The rural economy, as much as urban economy, is an integrated part of the overall Indian economy. Any talk of overall development without rural development is flawed and unsustainable as far as India is concerned. If we consider these as two parts of the overall national structure and try to understand the effects different policies have on them and so on the overall economy (measured by development indicators), we will realize that efforts put in one area will not necessarily mean endangering the other. There is an interrelationship between the rural and urban development and so if we frame our policies properly, invest wisely and utilize resources efficiently then there can be an all round development.

There is an imbalance in the way the Indian economy functions presently. The main reason for it is that resources are being transferred from urban economy to rural economy just for short term political motives. This is affecting both areas, not letting rural economy develop on its own and hampering growth and investments in urban economy.

A proper planned approach of rural development which will include the Center (having the hold and power to enforce regulatory frameworks), panchayats and key village personals (who enjoy the faith of the village people), NGOs (who have the right intent and deep reach) and private companies (who have the resources and can efficiently utilize conditions) will not only help reduce this imbalance but will have a multiplier effect on the overall economy.

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Development of Industry sector will play an important role in such a scenario as it can provide a link between rural and urban development. This has been explored further. Also there is a need for development of non-agricultural sectors in a rural economy to hedge monsoon and other agricultural risks. Monetary measures may also have to be taken initially and it may lead to temporary problems like devaluation, inflation etc.

By aligning the goals of the two parts we can convert this seemingly zero sum game into a win-win situation. It would be a very long drawn and difficult battle with conventions but the reward is worth the effort. This paper touches upon the plan and discusses a few issues involved.


India Shining, but only 30 %. Even though the NDA government did good work there’s no disputing the fact that India can’t develop into a modern economy while 300 million people subsist on less than $1 a day. The middle and upper classes thrived as growth averaged 6.2% annually in the 1990s. But far from the marble-and-glass research and office parks in Bangalore, Bombay, Hyderabad, and Delhi, 70% of Indians live on agriculture, a sector that has stagnated. Nearly 40% of Indians remain illiterate. Indeed, through the hot growth years, the gaps between rich and poor and between urban and rural areas grew dramatically wider. This cannot be called development. Given such unbalanced growth, many experts say it would have been difficult for India to sustain its success without a dramatic change in policy.

This paper proposes a major fundamental change in the way Indian economy works, so as to help ‘rural development’ in developing India. In this paper we first try to understand the whole Socio-Economic structure of India. The factors affecting the rural economy have been discussed in the first section. Then we will discuss the change agents- those who have the say or will or resources to bring about the change, then the proposed structure/model, how and why it will work. Because of the space constraints the model couldn’t be discussed in detail but we have tried to give an overview.

Development indicators (which affect the long term economic conditions) that have been considered in this paper are: 1) Economic productivity; 2)Quality of Infrastructure and public services; 3) Per capita income or total population under poverty line 4)Health of financial sector, good governance, sound legal, incentive, and regulatory frameworks that protect property rights, enforce contracts and stimulate competitive markets, 5) Health, education and social services that reach the poor, women and girls effectively; and 6) policies for environmental protection and human sustainability [1].

Current Socio-Economic Structure

Wheels of Indian economy: Agriculture and other rural sectors provide support to around 70% of the population while contribute only around 24% of the total GDP. Industry provides 26% of the GDP as against 50% for Services [3]. This shows that the per capita income in the rural sector is abysmally low and survey has found that rural poor outnumber urban poor by a measure of 1.26 [2].This gives rise to other Socio Economic imbalances as well. So rural development is the key to many socio economic problems

Rural structure in India: The rural society is highly dependent on the agricultural and allied sector for its income. Rain is the main variable in the agricultural sector and so the whole fate of a village depends mainly how was the monsoon that particular year.

The local government in the rural sector (panchayats) may be single-tiered, two-tiered or three-tiered according to state. There are gram panchayats (villages with an average population of around1,000), the panchayat samitis (around 100 villages) and the zilla panchayats (around 1,000 villages or 1,000,000 people). There are some 6,459 zilla panchayats, 5,930 panchayat samitis and 240,588 gram panchayats across India [4]. Local government is responsible for a limited number of services water supply and sanitation, waste disposal and management, burials, street lightning and roads. More recently it has been given a greater role in economic development, lower level education, public health and environment protection. It becomes more important to understand this structure in the context of rural development because in the villages these people are those in whom the villagers have complete faith. But limited responsibilities of panchayats make them ineffective.

Central and state help: Centre and the state provide a lot of help to the rural sector in form of subsidies, direct fund allotment, tax benefits, debt relief, grants etc. A major portion of central plan outlay also goes for rural development in one form or the other. It is a highly imbalanced spending with more short term and non developmental spendings. These spendings are more for political reasons than to help rural economy develop. Areas like agricultural R;D and Infrastructure (Roads etc.) have a very high return (13.45 and 5.41 Rupees per Rupee Spending) and high poverty reduction (84.5 and 123.8 No. of poor reduced per Million Rupee Spending). As against power subsidies and anti poverty programs (return of 0.26 and 1.09 and poverty reduction of 3.8 and 17.8). [5]. But the time lag in getting the returns is more in the first case making it unsuitable for political purposes and so the use and allocation of funds should not be in the hands of the government alone.

Who will do it – the Change Agents

Now we will discuss the institutes that can and should have a major role to play in the whole change.

