental sense with a relative shift in the labour force towards the secondary sector has been stymied in the 1990s. Ghosh and Chandrasekhar argue that in the 1990s the decline in per capita government development expenditure in the rural areas, reduced transfers from the Central to the States pool, and the adverse effects of financial liberalization on rural credit, contributed to reduce the growth of non-agricultural rural employment. We may add that with greater market integration following a freer play to market forces, the substitution of modern manufactured products for existing traditional manufactures also asserted a downward pressure on rural non-agricultural employment and the redundancy of traditional producers.  An example could be beedis being substituted by cheap cigarettes. 

But is the increase in agricultural employment a positive development or a manifestation of distress of the poor? The proponents of liberalization argue that the relative price incentive and the opportunity to export agricultural commodities should increase private investment in agriculture and thereby lead to an increase in agricultural output. But, the rate of growth of agricultural output has slowed down considerably. With a gradual decline in the output elasticity of employment in agriculture, this deceleration in the growth of agriculture has perhaps led to a deceleration in the growth of demand for labour in agriculture. With a relative decline in the non-agricultural rural economy, the supply curve of labour to agriculture has perhaps shifted to the right. A definite downward pressure on the money wage seems to have then operated in rural non-agricultural activity, which together with the increase in the relative price of food-grains, has led to a downward pressure on the real wage rate. This has also pushed labourers back towards offering more of their available labour hours to agricultural employment. Casualization of work has also increased dramatically in the 1990s.