Rural Industrialisation and Its Attendant Issues.

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This is a complete article written by me, the slightly edited / abridged version appears in The E- Magazine of the Chandigarh Management Association at http://cmaupdate.blogspot.com/

I am thankful to the CMA for publishing the article and the sound editing. My own article has some views which may not acceptable to all and hence the complete text is pasted below. 

Happy reading and remember views are welcome.

Rural Industrialisation and Its Attendant Issues.

By Dinesh K Kapila

Agricultural expansion is not enough to conquer poverty; this is the most important issue while discussing the rural non farm sector, of which Rural Industries are an integral part. The World Bank has also observed in its communications that the rural farm and non farm growth is widely shared, with a privately held and competitive agriculture & a vibrant agri business being vital engines of economic growth. Moreover, family farms and non farm enterprises provide ample remunerative opportunities and employment to men and women.

For any nation to succeed economically, Wealth creation is atleast as important as or more important than wealth redistribution. A competitive economy produces high productivity, efficiency, innovation & higher investments in human resources. The Japanese economic miracle inspite of the hiccups witnessed now is based on brutal domestic competition. The Indian Rural Sector, specially its Non Farm component, is yet to undergo this transformation while its urban counterpart modernizes fiercely and restructures itself. .

Gunnar Myrdal stated in the sixties that India’s social attitudes and systems were responsible for low industrialization, low productivity, a primitive production technology, low levels of living due to poor work discipline and contempt for manual work, low aptitude for cooperation etc. A debilitating land tenure system, low standards of efficiency and integrity in public administration, low peoples participation and rigid social structures were other negative factors. This is even now applicable in parts to the rural non farm sector inspite of various initiatives by the government and institutions. Economists do state cultural traits are not that important, that in South East Asia success was mainly due to efficient employment of resources, exports by labour intensive industries, vigorous literacy and a proactive government role in building competitiveness and correcting distortions. However, the Indian Rural Non Farm Sector needs corrective measures, cultural and governmental.

In India, the share of agriculture and allied activities in GDP dropped from 45.80 % in 1960-61 to 38.10 % in 1980-81, 27.90 % in 1995-96 & finally 17 % in 2008-09. The Indian industry’s share of GDP is only 26 %, in China it is 50 % and in Indonesia it is 45 %. India’s industrial sector needs to grow at 11 % as we cannot sustain or achieve 8 % growth in GDP with a stagnant industrial sector. The over 50 % share of services in India’s GDP indicates that we as a nation are still culturally attuned to being comfortable with a white collar approach to work. The impact is only deeper in the Rural Non Farm Sector with innovation being low key, sporadic, without committed financial support from multiple players and innovation.

We can learn from China. The Chinese economic success owes a lot to the immense revitalization of its Rural Industries. The Rural Industrialization process was to a great extent led by local government initiatives with incentive oriented schemes in place for officials. The schemes envisaged incentives related to the number of people employed in units, taxes paid to the federal government, FDI arranged for etc. At the core of China’s economic miracle; the reduction of poverty to less than 4 % of the population, was that by 1987 the output of rural industries surpassed that of agriculture that is in terms of a source of total rural income. We in India still need to take this process to the countryside, specially in terms of Food Processing etc. We may add to it the lower population growth rate in China, a focus on building human capability (health and education), developing a deep and resonant domestic market, making manufacturing highly productive and competent, 85 % products being based on labor intensity etc. Strong competition in the domestic Chinese market means that manufacturers resort to best practices and economies of scale. The high savings rate and heavy investment in infrastructure and labour reforms are additional facilitative factors.

The stress of Government of India & its institutions on the Rural Non Farm Sector to promote rural industrialization & services so as to reduce the pressure on agriculture can be understood in this context. In North West India, Agro processing and food processing industries could be the focus to start with coupled with small manufacturing of agricultural implements.

