The Indian budget for 2010-11 is being presented against a background of optimism -- the impact of the financial crisis on the Indian economy is waning, the growth rates of GDP in general and of the manufacturing sector in particular are picking up and there is an expectation based on strong fundamentals that the economy will return to a growth rate of over 7% in the next year.
However, it is too early to rejoice as the challenge of high poverty levels continues to dent all achievements on the growth front. While official poverty data have not been revised, the Expert Group chaired by Prof. Suresh Tendulkar has proposed new poverty estimates for India, and speaks about 42% of people living below the poverty line in rural areas.
The challenges facing rural India are indeed formidable. Low agricultural productivity, high food price inflation, shortages of crops like pulses which form the main source of protein for a majority of the population -- all have affected the rural poor adversely. M.S. Swaminathan, the eminent agricultural scientist, warns of a food crisis if agriculture and farmers are ignored.
Small and marginal farmers operating on not more than 2 hectares of land constitute 84% of the total farmers in the country. Agricultural laborers, who constitute the bottom rung of the occupational structure, include a majority of workers from Scheduled Castes and Tribes, and number around 89 million. This is also the poorest segment in the rural economy.
Surveys such as the National Sample Survey and the National Family Health Survey illustrate the precarious living conditions of a majority of the vulnerable rural households in modern India.
In 2006-07, the latest year for which such data is available, an estimated 50.3% of the rural population had a meager monthly consumption expenditure of less than 580 rupees. Of every rupee spent by a rural Indian on consumption, 52 paise were spent on food. The spiraling food inflation of over 17% would therefore have hit these households hardest.
About 22% of rural households lived in katcha structures (temporary shelters) and another 29% lived in semi-pucca structures (semi-permanent homes). Some 74% of rural households had no access to toilets while 75% of rural households depended on firewood and chips as a major cooking fuel. Some 9% used dung cake as fuel while 42% of households used kerosene for lighting. The brunt of the impact of these deprivations is borne by women. Not a very flattering picture for a country growing at over 8%!
Employment avenues in rural areas are limited. The implementation of the National Rural Employment Guarantee Program has offered some succor but due to various constraints, the promised 100 days of employment have been provided only in the state of Rajasthan. In fact, the performance of the program is quite low in the states of Bihar, Orissa and Jharkhand, which have large numbers of the rural poor.
While the plight of those living below the poverty line is unimaginable, the plight of those just above the poverty line is equally difficult as finding productive employment in rural areas is a huge challenge. The prospects of this improving in 2010 are not bright as the agriculture sector's growth is expected to be negative in 2009-10 and expected to pick up to 5% in 2010-11.
What this means is that in the immediate months following the budget, negative growth rate of agriculture will mean lower incomes and therefore subdued demand for consumer goods in rural areas with the situation improving somewhat only in the latter part of 2010.
What can the budget do?
In times such as these, when the global market is yet to recover fully, it seems prudent to rely on boosting domestic demand, particularly rural demand. Revitalizing the agricultural sector requires massive public investment, particularly in agricultural research and extension services in order to usher in a second "Green Revolution." These are long term investments that must be made. Additionally, in order to boost rural employment and incomes in the short run, a focus on rural infrastructure is essential as China has done.
When faced with declining exports in 2008-09, China resorted to a massive fiscal stimulus whose total magnitude is of the order of $586 billion. Unlike in India where the stimulus went mainly to export-oriented sectors, China used the stimulus to build infrastructure, generate employment and boost rural demand, including for consumer durables through its Home Electronics to the Countryside program. China is also reportedly contemplating providing incentives for private house construction which will tremendously boost the demand for cement and generate huge rural employment.
The Chinese example rests on providing a stimulus to the demand of households for mass consumption goods. For rural India, this is as yet a distant dream as the majority of the poor do not have access to even basic infrastructure – warehouses, cold storage facilities and market yards that can secure better livelihoods for them. Nor do they have access to basic amenities such as drinking water, sanitation and housing.
‘It is likely that the small and tiny sectors may find themselves pushed out of the formal credit sector altogether.’
Incentives to build "productive" rural infrastructure such as warehouses will provide better price realization and value addition for farmers in the medium and long term and boost their incomes. The emphasis on better health infrastructure will facilitate control of water borne and communicable diseases and contribute to reducing infant mortality rates, thereby enabling the achievement of the Millennium Development Goals for the country.
Moreover, the focus on social infrastructure in rural areas can provide employment opportunities for millions of people in toilet construction, waste recycling, methane farming for energy use, vermicomposting and a host of other such uses. What makes the proposal even more attractive is that sanitation projects can earn carbon credits for reducing green house gases and contribute to the government's green agenda.
Rural energy is another area which is in need of urgent attention from the government. The continued use of biomass in ill-ventilated kitchens leads to health hazards for rural women. The scope for biogas plants to supply cheap, clean and efficient energy to rural areas has not been fully exploited.
Out of a potential 12 million households that can be covered with such plants, less than half had been covered by 2007. Fiscal incentives to promote the building of biogas plants by private households or village panchayats in a large way are the need of the hour. The move will liberate millions of rural women from the tyranny of being compelled to use outdated and harmful fuels which are harmful to their health. This will lead to meeting the twin objectives of women's empowerment and reduced emissions simultaneously.
The construction boom that the combined impact of the above measures will generate in rural India will provide the necessary stimulus not only to the rural economy but also to the economy as a whole through increased demand for cement and other building materials.
Now we turn to credit.
For low income, self-employed workers in rural India, the most binding constraint is that of credit. Access to credit for the small and tiny sector has been extremely limited. The National Commission for Enterprises for Unorganized Sector has reported that tiny enterprises with less than 5 lakhs rupees' investment in plant and machinery get 2% of total bank credit and this has further declined to 1.2% during the period of the financial crisis. The small sector with up to 25 lakh rupees' investment has a share of only 5% of credit in the formal sector.
With the revival of the economy and heightened prudence on the part of bankers, it is likely that the small and tiny sectors may find themselves pushed out of the formal credit sector altogether.
Microfinance, despite its considerable progress, continues to suffer from small average size of loans at around 5000 rupees. What rural enterprises need is substantial and continuous support for at least three to four years to enable them to be self sustaining.
This can be another area pushed in the budget and followed through by appropriate policy measures by the Reserve Bank of India and other regulatory agencies.
The government's vision of "inclusive growth" requires that rural India is revitalized and is able to provide jobs at decent levels of income. This will provide a surge in rural demand and provide a much-needed stimulus to the economy.
What's more, the stimulus from the rural economy will contribute to a virtuous spiral and benefit the entire economy. This type of stimulus will also not fizzle out in a hurry – a fear that haunts fiscal experts when the stimulus is narrowly focused.
—K. Seeta Prabhu is Senior Assistant Country Director, United Nations Development Programme, New Delhi.