Rural entrepreneurship through restructuring state finances: a note for policy.

AuthorDutta, Subrata

If India's rural economy is considered to be demand deficient (due to low per capita income) then there is the need to raise the level of income of rural people through encouraging rural economic activities (both agricultural and non-agricultural); rural entrepreneurship needs to be encouraged. Better rural infrastructure removes supply-side bottlenecks and helps enterprises to grow. For rural infrastructure not only the level of capital outlay has to be increased, but a clear-cut policy also needs to be adopted. If a significant proportion of the capital outlay is diverted towards infrastructure in 'core' urban areas, mitigation of income disparity between rural and urban areas will continue to remain a far-cry.

Demand Deficiency or Supply-side Bottlenecks?

In this paper we are concerned with the problem of how to woo small-scale entrepreneurship in rural India through restructuring of state finances. Rural India is often characterized as a demand deficient economy and thus often fails to offer conducive environment that would promote growth-induced local entrepreneurship. Let us first try to understand the demand mechanism in the rural sector in a simplistic manner and this would help us to delve into the discussion further. Here we follow Rakshit (1983) and construct an equation of aggregate demand for non-agricultural products. Let us divide our rural economy into two sectors --agriculture and non-agriculture. It is generally considered that our rural economy is a labor-surplus economy. (1) The urban sector is excluded from this model. In our rural economy, demand for the products of non-agricultural sector generates from three sources: the peasants, the landlords and the rest (i.e. the whole non-agricultural community).

The peasants spend the whole of their income for two products--agricultural products and non-agricultural products. For agricultural products, they spend a fixed fraction, [alpha], of their income, while they spend 1 - [alpha] for non-agricultural products. Let us consider that the individuals do not save and only family labor is used by the tenants. If the wage rate, w, is fixed and N is the number of employment, then peasants' income is given by wN. Thus, the peasants' demand for non-agricultural products is expressed by:

wN(1 - [alpha])

Since the total agricultural output, X, is distributed between landlords and peasants in terms of 'corn', the landlords' income can be expressed as X - wN. The landlords spend a fixed fraction, [beta], of their income for agricultural products, and they spend 1 - [beta] for non-agricultural products. Hence, the landlords' demand for non-agricultural products is given by

(X - wN)(1 - [beta])

Now. if the income of the working population other than the peasants and the landlords is denoted by Y and if these people spend a fixed fraction, [gamma], of their income for agricultural products and 1 - [gamma] for non-agricultural products, then their demand for non-agricultural products is expressed by

Y (1 - [gamma])

Now, aggregate demand, E, for nonagricultural products can be obtained by adding the above three components:

E = wN(1 - [alpha]) + (X-wN)(1 - [beta]) + Y(1 - [gamma])

In rural economy, growth in agricultural income would lead to growth in demand for non-agricultural products (at least, by those who are not in acute poverty). For example, if incomes of landlords and peasants (i.e. wN and X-wN) go up, that would reflect on the demand for non-agricultural products. So, there is clear-cut and direct linkage between agriculture and non-agriculture. But, growth in agriculture is often constrained by lack of proper infrastructure such as irrigation, electricity, roads, banking, etc. However, if growth in agricultural income leads to growth in E , then E would, in turn, lead to growth in Y (since a part of Y comes from local non-agricultural entrepreneurship). This means, a part of increase in E will be responded by an increase in local (rural) non-agricultural entrepreneurship. However, as far as nonagricultural entrepreneurship is concerned, the issue of shortfall of proper infrastructure again comes in. That is, growth of both agricultural and rural nonagricultural activities is partly and crucially contingent upon the condition of rural...

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