Development inclusive of people in rural areas is not really distinct from development in general. Indeed it is not possible to have real development while excluding the majority of the people — the majority of Indians are rural.

Generally speaking, Indian rural populations and subsistence agriculture are almost exactly congruent notions. As long as that equation persists, India will continue to be underdeveloped and poor. The reason is that subsistence agriculture does not scale, and therefore the productivity is bounded by a very low limit.

One can move beyond subsistence agriculture by raising agricultural productivity. There are two distinct ways of doing that.

Case A: You raise the productivity of agriculture by some means such as using more capital (more mechanization and more energy, for instance). Basically, you “pull” the productivity up without any provocation such as a shortage of labor.

Raising productivity means the same (or even increased) production requires less labor. The surplus labor can then just sit around in the rural areas or migrate to the urban areas to live in slums. Here the labor is “pushed” out of agriculture as a consequence of the pulled up productivity.

I call it the “productivity pull, labor pushed” scenario.

Case B: You somehow “pull” labor out of the agriculture. There are many ways but let’s just say that industry is booming and requires labor. That means jobs in the manufacturing sector. Also imagine that the manufacturing sector jobs require some degree of skills but which can be acquired in a short time and on the job itself. So the labor gets pulled out of agriculture and into manufacturing. Now agriculture gets “pushed” to increase its productivity because there is a shortage of labor in the rural sector.

I call this the “labor pull, productivity pushed” scenario.

The two scenarios have distinct distributional outcomes. In the first case, average incomes in the rural sector don’t go up. Those who continue to be employed in agriculture do see their incomes go up because of greater productivity but that is balanced by the lowered incomes of those who are rendered unemployed. The increase in productivity merely takes from one segment of the rural labor force (those previously employed) and transfers that to those who remain in agriculture. Furthermore, there is no labor linkage between the non-agricultural and agricultural sectors.

In the second case, the average rural income goes up. Increased productivity means increased average income because the labor force has contracted. The labor released from agriculture ends up in manufacturing. Their incomes in manufacturing is higher than what it was in subsistence agriculture. So the average income of the total rural labor force (which was previously only in agriculture but now is distributed in agri and non-agri work) goes up.

That is what can be called “inclusive growth.” It is a consequence of balanced growth. To recount, the story goes this way:

1. Increase capacity in the non-agricultural sector, such as increased manufacturing or services.
2. This pushes demand for labor in the non-ag sector.
3. Labor from rural areas (agricultural labor) is pulled to urban areas.
4. Shortage of labor in agriculture pushes productivity increases in agriculture.
5. Incomes go up for the entire group that used to be previously only in agriculture.

Why do average incomes go up when labor moves from agricultural to non-agricultural sectors? Because agriculture does not admit scale economies while manufacturing and services sectors do. That’s just the way it works.

Which is why urbanization and economic growth are conjoined twins: you cannot have one without the other. Economic growth is what happens when the labor moves from agriculture to manufacturing and services. Which is another way of saying that when people move from rural areas to urban areas. But that move has to be pulled rather than pushed (in the sense I have defined them above.)

It is interesting to note that sometimes the solution to a problem does not lie in the same space as the problem. This is one such case. The problem of rural inclusive growth has a solution but that solution lies in non-rural areas and in non-agricultural sectors. India’s misplaced focus on rural areas (as opposed to a focus on rural populations) has done a lot to promote mass misery and poverty.

As Einstein had famously observed, no problem can be solved from the same level of consciousness that created it. The mindset that created the impoverishment of rural populations was one which did not understand the economic linkages that connect all sectors of the economy. It was a mindset that separated villages (and even elevated them) and tried to make them “self-sufficient.” Persistence of that mindset guarantees persistent poverty in rural areas and rural populations.

We can spend a lot of time debating how entrepreneurship and innovation in rural areas will help the rural people. But that will be of limited use until one re-evaluates the problem of inclusive growth in terms of the growth of urban India. The solution to rural India lies in the urban India that is waiting to be born.

Related post:

1. ADLI: A Lesson from the Age of Industrialization. [Dec 2003.]

2. The Better, Faster Way to Help Rural India. [July 2006.]