Page 1 of 8

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 03

March 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 365

Contribution of Rural Areas in Indian

Economy: A Review

Patel Godavari

Dept.of Economic

Dr.K.Venkataiah

Dept.of Economics

Abstract

The contribution of the rural areas in economy of India for the period 1970-71 to 2011-12 is

seen from its share in national output and employment1

(Table 1). The rural areas engaged 84.1

per cent of the total workforce and produced 62.4 per cent of the total net domestic product

(NDP) in 1970-71. Subsequently, rural share in the national income declined sharply till 1999-

00. Rural share in total employment also witnessed a decline but its pace did not match with the

changes in its share in national output or income. The declining contribution of rural areas in

national output without a commensurate reduction in its share in employment implies that a

major portion of the overall economic growth in the country came from the capital-intensive

sectors in urban areas without generating significant employment during the period under

consideration. Notwithstanding, the difference between the rural share in output and

employment increased from 22 percentage points in 1970-71 to 28 percentage points in 1999-00.

Table 1. Share of rural areas in total NDP and workforce

(per cent)

Year Economy Workforce

1970-71 62.4 84.1

1980-81 58.9 80.8

1993-94 54.3 77.8

1999-00 48.1 76.1

2004-05 48.1 74.6

2011-12 46.9 70.9

After 1999-00, growth rate of rural economy picked up the pace and reached at par with the growth rate of urban

economy. This led to stabilization in rural contribution in total NDP at around 48 per cent. The rural share in

national NDP dropped slightly during 2004-05 to 2011-12 despite acceleration in growth rate. On the other hand, the

rural share in total workforce. services sector, rural areas lost to urban areas in a big way after 2004-05 and

accounted for 25.9 per cent of services output in the country in the year 2011-12. These changes indicate that rural

employment has risen at a much faster rate in relatively low paid construction activities. The underlying reasons and

implications of these changes are discussed in the later sections of the paper.

Page 2 of 8

Journal for Studies in Management and Planning

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ISSN: 2395-0463

Volume 04 Issue 03

March 2018

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1.Structural Changes in Output and Employment in Rural India

During the four decades from 1970-71 to 2011-12, India‟s rural economy expanded from Rs. 229 billion to Rs.

34167 billion at current prices and from Rs. 3199 billon to Rs. 21107 billion at 2004-05 prices. In the same period,

employment expanded from 191 million to 336 million. Thus, despite almost seven times increase in output in

rural India the employment could not even double in a long period of four decades.

The growth rates in output and employment show large variations across sectors and over different period, which

is very useful in understanding the transition in rural economy in the country. The sector-wise growth rate in NDP

and employment during three sub periods viz. 1970-71 to 1993-94 (termed as pre-reform period), 1993-94 to

2004-05 (termed as post-reform period) and 2004-05 to 2011-12 (termed as period of economic acceleration) are

presented in Table 2and sectoral composition is presented in Table 3.2.

Table 2 Growth rates in rural NDP (at 2004-05 prices) and rural employment

(per cent)

Period Agriculture Manufacturing Construction Services Non- Total

agriculture

Net Domestic Product (at constant prices)

1971-94 2.57 5.18 3.94 6.10 5.70 3.72

1994-05 1.87 8.38 7.92 8.55 7.93 5.06

2005-12 4.27 15.87 11.49 3.48 9.21 7.45

Employment (usual status)

1973-94 1.72 3.55 4.82 4.51 4.22 2.16

1994-05 0.74 2.79 8.32 3.25 3.70 1.45

2005-12 -2.04 0.67 12.09 1.35 3.65 -0.28

The period 1970-71 to 1993-94 witnessed 2.57 per cent annual growth in the NDP of agriculture sector as

compared to 5.70 per cent annual growth in non-farm sectors (Table 3.1). As a consequence, the share of

agriculture in the rural NDP declined from 72.4 per cent to 57 per cent by the year 1993-94 (Table 2). Among the

non-farm sectors, manufacturing, construction and services sectors experienced 5.18, 3.94 and 6.10 per cent

annual growth, and their share in rural NDP increased by 2, 2 and 10 percentage points during the pre-reforms

period, respectively. During the post-reform period (1993-94 and 2004-05), growth in agricultural sector

decelerated to 1.87 per cent, whereas growth rate in non-farm economy accelerated to 7.93 per cent. The effect of

slowdown in agriculture on rural economy was offset by significantly higher growth in non-farm sectors, which

accelerated growth rate in rural economy to above 5 per cent as compared to 3.72 during the pre-reforms period.

