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Mapping the Rural Economy and the Rural Market The Context of Innovation

Sanjay Kaul

Structure of presentation
Rural economy Emerging opportunities and potential Concerns Stagnant agriculture; high poverty Unemployment; negligible surpluses Limited impact of Government programmes Widening gaps The rural economy: A market or production base? Rural India as production base Households as business partners Importance of non-farm sector

Structure of presentation
Augmenting and sustaining rural growth Context of innovation Key strategies for Government and private sector Rural markets Existing character Reforming rural markets NCDEX initiative for electronic spot exchanges Changes required

Rural economy: Emerging opportunities and potential

Substantial increase in purchasing power of rural communities Monthly per capita rural consumption expenditure Rs. 559 (2004-05); up from Rs. 281 in 1993-94. Size of rural market Agri-inputs Rs. 50,000 crore FMCG Rs. 70,000 crore Durables Rs. 10,000 crore 2/4 wheelers Rs. 5000 crore Percentage of rural households owning TV sets increased to 26%. purchasing readymade garments increased 75% since 1993-94,

using LPG has increased 6 fold to 11.7 % since 1993-94.

Concerns: Stagnant agriculture and poverty

Agriculture growth - 1.9 % and growth in agriculture wages - 2 % in 1990s. Capital formation in agriculture down from 1.92 per cent of GDP in 1990s to 1.28% in the early 2000s. Though rural poverty declined from 37 % to 27% from 1993-94 to 2004-05 this level unacceptably high. 30% of rural population had per capita expenditure of less than Rs. 12 per day. Child poverty widespread in rural areas. 33 % of 15 year old children in rural households below poverty line

high level of child poverty would undermine their future capabilities.

Public and private investment in rural areas minimal.

Concerns: Rural unemployment

Decline in annual rate of employment

from 2.7 % per annum in 1983-94 to 1.07% per annum in 1994-2000. (55th round of NSSO) This rate is practically half the growth rate in the labour force. by use of tractors and combine harvesters has compounded the problem. (from 9.5% in 1993-94 to 15.3% in 2004-05) among agricultural labour households, which represents the poorest group. Exposes poor to market risks and increases transient poverty, whereby households move in and out of poverty due to labour market fluctuations from 41% of rural poor in 1993-94 to 47% in 1999-00. In addition to open unemployment, large sections of the agricultural labour force are disguisedly unemployed, leading to distress migration to urban areas.

Increased capital intensity

Sharp increase in unemployment Growing dependence of rural households on casual labour market

Share of agricultural labour poor households has increased

Large disguised unemployment

Concerns: Limited impact of employment programmes

Employment generated
peaked in the mid-1990s to around 1200 million person days annually has tapered off since then. even the NREG Act has not significantly altered the situation only 30-40 days of employment generated. these initiatives grossly inadequate to effectively deal with the unemployment situation, especially in the lean agricultural seasons.

While road connectivity has improved, asset creation has been thinly spread and quality of assets poor. Even at locations where useful infrastructure has been created, much of their usefulness lost due to poor maintenance and lack of ownership by the local community.

Concerns: Widening gaps

Gap between incomes in agriculture and non-agriculture has widened. Employment growth in urban India approximately double that in rural India. Spatial map and social base of poverty significantly changed increasingly concentrated in a few geographical locations and among SCs/STs. Poverty share of Bihar, Orissa, MP and UP in rural poor rose from 53% in 1993-94 to 61% in 1999. Share of North-Western States declined from 3.03% to 1.26% Share of Southern Sates also declined from 15.12% to 11.23%.

Concerns: Widening gaps

Rainfed agro-ecological areas have damaged environment and affected livelihoods.

largely in Central and Eastern India covering 60% of the net cropped area and supporting about 44% of the population Trend annual growth rate in rural per capita consumption decelerated from 1.60% during 1970-89 to 1.20% during 1990-01. In contrast, the urban annual growth rate accelerated from 1.92 per cent during same period. Ratio of urban to rural p/c consumption increased from 1.62 in 1993-94 to 1.91 in 2004-05.

The rural economy: A market?

The rural market translates into 750 million population The focus of this summit can remain on how to efficiently sell these households what they need. This would be a limited perspective The larger perspective is to look at the potential To increase the incomes of these households so that they can consume more products Market should be viewed in the context of the potential production base. 140 million households engaged in some production activity. At the core of the rural community is the rural household. Currently 30% of rural households are outside the market system. Ensuring that every adult member of the family is empowered to generate surplus income through gainful activity is the real challenge.


