Chapter II. Rural Non - Farm Employment: A Review of the Literature

Transcription

1 Chapter II Rural Non - Farm Employment: A Review of the Literature

2 Chapter II Rural Non - Farm Employment: A Review of the Literature 2.1. Introduction Debates around rural development in recent years attach increasing importance to the rural non-farm sector. Traditionally, rural households in developing countries have been viewed as though they were exclusively engaged in agriculture. However, there are several evidences (see for e.g. Lanjouw, J.O. and P. Lanjouw, 1995, Hazell, Haggblade and Reardon, 2008) showing that rural households can have highly varied sources of income. Rural households can participate in a wide range of non-farm activities, such as wage and self-employment in commerce, manufacturing and services, alongside the traditional rural activities of farming and agricultural labour. Such non- farm incomes can contribute significantly to total incomes of farm households in developing countries (Lanjouw and Shariff, 2000, Ferreira, F and P. Lanjouw, 2001 and Haggblade, 2008). There has been an increasing recognition to the fact that, for most rural people in developing countries, rural non-farm activities are part of a diversified livelihood portfolio. However, there are large variations in the share of non-farm income in poor countries. Rural non-farm economy accounts for around 20 to 50 percent of rural employment in Asian Countries (Lanjouw and Feder, 2001). In rapidly growing East Asian countries like South Korea, Taiwan and Malaysia, the non-farm sector is an important source of income. Lanjouw and Lanjouw (1995 and 2001) studied the importance of non-farm employment and income in Asian regions. Reardon, Berdegue and Escobar (2001) have shown the importance of rural non-farm employment and income in Latin America (particularly in Chile, Colombia, Costa Rica, Honduras, Mexico, Panama and El Salvador). It is also equally important in many countries of Africa like Ethiopia, Kenya, Tanzania, Ghana, Uganda and Mali (see Barett, Reardon and Webb, 2001, Woldenhanna and Oskam, 2001, Barett, Bezuneh and Aboud, 2001, Lanjouw, 11

3 Quizon and Sparrow, 2001, Canagarajah, Newman and Bhattamishra, 2001 and Abdulai and Crole Rees, 2001). The experiences of the countries of Africa, Latin America and Asia have shown that there are many advantages of expanding non-farm activities. Given the high income elasticity of demand for non-farm goods have absorbed increasing proportion of the rural labour force ( King and Byeriee, 1978).In this way they have moderated the socially and economically harmful rural-urban migration (Kabra, 2005). The development of rural non-farm sector in India is not only of paramount importance but also of pressing urgency in view of the ever rising unemployment and a high proportion of rural population in the country s workforce. The rural and village non-farm sector in India has immense potential to generate new jobs with relatively low direct investments, by utilizing local skills and resources or by meeting local demands by adoption of simple techniques. Development of this sector would also prevent migration of rural population to urban areas in search of employment and reduce the pressure of increasing urbanization. In India there are mainly two sources of official statistics NSSO and the decennial Census for studying the trend of employment and unemployment. A number of studies based on these data have envisaged the significant role of the non-farm sector in absorbing growing amount of labour in India. Vaidyanathan (1986) studied the use of sectoral labour in rural India and found that the pattern of rural employment reflects a significant and sustained tendency towards diversification. This implies that the share of the non-farm workforce in the total workforce increase in the 1970s and 1980s. Basant and Kumar (1989) used NSSO data to explore the inter-sectoral analysis of non-farm employment and concluded that the tertiary sector seems to have grown faster than the secondary sector for rural males. Papola (1992) examined NSSO data and found that the number of workers who recorded Rural Non-farm employment as their principal employment grew at 5 percent per annum between and , while the share of non-farm jobs rose from 17.9 to 23.4 percent in rural employment. Sen (1994) argues that the nonfarm sector provided the majority of new jobs in the rural sector during the 1980s. Chadha (1993) demonstrates that the Census records a growth rate of 2.8 percent per 12