These changes further reduced the share of agriculture in rural economy from 57 per cent in 1993-94 to 39 per

cent in 2004-

5. Thus, rural economy became more non-agricultural than agricultural by the year 2004-05. Among the non- farm sectors, services, manufacturing and construction sectors constituted 37.3, 11.5 and 7.8 per cent share in

rural output in 2004-05, respectively (Table 2).

Table 3. Sectoral share in NDP and employment in rural areas: 1970 to 2012

(per cent)

Year Agriculture Manufacturing Construction Services

Share in rural NDP (at current prices)

1970-71 72.4 5.9 3.5 17.1

1980-81 64.4 9.2 4.1 20.6

Page 3 of 8

Journal for Studies in Management and Planning

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Volume 04 Issue 03

March 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 367

1993-94 57.0 8.2 4.6 26.8

1999-00 51.4 11.1 5.6 28.6

2004-05 38.9 11.5 7.8 37.3

2011-12 39.2 18.4 10.5 27.0

Share in rural employment

1972-73 85.5 5.3 1.4 7.3

1983 83.6 6.2 1.3 8.8

1993-94 78.4 7.0 2.4 11.4

1999-00 76.3 7.4 3.3 12.5

2004-05 72.6 8.1 4.9 13.9

2011-12 64.1 8.6 10.7 15.5

Note: Shares do not sum up to 100 due to exclusion of some minor sectors.

During the period 2004-05 to 2011-12, agriculture sector witnessed revival and registered impressive annual growth

rate of 4.27 per cent. Similarly, non-farm sectors growth accelerated to 9.21 per cent. Based on acceleration in

growth in agriculture as well as non-farm sectors, this period is termed as the “period of economic acceleration”.

Annual growth in the overall rural economy during this period was 7.45 per cent. It is worth pointing that the period

2004-05 to 2011-12 witnessed much higher increase in agricultural prices compared to non-agricultural prices and

growth rate in agriculture and non-farm sectors at current prices was almost the same. Therefore, the share of

agriculture in rural NDP at current prices did not decline further and stood at marginally higher level of 39.2 per cent

in 2011-12 over the year 2004-05.

Within non-farm sectors the growth in services sector output decelerated to 3.48 per cent after 2004-05 as compared

to 8.55 per cent growth during the preceding decade. On the other hand, manufacturing and construction sectors

witnessed impressive growth of 15.87 and 11.49 per cent, respectively between 2004-05 and 2011-12.

Consequently, in these seven years the share of services sector declined from 37.3 to 27.0 per cent whereas the share

of manufacturing in rural economy increased from 11.4 to 18.4 per cent and construction sector share increased from

7.8 to 10.5 per cent.

Growth pattern in various sectors reveal sizable diversification of the rural economy towards non-farm sectors. From

economic development point of view, similar trend and pattern should be reflected in the employment. This was

examined from employment data in successive NSS rounds corresponding to the years for which data on rural-urban

distribution of national income was available.2

A perusal of Table 3.1 shows that rural employment and output followed different growth patterns. Rural

employment showed 2.16 per cent annual growth rate during the pre-reform period, which decelerated in the post- reform period to 1.45% and turned negative (-0.28%) in the period of economic acceleration. The output growth rate

in the same sub-periods accelerated.3 Thus, employment increased at a much lower rate compared to output and it

even declined in the wake of high growth in output post 2004-05.

The main reason for sluggish growth followed by negative growth in rural employment is that non-farm rural sectors

could not absorb the labour-force leaving agriculture. The results presented in Table 3.1 also imply that employment

elasticity in rural areas declined over time and has reached the negative range after 2004-05. The employment

insensitive growth raises serious concerns over the capacity of the rural economy to provide productive jobs to the

rising population and workforce moving out of agriculture. Among non-farm sectors, deceleration in employment

growth was experienced in manufacturing and services sector; but construction sector witnessed sharp acceleration