Around 2004-05; the media reported the CII stating that in the northern region a lack of interest in process and product development & limited investment in R&D as being the primary reasons for slow growth of industry. The services and other sectors are strong in the north but the engine of growth in any economy is manufacturing ( President Obama has promised to boost manufacturing in the USA – the real sector). To sharpen the manufacturing edge, the People Factor that is selection, training - technical and behavioral is a prime concern. Physical, mental and intellectual capital has to be put to the best use. This as such is equally applicable to the Rural Non Farm Sector (RNFS).

My own personal observations based on interactions with progressive micro / small industrialists / businessmen in two to three districts over a period of time were that the growth rate of RNFS in the district remained low inspite of the policy push. The gray areas (though there are several positive features ) was the absence of systems at times for sound appraisal for projects specific to rural areas in financial institutions, inability to follow up intimately with vigour the projects etc. Amongst other contributory factors as per feedback, were delays in release of assured subsidy, governmental agencies at times not updating project profiles, 70 % to 75 % loans (a rough estimate admittedly) going for expansion of existing business / units, the cost & quality of power etc.

The increasing unemployment levels and the poor assets base of a sizable number of rural households in two / three districts as observed by me are issues which require attention. Financial literacy and effective functional literacy were found to be lacking to a large extent in the countryside, even in small towns. Lack of literacy levels as demanded by modern day business / industry is impacting on progress in the countryside. I found that an awareness of the rules and processes of banks for assets and liabilities products, eligibility criteria etc. are not known to many small businessmen or micro entrepreneurs. They also reported feeling under confident in initiating discussions with bankers on loans, specially if the amount to be borrowed was small. Thus a mix of cultural and literacy factors impact this sector.

For an economically advanced region, I found a those who watch TV / Hear Radio / Read newspapers or magazines, do so mainly for religious programmes and secondly for a reduced degree watch mass entertainment or criminal news etc. The preference for economic /developmental news is very limited. Some villages in the kandi belt have residents yet to take to reading newspapers. A minimal number of micro entrepreneurs I could interact with read technical literature or were ready to discuss technological upgradation. However, there is a huge demand for lifestyle products and vehicles, specially in the younger generation belonging to the better off strata. This again implies an immediate need for reaching out with financial literacy to be embedded, as the costs of such lifestyle products are not understood or its negative impact on building up the business / enterprise.

The lack of effective functional literacy has also led to a reduced awareness about the GOI schemes such as the Credit Linked Capital Subsidy Scheme for Technology Upgradation of SSIs or the Development / Strengthening of Agricultural Marketing Infrastructure and Grading. Even more puzzling was the reaction of some entrepreneurs when advised about such schemes (it was rice Sheller owners), they expressed their inability to cope up with the documentation and stated they would deploy their own funds for expansion or modernization. The financial loss, which I explained, was waved away as being immaterial! The subsidies naturally flow to the aware entrepreneurs, mainly from the urbanized class.

I must conclude here by recalling that Japan did not experience the scientific revolution as also the reforms (also applicable to Asia ), but after the Meiji reforms of the 17 century, it took off industrially as the country as such decided to adopt this path. India and China did not. The Japanese society had a higher level of literacy, this contributed to technological progress in agriculture and in industry. Japan focused on western science and technology more than the Indians or Chinese three centuries ago. India then had a large export trade but Japan was upgrading its technology. This is an important cultural factor even today in our manufacturing and reflects in the rural countryside more sharply. China has broken through now but we need to focus more effectively to catch up. (as an aside, our engineers even from IIT prefer to be MBAs and become marketers or bankers rather than manufacturers, this is again a cultural response).

Lastly, Alberuni in 1000 AD, said that Indians displayed a marked preference for theoretical over practical learning (readers may debate how far have we moved on this path). We need to become practical innovators and engineers, to combine knowledge with a manual hands on approach: this produces innovation in manufacturing. Rural India needs to be encouraged and its capacity built up for entrepreneurial efforts, in case we are to reduce the rural urban divide as also to create a vibrant market for our industries. This only will build a more inclusive society.

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This article contains my personal views only and it does not reflect in any manner the views or policies of my employer.