4 annum during This compares to 1.6 percent among cultivators and 2.8 percent among agricultural labourers, suggesting that cultivating households are moving into the other two categories. Other literature based on Census data (Bhalla 1993), and NSSO data (Basant and Kumar, 1989; Chadha, 1997; Visaria, 1995) detail similar trends within the sector. Bhalla finds that 40 percent of all new non-farm employment was created in rural areas whilst non-farm employment in the same period account for almost one third of all new jobs for male workers. Thus numbers of household engaged in RNF employment are rising, as is the proportion of non-farm income per household. This chapter basically reviews the existing literature on rural non-farm sector by presenting the key ideas in the following sections. The study first discusses the definition of rural non-farm sector in Section 2.2. Section 2.3 deals with the trends in occupational pattern in developing countries. Section 2.4 analyses the development strategies and employment in India over the different plan periods; the quantitative significance of non-farm employment in India is presented in Section-2.5. Intersectoral linkages and the determinants of non-farm employment is presented in Section-2.6.Section 2.7 examine the relation between non-farm employment and the incidence of poverty. Quality of employment and the notion of decent work are presented in Section-2.8. Summary of findings is presented in Section Defining the Rural Non-farm Sector (RNFS) The non-farm sector includes all economic activities except agriculture, livestock, fishing and hunting (Lanjouw and Lanjouw, 2001).Therefore, non-farm workers are engaged in mining and quarrying, manufacturing, utilities, construction, trade, hotel and restaurant, transport, storage and communication and services (includes financial intermediation, real estate, renting and business activities, public administration and defense, education, health and social work and other community, social and personal services). Approximately one fifth of total rural non-farm employment is estimated to be generated by public sector services, primarily public administration and education (Lanjouw and Shariff, 1999). While manufacturing activities are often the first that come to mind when discussing the non-farm sector, the other important sectors in 13

5 terms of employment shares were found to include retail trade, personal services, construction, road transport and textiles. Therefore, the RNFS is not a homogenous sector. The non farm sector consists of heterogeneous set of activities which are best classified in terms of capital use, productivity and production relation rather than product categories (Mukhopadhyay and Lim, 1985). A distinction needs to be made between categories of enterprises and individual workers in the non - farm sector. Such a classification of non - farm employment is useful from the point of view of policy implementation. Within the non-farm sector, we had three different sources of employment and earnings- non-farm self-employment, regular employment and casual employment. Non-farm self-employed included activities related to processing industry (e.g. husking paddy, weaving, pottery, bamboo work etc), trade (e.g. tailoring, goldsmith, barber, vendor etc), repair and processing industries (e.g. carpenter, electrician, plumber, and cycle-rickshaw-van repair etc), transport (e.g. cycle rickshaw, trolley etc),business ( Grocery, ration shop, decorators, seed seller, fertilizer shop, bookshop etc) and others (e.g. tuition, LIC agency, medical practice, domestic helper etc). Regular employment included service in the formal sector. Some common type of regular activities are the jobs of school teacher, workers in Panchayets, government sponsored rural development project like ICDS (Integrated Child Development Scheme), Bank clerk, School Clerk, Border Security Force.Central Reserve Police Force etc. It also included regular employment in the informal sector like working in shops on regular and permanent basis. Casual employment included various kinds of jobs some of which lasted for fortnight to six months a year. Thus rural non-farm sector includes all economic activities outside the farm sector in the rural areas. There is a need to make a proper definition of the term rural. The definition of rural varies from one country to another country. The definition of rural in Asia is often any settlement with 5000 or fewer inhabitants. In some countries like Taiwan, rural areas include rural towns, often define as settlements with populations of to (see Islam, 1997).In Latin America, the cut-off points is often 2000 to 2500 inhabitants (see Islam, 1997). There are also occasions when urban and 14

6 rural areas are defined not only by size but also by kinds of activity-agricultural and industrial activities that are carried out in the settlement. Thus, the definition of rural areas varies among developing regions and among countries within a developing region. The distinction between rural and urban employment is also based on the place of residence of workers, so those who commute to a job in a nearby urban centre are considered to be rural workers. Rural is usually defined as to include settlements about or fewer inhabitants (NABARD, 1994), The meaning of rural in rural non-farm employment is critical in understanding its nature; importance and viability (Lanjouw and Lanjouw, 1995).There are some important difficulties in defining the rural non-farm employment in a spatial perspective. Barrett and Reardon (2000) note that an activity can be local with two sub-categories a) at home b) local away-from -home, with sub-categories of i) country side or strictly rural ii) nearby rural town and iii) intermediate city. These distinctions are important particularly with reference to the extent of dependency of households on the local economy (Quoted in Davis, 2001).The rural non-farm sector can be classified on many dimensions: on farm/off-farm, wage/self-employment, agriculturally related/otherwise. Start (2001) includes the following dimensions of the rural non-farm employment to understand its nature: i) degree of linkages to agriculture and other sectors, ii) the relations of production (which according to him, at the rural economy level refers to the structure or scale of production; and at the household level refers to whether the worker is employed or self-employed), iii) the level of technology, capitalisation or modernisation which has a direct effect on iv) the levels of productivity and associated returns. According to him, in reality, different parts of the economy will develop at different rates and many rural locations will display varying degrees of all stages concurrently. The actual position and mix will depend on levels of agricultural development, rural income, rural infrastructure and urbanisation. Davis (2003) notes that an ideal classification of the rural non-farm employment should capture some or all of the following distinctions: 15