Augmenting and sustaining rural incomes

Key strategies for Government for augmenting and sustaining rural incomes

Much greater investments in irrigation, rural connectivity and electricity Poverty alleviation programmes should go beyond minimal concerns of providing safety nets. Government must move from welfare schemes such as NREGA to growth investments. Move away from regulating to freeing rural markets.

The main design challenge for the Government is implementation of development plans focusing on the livelihood base of the rural poor

Poor should be equipped with assets and skills for livelihood outside agriculture.


Augmenting and sustaining rural incomes: Key strategies for the private sector
Economic reform must enrich the rural poor Otherwise the poor will become hostile to reform. Existing rural incomes are spent on sustenance. Additional incomes will be spent on goods and services Huge opportunity in agriculture along the entire value chain. Need to go beyond contract farming into an equity sharing model. Freeing of rural markets can significantly contribute in enhancing rural incomes. However, share of agriculture will further decline. Non-farm sector is an important source of rural incomes contributes over one third of the total rural household income


Augmenting and sustaining rural growth: Key strategies for the private sector
Manufacturing would provide rural India with sustainable growth and contribute to poverty reduction. Small scale industrial activity in rural areas is widespread but many of the smallest enterprises have low productivity. A key pre-requisite for the future expansion of manufacturing activities is improvement of the skills of the rural population. Skilled and educated rural population will find it easy to move from farming to more productive areas. Business models can have contractual relationships between small rural-based manufacturers and large urban-based entities. Produce of rural enterprises need to be marketed effectively.


Augmenting and sustaining rural growth: Key strategies for the private sector
Private sector could seize the potential of disguised unemployed

At least 30 million households available for diversifying into nonfarm activities without affecting agriculture production base. Technology can make a significant difference to the lives of such rural households. Also need to empower the rural population through use of technology and knowledge.


Rural markets: Current reality

Exploitation by money lenders and intermediaries 43% of total amount of borrowing Disconnected and location specific markets 28090 rural markets 7557 regulated Participation/dominance of regional players in spot markets Income disparity of farmers Farmers get 30-60% of what consumer pays 8-20% of income of farmer is used for servicing intermediaries Longest chain of intermediaries Loss of value: wastages during storage, transportation, handling Disharmony between spot and futures market


Rural markets: Current reality

Opaque practices Asymmetric market & price information Bundled processes Price Information Decision to buy/sell Grading (poor/subjective) Physical delivery Realization of value Servicing by intermediaries Income disparity of farmers Farmers get 30-60% of what consumer pays 8-20% of income of farmer is used for servicing intermediaries Longest chain of intermediaries Loss of value: wastages during storage, transportation, handling


Rural markets: Current reality

Distress sales and suicides by farmers (Maharashtra, Karnataka, A.P, Kerala) High volatility in spot markets Concentration of pricing power with few participants The agricultural marketing system and infrastructure incapable of profitably and efficiently marketing even the current output. APMC Acts of different states have become a stumbling block. Marketing of farm produce under the Act are controlled by arthiyas, or commission agents.


Reforming rural markets

Abolition of APMC Act would facilitate free movement of agricultural produce among States. Collection of all additional fees and cesses in the mandis can be withdrawn alternative sources of revenue can be found. Though 18 states have approved amendments to APMC Act, in most States rules yet to be notified. States such as MP, Rajasthan and UP have permitted companies such as ITC Ltd to set up its e-choupal network to procure goods. Karnataka government has permitted the National Dairy Development Board to set up a terminal market at Bangalore for marketing fruits, vegetables and flowers. Several States reluctant to change laws for fear of loss in revenue collection and vested interests.


An innovation model: Electronic spot exchanges

Model uses technology and power of information to provide value addition to farmers, traders and end users alike. Electronic continuous day trading Standardised commodities as in futures trading Pre-delivery dematerialization Electronic auctions Auction for commodities with standard and non-standard specifications both possible Various auctions possible (best price/reverse auction etc.) Use of technology base and country-wide terminals of NCDEX Facilitates state of art warehousing with grading, assaying facilities Emphasis on smooth clearing and settlement Aggregation of framers can be facilitated

Benefits of electronic spot exchange

Transparency Efficient price discovery Value addition Enlarged market & liquidity Arbitrage opportunities Selective quality assurance Flexibility Anonymity Integration of fragmented markets Can Substitute MSP Complement to the Futures platform


Changes required
Single Model Act with the following provisions
Recognition of e-auction/trading through private mandis Establishment of private mandis with limited infrastructure requirements Exclusion from the provisions of APMC Act/ mandi bye-laws Exemptions from licensing requirements for all participants of private mandis Enabling direct purchase from farmers Allowing free movement of mandi tax paid goods across States to give pan-India reach Simplification of post sale requirements / compliances

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