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Is Urban Growth Good For Rural India?: Future Capital Research

1) The document examines the relationship between urban and rural growth in India and finds that urban consumption expenditure is positively correlated with rural household incomes and non-farm employment. 2) A time-series analysis shows that a 10% increase in urban expenditure is associated with a 3.9% rise in rural incomes, while cross-sectional analysis across Indian states finds a similar relationship. 3) The impact of urban expenditure on rural areas is argued to occur through increased demand for rural non-farm goods and services, with one estimate suggesting urban expenditure growth could generate over $90 billion in rural incomes over 10 years.

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55 views21 pages

Is Urban Growth Good For Rural India?: Future Capital Research

1) The document examines the relationship between urban and rural growth in India and finds that urban consumption expenditure is positively correlated with rural household incomes and non-farm employment. 2) A time-series analysis shows that a 10% increase in urban expenditure is associated with a 3.9% rise in rural incomes, while cross-sectional analysis across Indian states finds a similar relationship. 3) The impact of urban expenditure on rural areas is argued to occur through increased demand for rural non-farm goods and services, with one estimate suggesting urban expenditure growth could generate over $90 billion in rural incomes over 10 years.

Uploaded by

innocentshah
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Is Urban Growth Good For Rural India?

Future Capital Research


Roopa Purushothaman
Saurabh Bandyopadhyay
Anindya Roy
Two Parts to the Story
3 Urban Myths About Contemporary Rural India
Myth 1: Faster Economic Growth in Urban India is
Driving Rapid Urbanization
Myth 2: Rural India is Still an Agricultural Economy
Myth 3: Rural-Urban Inequality is on the Rise
A Link Between Rural and Urban India
An Econometric Approach
ƒ the impact of urban consumption expenditure on
rural employment and incomes
ƒ cross-section and timeseries analysis
ƒ the role of rural nonfarm employment
Results reflect a relationship that is virtually ignored at
the corporate and policymaking level
Urban consumption could be one important—and
largely overlooked—engine driving the shift from farm
to nonfarm employment in rural India
The Results
ƒ 100 rupee increase in urban consumption could lead
to up to 39 rupee increase in real rural household
incomes
ƒ this relationship means 6.3mn rural nonfarm jobs and
$91bn in real rural hshld income over the next decade
ƒ a 10% increase in urban expenditure is associated with
a 4.8% increase in RNFE
Growth in Rural Manufacturing Output
Stands Out
Economy Growing, Urbanization Slowing?
India’s Change in Urban Share Lags
Other Comparable Economies
Composition of Rural GDP 1970-71
Composition of Rural GDP 1999-2000
Inequality Worsening More In Urban Areas
Than in Rural
A Rough Cut: Cross-Section Evidence
ƒ rural household income as a function of urban consumption expenditure

ƒ point-to-point difference in our variables between the years 1983 and


2001

ƒ 15 major states of India, accounting for 90% of total population

ƒ two other explanatory variables to the model: the initial level of rural
income (RY_83) and initial level of rural literacy in 1983 (RLIT_83)

ƒ other variables considered: degree of urbanization; share of arable land;


climate indicators; rural population density; and distance to major markets

ƒ in the end, rural household income is expressed as a function of a


constant, urban consumption expenditure, initial rural income levels and
initial rural literacy levels
Data
Cross-Section Results
ƒ urban expenditure significant at 94% level, initial rural income level at
93% level, while rural literacy at 89% percent level

A 10% increase in:

ƒ urban expenditure is associated with a 3.8% increase in rural


household income;

ƒ the initial state level of rural income is associated with a 15.2%


increase in rural household income; and

ƒ the initial level of rural literacy is associated with a 5.7% increase in


rural household income

ƒ initial results are indicative, but we give less weight to the actual
coefficients.
A Closer Look: The Timeseries Evidence
ƒ all-India data spanning the years 1980/81-2005/06

ƒ including an explanatory variable covering public investment in


agriculture in addition to urban consumption expenditure

ƒ other indicators considered: literacy rates; an infrastructure index; policy


dummies; and industry-agriculture terms of trade

ƒ timeseries model specifies per capita rural household income as a


function of a constant, urban consumption expenditure and public
investment in agriculture
Time Series Model
Timeseries Results
ƒ urban consumption expenditure and public investment in agriculture
move with rural household income in the expected direction

ƒ both are statistically significant at the 91% and 98% level respectively

A 10% increase in:

ƒ urban expenditure is associated with a 3.9% increase in rural


household income per head; and

ƒ public investment in agriculture is associated with a 1.1% increase in


rural household income per head
Identifying the Channel
ƒ next step: cast light on the channel through which the relationship
occurs

ƒ hypothesis: urban expenditure may affect rural household income


through rural nonfarm employment (RNFE).

ƒ theoretically, including rural nonfarm employment should render our


urban expenditure variable insignificant

ƒ to test, we look at household income as a function of a constant, urban


consumption expenditure, public investment in agriculture and rural
nonfarm employment
Results with RNFE
ƒ inclusion of rural nonfarm employment dramatically reduces the
significance of the urban expenditure variable

ƒ a 10% increase in rural nonfarm employment translates into a 1.7%


increase in rural household incomes, at a 98% significance level

ƒ related work shows that a 10% increase in urban expenditure could lead
to a 4.8% increase in rural nonfarm employment

ƒ on conservative estimates, urban household expenditure growth could


translate into a boost of 6.3 million rural nonfarm jobs and $91billion in
rural household incomes over the next ten years
Conclusion
ƒ urban and rural economies are more integrated than we traditionally
acknowledge
ƒ only focused on one transmission mechanism running from the urban to
the rural economy, but there are many more channels running both ways
ƒ although the country tends to focus on distinct rural strategies and rural
policies, urban demand may be one important—and largely overlooked—
engine driving the shift from farm to nonfarm employment in rural India

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