7 i) Agricultural linkages are often key determinants of the rural non-farm employment s potential for employment and income generation. ii) Market linkages: those producing goods and services for the local market and those producing for distant market- since the latter have the chance to create jobs and incomes independently of the rural economy and iii) Size and productivity: those are sufficiently large, productive and capitalised to generate incomes above returns obtainable in farming and those that offer only marginal returns since this reflects the rural non-farm employment capacity to generate local economic growth. Low return activities can maintain households above the poverty line; they usually do not foster growth. Lanjouw and Lanjouw (2001) distinguish the activities in the non-farm sector in terms of productivity. According to them there are two different groups of occupations within the non-farm sector: low labour productivity activities serving as a residual source of employment and high labour productivity activities. Accordingly, incomes accruing to the members of the households residing in the rural areas and pursuing all such non-farm activities are rural non-farm incomes. Study by Islam (1997) showed that different sources of rural non-farm incomes can be distinguished as i) income earned from non-farm activities in rural areas, whether earn within the household or outside, in self-employment and wage employment; ii) income earned by rural households through commuting to work in towns or cities; iii) income obtained through remittances from household members migrated to other cities or states or countries Trends of Rural Non-farm employment and earnings in developing countries Given the limitations of data and conceptual differences across the countries, we can provide a generalised picture of incidence of non-farm employment based on research studies conducted in different countries of the world. Anderson and Leiserson (1980) have predicted a rise in non-farm activities in agricultural regions as agriculture develops through theoretical models for the developing countries including India. In this paper they have demonstrated that the non-farm activities in agricultural regions expand quite rapidly in response to agricultural development. This paper has assessed the extent and importance of non-farm activities in rural areas and towns from the 16

8 view point of their contribution to the output, employment and earnings for approximately one-quarter of the rural labour force in most developing countries (one-third including the labour force in the rural towns), and a significant source of secondary earnings in the slack seasons for the small and landless farmers. In the African countries, rural non-farm activities account for over two-thirds of all nonfarm employment (both urban and rural), in Asia for over one-half, and in Latin America for over one third (including activities in rural towns). In presenting the evidence on these points they assessed the magnitude and growth of rural non-farm employment and examine the role of rural non-farm activities in the development process and their linkages with agricultural growth. In Latin America the percentage of rural employment varied from 32 to 43 percent (Lanjouw and Lanjouw, 1995). In Chile, Colombia, Costa Rica, Honduras, Mexico, Panama and El Salvador, rural -non-farm employment in both absolute and relative terms has continued to grow rapidly (see Berdegue, Escobar and Reardon, 2001). For example it has 39 percent share in Chile (1996) (see Berdegue, Ramirez, Escobar and Reardon 2001), 36.4 percent in El Salvador (1994) (see Lanjouw,2001) and in rural Ecuador Lanjouw (1999b) finds that about 40 percent of the rural population is engaged in non-agricultural activities as either a primary or secondary occupation. On the other hand in Northeast Brazil 21.2 percent of the rural working populations and 31.7 percent in the Southeast Brazil depended on rural non-farm employment but these percentages are lower than the other countries. Percentage of rural non-farm employment (both for male and female), ranges from 25perecnt (2000) in China to as high as 52 percent (2000) in Bangladesh and 67 percent (1985) in Taiwan. For Pakistan (1982/83), Philippines (1985), about one-third of total employment is in the non-farm sector and for Malaysia (1980) it is almost one-half (see Lanjouw and Lanjouw, 2001 for details). In rural Africa, non-farm sources account for percent of average household income and seem to be growing in importance (Bryceson and Jamal, 1997; Reardon, 1997; Little et al, 2001).Here, non-farm activity is positively correlated with income and wealth (in the form of land and livestock) and therefore offer a pathway out of poverty if non-farm opportunities can be seized by the rural poor. 17

