Posted by: Vikram | December 19, 2011

Distant from Prosperity: The rural Indian economy, 1993-2005

What has happened to the Indian economy over the last two decades ? The general consensus is that there has been a significant expansion of the economy, but that the rural areas have been ‘left out’, leading to an economic and social chasm between India and Bharat. I have talked about this chasm in a qualitative sense before. The objective of this post is to provide a more quantitative discussion regarding the rural-urban inequality. How much richer did urban India really get compared to the rural areas ? How do these patterns vary across different areas ? What about the rural economic growth numbers ? The paper ‘Lineal Spread and Radial Dissipation‘ published by Anirudh Krishna of Duke University and Devendra Bajpai of the Birla Institute of Management Technology provides some answers to these questions.

One critical aspect of any quantitative analysis is the definition of variables; what to measure, where and when to measure it.  Clearly, one can just look at populations in rural and urban areas, and then compute the appropriate economic metrics for both. However, Krishna and Bajpai refine this process a step further by introducing a ‘distance from an urban centre’ metric. Basically they subdivide the population into four categories:

  • Urban areas (cities and towns)
  • Villages less than 5 km away from an urban area
  • Villages between 5 and 10 km from an urban area
  • Villages more than 10 km away from an urban area

The authors mention the rationale for such a subdivision as follows,

Distance from market, both physical and cognitive, can importantly influence an individual’s economic prospects.

The physical distance from the market here is captured by the distance from an urban area; since urban areas are the major market area in India. The authors then computed the change in income (adjusted for inflation) in each of the four subdivisions between the years of 1993 and 2005. The figure below summarizes their results,

Figure 1: Income growth in India urban areas, villages less than 5 km away from urban areas, villages between 5 and 10 km away from an urban area and villages more than 10 km away. The income growth figure for urban areas (not mentioned in the paper) has been estimated by using an average of 6 % growth in income overall.

The figure clearly illustrates that economic growth has been rapid and concentrated in urban areas and their peripheries. But alarmingly, in areas outside this urban and peri-urban circle, where the majority of population lives, incomes have actually fallen ! The authors point out that,

Being less well linked to towns is no longer a matter of merely standing still, of being a bystander left behind by the train of economic progress. Those who were left behind have tended to fall further behind.

Perhaps, the difference in the income growth rates between places in and around urban areas and the rural core would not be surprising for most readers. The serious question though is why have the incomes in rural areas actually declined. And the question becomes even more serious if we look at the changes in income for different income groups (very poor, poor, lower middle, middle and rich/upper middle class) within a single subdivision.

Figure 2 shows these changes for the population living in villages more than 10 km away from an urban area,

Figure 2: The growth (or decline) in incomes for different classes in the core rural areas of India where 52 % of the population lives

The figure above is shocking. The Indian government and media goes into a huff when the rupee falls or the stock market fluctuates. Analysts and experts predict dire futures if FDI inflows fall down or if ‘market sentiment is hurt’. But the wholesale impoverishment of the poor and very poor in Bharat, (who certainly make up a huge chunk of the population, if not the majority) did need not merit alarm ? The author’s point out,

To be further away from towns and markets is a bane in this era of market led growth, but to be poorer and further away is a recipe for disaster.

To see others get rich while not being able to improve one’s own income is irksome. But others getting rich while one gets poorer is usually seen as an injustice.  In my opinion, Figure 2 partly explains both the defeat of the BJP led NDA in 2004 and the rise of left wing extremism in the 2000’s.

Is there a silver lining ? If one sees the analog to Figure 2 for rural areas within 5 km from an urban area, we see perhaps a more promising picture.

Figure 3: The growth in incomes in the peri urban areas of India (villages less than 5 km away from an urban area)

We see that even the most poor section of urban and peri-urban Indians saw inflation adjusted incomes improve between 1993-2005. This shows that India’s growth can indeed reduce poverty and improve the lives of all its people, and achieve the much vaunted ‘inclusive growth’ goal. The NREGA (implemented post 2005) was an attempt in this direction. It would be interesting to see how the NREGA has affected Figures 2 and 3 since its inception. In its ideal form, the scheme provided a direct boost to the incomes of the poor and very poor in Bharat and in the process employed them to create the infrastructure for future rural economic growth. Perhaps, the Congress led UPA’s success in the 2009 election indicates that the scheme did indeed address some of these imbalances.

However, the NREGA will not form an engine for growth by itself. It addresses inequality by state investment, not actual wealth and job creation. Creating the conditions for such wealth and job creation remains a challenge for Indian society and its government.

Readers might also be interested in reading:The Three Layers of Emerging India

(Thanks to Vinay Pandey for Figure 1, Akanksha Jain for Figure 2 and 3)


  1. A couple of questions regarding the analysis –

    1. the data between 1993 and 2005 are compared. I’m just curious about the population statistics in the first graph. I assume there has been an urban shift in the population during this period as well, so what’s the source of the population data? (this probably won’t affect the results of the analysis, but I’m just curious about the same)

    2. The income statistics being quoted are inflation adjusted. Now this immediately draws attention to the basket of goods being used. Is the basket of goods same for the various population segments? If that is the case (as I guess is highly likely), then that is an obvious challenge to the relevance of the claims as consumption patterns would vary based on the income and location of the population group.

    Adjusting the income data for inflation is obviously necessary while measuring changes in the prosperity or poverty levels of various groups, but it needs to be done based on a basket of goods which accurately reflects the consumption pattern of that group (simply put, inflation levels for different groups is not the same, this might significantly affect the resultant numbers so as to strengthen or weaken the claims).

