Roopa Purushothaman's report "Is Urban Growth Good for Rural India?"

Future Capital Holdings chief economist Roopa Purushothaman and her team’s recent research shows urban and rural India are too intertwined to be treated as two different worlds and when India does well, so does Bharat.

“The question has been doing the rounds in corporate boardrooms and government. There are many in policy circles who believe urban and rural are two different economies and they need different measures,” says Purushothaman. The big message from the research is the two parts of India are really one. “Policy makers just need to let the economy pull itself,” she says.

There might be something to this because the rural economy is increasingly looking urban. It too has popped the services pill. While agriculture continues to remain the bulk of the economy, it is no longer as powerful. It is important to the extent that 73% of the rural population is still stuck in farm jobs.

Unfortunately, agriculture sector no longer creates wealth. There are more wealth and jobs being created in manufacturing, construction, restaurants, hotels and trade — chemists, for example — than in agriculture. The reason why it doesn’t appear as powerful is there are far less number of people to speak for the non-farm sector. Just 27% of the rural workforce is employed in non-farm jobs.

The one large change in rural economy is wage parity with urban centres in some sectors. People employed in trade and manufacturing now earn wages that are on a par with urban centres. There are sectors such as utilities, construction and transport where the rural areas still lag behind, but the improved performance in such sectors is also responsible for closing the gap between the spending power of the two parts of the economy.

The research shows during 2000-05, the rural spending grew at 8% while urban India’s spending grew only 4%. In absolute terms, urban households spend twice the amount that a rural household does. “This will remain, but we are interested in what is changing at the margins, and there it is clear that rural India is growing much faster,” says Purushothaman.

The counter-intuitive bit is that those at the lower income levels in rural areas are closing the gap with their urban counterparts at a much faster rate. So, those in low-income groups in urban areas are facing a greater inequality than the same strata of people in rural areas. This is not surprising because little investment has been made in improving the quality of urban infrastructure.

“Our research shows that over the last 20 years, urbanisation has actually declined in the country. India clearly has a model different from China’s. China is building new urban centres while India is pushing production processes to rural areas,” she says. The rural rich are not faring that well when compared to the urban rich — for the time being.

The changes have largely been possible because the supply chain of goods and services is now spreading nationwide. Since urban headends of the supply chain are now taking more rupees of consumption, a little over a third of the rupees are ending up as income for the rural population