9 For most rural people in developing economies, rural non-farm activities are part of a diversified livelihood portfolio. The rural population in developing countries derives important income shares from rural non farm activities. Reardon et al. (1998) find an average non-farm income share of 42 percent in Africa, followed by 40 percent in Latin America and 32 percent in Asia. Ellis (2000) states that (30-50) percentage non-farm income share are common in Sub-Saharan Africa and FAO (1998)7 gives a mean figure of 42% in Sub-Saharan Africa. In Asia and Latin America, FAO estimates the Figures to be 32% and 40% respectively. Bezemer and Davis and Wandschneider (2003) found that the average non-farm income shares of rural households in some Central and Eastern European countries and Common wealth of Independent States (CIS) is 44 percent (see Table-2.1). Table -2.1: Rural non- farm income shares by region: Africa East/ South West Region Asia East South Latin America Eastern Europe and CIS Source: Reardon et al (1998); Bezermen and Davis (2003). Average share This promising role of the rural non-farm sector (RNFS) is often neglected in some theoretical studies (see for example, Hymer and Resnick, 1969)8. Contrary to the expectations of these studies, rural labour time in non-farm activities in the Asian region has been strikingly high. Also in rapidly growing East Asian countries like South Korea, the rate of growth of income generated in the RNFS has been substantial. In surplus labour countries of South Asia such as India and Bangladesh, this sector is absorbing a growing amount of human labour (Mukhopadhyay, 1985). Table 2.2 below shows a composition of Rural Non farm Employment (RNFE) in less developed and developing countries. Agriculture still dominates, as the most important sector of economic activity for less developed countries. Manufacturing is 7 FAO study summarises data from over 100 studies focusing mainly on farm households- undertaken over three decades (1970s to the 1990s); 8 for detail explanations see Section-2.6 below. 18

10 less important in terms of income and employment than the services and commerce sectors. Within the rural non-farm economy, earnings from self-employment and nonfarm wage employment dominate agricultural wage earnings and remittances. Therefore, non-farm sector is not a homogeneous sector; it consists of heterogeneous set of activities. The composition of rural non-farm activity changes over time and across the country. Increase in real wages raise the opportunity cost of labour, thereby making low-return non-farm activities uneconomic (Hazell, Haggblade and Reardon, 2008). Table - 2.2: Composition of RNFE by Region (Primary workers) Region % rural workers employed inrnf activity % women of total rural workers % of total in manufacturing %of total in trade and transport %of total in other Services % of total in other activities. Africa Asia Latin America West and North Africa Eastern Europe Source: Haggblade, Hazell and Reardon (2008) As a result, there is a decline of many low-productivity craft and household manufacturing activities and to the growth of higher- return non-farm activities such as mechanical milling, transport, commerce and personal, health and educational services. Time series data from rural Bangladesh9 during a period of rapid agricultural diversification and growth in high value agriculture demonstrate this trend. Low- productivity household manufacturing frequently decline as a result of wage pressure on the supply side and competition from urban imports on the demand side. Consumption spending likewise favours the growth of rural non-farm activities. Time series data (Table-2.3) suggest that rural commerce and services achieve annual growth rates 2 to 4 percentage points higher than those of rural manufacturing. 9 see Hossain (2004). 19

11 Table - 2.3: Annual Growth of Rural Non-farm Employment, by Sector (Percent) Country Total Rural Labour Agriculture Total RNFL Mining Manufacturing Utilities Asia Bangladesh ) India( ) Indonesia( ) Iran ( ) Korea ( ) Pakistan( ) Philippines( ) Africa Cameron( ) Egypt( ) Malawi( ) South Africa(l ) Latin America Chile(l ) Ecuador! ) Honduras(l ) Venezuelan ) Table- Contd... Construction Commerce Transport Financial Services Personal and Social Services Asia Bangladesh ) o.o- 0.0 India(l ) Indonesia( ) Iran ( ) Korea ( ) Pakistani ) Philippines( ) Africa Cameron( ) Egypt( ) Malawi! ) South Africa( ) Latin America Chile( ) Ecuador(l ) Honduras! ) Venezuelan ) Source: Haggblade, Hazell and Reardon,