    • Hey Anubhav, thanks for the questions:

      1) The statistics in the paper were arrived at using data from the National Council for Applied Economic Research’s 1993 and 2005 surveys, the 2001 Census and the District Level Household and Facility Survey of 2007-2008.

      The author’s do talk about the changing rural urban population ratios. By comparing data from the above survey’s they estimated that the proportion of rural population living in the peri urban villages increased by 18 %, while the population in the villages farthest away from urban areas might have decreased by as much as 25 %, indicating perhaps a major spurt in distress migration by wage earning members of Bharat families. However, the majority (69 %)of the rural population still lives in the farthest away villages.

      2) For the inflation adjustment, the Consumer Price Index for Agricultural and Rural Labourers was utilized. I dont know a lot of economics, but I would think this would more accurately capture the income trends in rural areas, while perhaps overestimating the increase in incomes for richer urban folk.

  2. I am not so scholarly as to comment on the validity of the nature of research, the inference made etc. But what has struck me shocking is how people concerned can be be so blind to these developments.That somebody is thinking of these rural areas is the only heartening thing because most of the time all the players in the mainstream media and all politicians do not appear to be doing much to address this problem. perhaps they have got their priorities wrong.

    • Welcome ksr. Your comment is absolutely true. The priorities of our governments are skewed towards investment led and urban growth. The saddest part is that some of the policies have actually made making a living from agriculture difficult without creating the environment for alternative livelihoods to come up.

  3. I have doubts over the index and basket of goods used for inflation etc. But I’ll assume they were correct.

    Since what BJP led NDA followed was growth based poverty reduction(not redistribution), it would inevitably take a) time to trickle down, b) it would trickle down sooner to villages near cities than far away.

    Given this, a)time period of study is not enough to point fingers at NDA and should have seen 2007-8 figures etc(provided same path was followed sans NREGA) and b) suggests that indeed their policy worked as expected, pulling nearer-to-urban villages out of poverty.

    Now, given this, shouldn’t the UPA have hastened the massive road laying programme undertaken by BJP led NDA? Roads reduce distance between villages and town(metaphorically, that is.) Experiences from my extended family here: once singleton path was replaced by a road, my (erstwhile)village saw a high jump in high school finishing children numbers, food prices dropped, wage earners bitten by snake could live, etc. No longer were children who wished to study need to be sent to town hostels.

    There was a massive reduction in road development after UPA came into power, and certain villages away from mine are yet to get roads. Redistribution of wealth is meaningless votebank politics. How long will govt. give handouts to villagers? Enable villagers to earn; they will earn. NREGA is a first degree failure of sane economics. In fact it has hurt agricultural farm labour economics.

    • Barathi welcome. To answer the first part of your question, one thing that could be looked at is what the trends in income growth (or decrease) were over the time period from 1993-2005. If say for example, inflation adjusted income growth for the period 2000-2005 was faster than that for 1993-2000 then one could think that a such an improving trend would continue in to 2007-2008 sans NREGA.

      However, in terms of the core rural economy, the question facing us is not one of differing rates of economic growth. Income among the poorest sections has fallen substantially in the period 1993-2005. So I am not sure, what new information a study in 2007-2008 will tell us.

      As for the UPA vs NDA question, given the numbers as they are, I am not sure how continuing a specific policy would rectify all the accumulated impoverishment over this time period, which is the result of multiple policies and other failures.

  4. Vikram,
    I am a bit confused as to what you mean when you conclude:
    “However, the NREGA will not form an engine for growth by itself. It addresses inequality by state investment, not actual wealth and job creation. Creating the conditions for such wealth and job creation remains a challenge for Indian society and its government.”

    Certainly NREGA ‘alone’ cannot promote growth. But, it forms a crucial component in employment generation, which is one of the major objectives of economic policy. Could you please elaborate as to what you mean when you write that NREGA does not lead to actual job creation and that it addresses inequality by state investment?


    • Hi Alex. I am of the opinion that the employment generated by the NREGA is not of a sustainable kind. The expenditure for NREGA is better classified as an investment. Certainly, the infrastructure built via the NREGA can promote economic growth in the future, but the jobs created to build this infrastructure are temporary. In fact, the finance minister has been classifying the NREGA expenditure as investment.

      • But, Vikarm, employment guarantee programmes have been sustainable in the West. Besides that, at a more fundamental level, government investment is considered to be less volatile than private (business sector) investment, as it is crucially determined by expectations.

        Investment generates employment opportunities. So, why would we not want more investment, both private and public?

      • Because the state has a very limited capacity for creating jobs. Also, the jobs being created by the NREGA dont appear to be very sustainable (from my knowledge, they mostly seem to be unskilled construction jobs).

        What will NREGA do once all the wells have been dug and all the roads built ?

  5. a)Where did you get the data for all these 5km from an urban area?

    b) How do you define an urban area first?

    c) I think your stats may be very well wrong…because it’s the rural areas that benefited greatly from the industries mushrooming in an urban area and They had increase income rates for those who were working in urban areas…

  6. On a tangential note, this is a very good piece regarding the “reforms” in Indian economy over the last two decades and the nature of poverty, perhaps you have read it already:

    I am no fan of Arundhati Roy however she is quite spot-on here. Though I completely disagree with her about Anna Hazare and the role of Maoists as “crusaders of justice” as she paints it.

    • Hey Priyank, thanks for sharing that article. I have seen it being circulated on FB and other sharing portals. Currently, I am a bit overloaded on work 😦 Will be a while before I can respond to it.

  7. Dear Vikram, I red this great paper. Do you know why they use monthly income data when the original version of income is annual?

    • Hey Paola, I am not sure why the monthly income data was used. I dont recall them providing an explanation in the paper.

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