NGOs: In India there are 12265 NGOs of which 52.75% in Rural Development (RD) [6]. Others cover different areas but directly or indirectly have an affect on the rural population. The core strength that the NGOs will provide to the whole process is there basic intent of social development. These NGOs are very involved as they are generally run by people who have an inner urge to do well and have a single minded motive of social / rural development. The role of NGOs and their capacity in reaching across to large sections of the population and the quality of reach is undoubted. However, in view of the limited organizational, managerial and financial capacities of NGOs, they cannot, in any way supplant the normal government machinery in addressing the various developmental problems of the social sector.

Panchayats: These are organizations which enjoy both public support and government help but are restrained because of the resources.

Key Village individuals: There are people in every village other than the panchayat committee (surpunchs) like the village head master, the village doctor, priest, money lender, etc who enjoy great faith of the villagers and who have a great say in the village. If a change has to be brought about these people will have to be taken into account. They have a deep reach and a sound mentality to understand the good of the village. They along with the panchayat are people who should form the public face of the whole process as they hold positions of faith in a village and have the best of the village at heart.

Government: Government has a huge role to play as well when it comes to fund allocation, regulatory framework, security support, etc. The government should lay down the framework and then play the facilitator role.

Private participation: Private companies can provide various resources from capital to technology and also will use conditions very efficiently unlike the government. E.g. Company towns or villages adopted by large companies are doing much better than others.

What will work- Structure proposed

There are outstanding examples of inter-sectoral collaboration and close linkages between NGOs, community groups and government in many countries. For instance, in Maldives, collaboration between youth groups, island development committees (IDCs) and health workers led to the declaration of two islands as “No Smoking Islands “. Something similar but on a very large scale is needed in India to turn things around. The key features of such a structure are listed below (detailed structure not included because of space constraints):

* A well defined structure of NGOs, companies, panchayats and village inhabitants in a deep and rigorous framework provided by the government will have to be formed.

* Form a central committee in every village having members from each of these areas. Place them under the tier system of zilla parisads etc but functionally they should be directly under the ministry of rural development.

* Divide the villages into types depending on population, existing infrastructure, proximity to city etc so that villages in one group will have similar needs and resources.

* Define structures for each type of village and describe in details the role (rights and responsibilities) participant will play depending on there core strengths.

* Replace subsidies with direct help to these committees, this will reduce wastage.

* Companies may get tax cuts depending on there involvement. By doing this you are removing government from between. Collecting TAX from private players and using them inefficiently will be replaced by direct use of the same money. Companies also get big markets and cheap labor. Social responsibility which is pursued by many big companies will also be satisfied.

* Villages will start functioning as profit centers and they will be allowed to keep a part of the revenue that they have generated. They may also start collecting revenue in some form.

* Key point here is efficient resource utilization, every village will converge towards doing what it is best at. Private players should be encouraged to invest more and more in such projects.

* Areas that are to be taken care by this central committee are electricity, water supply, financial system: rural credit system etc (the farmers at present are paying very high interest), social environment/legal structure (to reduce costs and speedy justice), non farming sector development, exports, area under cultivation, infrastructure (one computer, one phone line, road reach and power in each village), Education, Health, Calamity management etc.

How will it work- steps to be taken.

Implementation is as important as planning.

* It will be a long drawn process divided in phases and steps. Commitment from the government is must. In each phase take groups of villages and after each step try to review and improve your current structure.

* In each phase before inviting private players first give it to NGOs and panchayats. Let them lay the ground and then invite companies.

* With each step it will become clear what exactly should be done next. For e.g. if the village produces excess grains/crops then it might be a good idea for it to set up a private packaged food processing unit. The private company will benefit from the availability of raw materials near the site.

* The Indian agricultural sector is beset with inefficiencies from the farm gate to the end consumer. The sector lacks a strong marketing network for agricultural produce. The entire sequence from harvesting to packing, transportation, and storage, wholesale to retail is too long. Around 40% of the value is lost in the supply chain by the time the produce reaches the consumer. Private players can play a big role in increasing efficiency here.

* Back office for a near by city, Government setup, tourism, educational institute, industry township, Agro-business etc are a few other options that a village can move towards. This will also reduce dependency on agriculture alone [11].

* Investments by companies in private canals etc., which are an efficient way of irrigation, can also be looked at. It will also reduce reliance on monsoon.

* To aid initial development the government may have to increase the money supply which might give rise to temporary problems in the money market like devaluation. This will have to be dealt with.

Why will it work for India – Rural and Urban Development: Not a zero sum game

What is sustainable development, or what is development in the first place. It is not only the economic prosperity but also reduced poverty, equality etc also count (other wise we will end up becoming another Brazil). So concentrating on urban areas alone will not help and so rural development (affecting the majority population) is directly called for. Secondly if the country has to have a sustainable growth say of 8%GDP for the next 20 years then it should start concentrating on the industrial sector. At present CAGR for agriculture is -5.2%, industry is 6.4 % and for services is 7.1%. For getting a sustainable GDP of 8% the industry will have to grow at 11% (CII) [9].

For industry to grow at that rate it is important that it enters the rural economy in a significant way which is exactly what we have proposed in the current structure. Initially infrastructural development and then industry being set up in rural areas will help both rural development and Industry sector. As the per capita income of rural population increases there spendings will also increase which will provide a market for the whole economy and will have a multiplier effect on the overall GDP. Research has shown that there is a +ve correlation between rural income and sale in sectors like durables, FMCG, two wheelers/tractors ; construction. Rise in the rural income can raise the sales in these sectors from 10% to 25% [8].

Also as the villages become self reliant the need of subsidies will decrease and that in turn will reduce the load on other sectors.

This will lead to an overall, sustainable and equitable growth. If we unify goals of different development indicators, it will be clear why this is the best solution.


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