12 The growth of different non-farm activities varies from one country to another country over the period of time. Therefore, to provide any policy measures, a detailed analysis of the sector in that specific country is required. Therefore, in the next section (Section-2.4), we analyse the trend and the growth of non-farm sector in India and her states Development strategies and employment in India over the different plan periods Through out the past five and half decades of development planning in India, employment has been a key concern. In the early years of development planning, employment generation was treated as a goal of development planning, not a central concern and it seemed to be a corollary of the development process (see Papola, 2008). Since the mid 1973, the estimates of poverty, employment and unemployment based on NSSO data indicated that the achievements relating to growth and employment fell far short of expectations. It was in the fifth five year plan ( ) when reorientation of the development strategies towards an employment - oriented growth and the introduction of special anti-poverty and employment programmes were initiated. In the seventh plan ( ), the central element in the development strategy was the generation of productive employment. In the eighth plan ( ), employment was considered to be important enough as a subject to merit an independent chapter in the plan document (Planning Commission, 1992, Chapter-6). In this plan period, several overall and sectoral priorities, policies and programmes like agriculture and waste land development, support and policy framework for the development of the rural non-farm sector, small and decentralised industrial sector, faster growth of informal and services were initiated for achieving the goal of employment for all by 2002 (Planning Commission, 1992, p-120). The ninth plan ( ) identified three important dimensions of state policyemployment, quality of life and regional balance. Ninth plan emphasised, like the eighth plan, that growth could be made more employment friendly by concentrating on sectors, sub-sectors and technologies that are more labour intensive, in regions characterised by higher incidence of unemployment and underemployment (Planning Commission, 1998, p-14).accordingly it provides priority to agriculture and rural development with a view to generating adequate productive employment and eradication of poverty, as its first objective. However, growth- led employment 1* S 21

13 strategy failed in 1990s and the plan period, leaving the backlog of unemployment unchanged. The planning commission appointed two committees - a Task Force on Employment Opportunities in 2001 and a Special Group on Targeting 10 Million Employment Opportunities per year in 2002 to examine the trend and potential for employment generation to achieve the goal of employment for all within a specified period of time. A number of special programmes relating to different sectors, particularly in agriculture and related activities, rural non farm sector and social sectors like construction, tourism, information and communication technology and financial services were envisaged following the recommendations of the Special Group (Planning Commission, 2002a). Estimates based on the NSSO 61st round, however, reveal that employment has grown at around 2.8 percent per annum during / The rate of GDP growth has been higher in this period as compare to earlier quinquennium, and the employment content of growth have significantly improved from 0.15 during to 0.48 during Planning Commission sources indicate that about 47 million employment opportunities were created per year during the Plan period ( ). This is close to the target of 50 million. However, decline of poverty has been relatively low, at 0.8 per cent per annum, in spite of high GDP and high employment growth. The Approach Paper to the Eleventh Plan ( ), therefore, emphasised on inclusive growth and envisages employment as a central element of such growth. Now the emphasis is on two aspects of employment: productivity and incomes to address the problem of working poor10. The approach paper to the 12th five year plan ( ) also emphasised on faster, sustainable and more inclusive growth. Adequate and sustainable livelihood opportunities are required to generate to realise the dream of inclusive growth. The 66th round NSSO survey on Employment shows that majority of new jobs created during and were casual in nature, mainly in construction. NSSO reports on Employment showed that in India there is displacement of labour from labour surplus agricultural sector to the non-farm sector but the nature of work in 10 working but not having sufficient income. 22

14 which they are absorbed, conditions of work and their earnings are required to examine. Therefore, in the next section, we reviewed the quantitative significance of rural nonfarm employment and the quality of employment that have been studied by different researchers in the past period Quantitative significance of rural non-farm employment Overall growth of the Rural Non-farm Employment (RNFE) Diversification in rural employment has gained significance over time. Several researchers over the past two decades (for e.g. Basant and Kumar, 1989; Visaria, 1995; Chaddah, 1993; Chaddah and Sahu, 2002; Mukhopadhyay and Rajaraman, 2007 and Bhaumik, S, 2002b) have studied the extent and the process of employment diversification. However, there are some studies (for e.g. see Acharya and Mitra, 2000) that showed that positive non-farm employment trend that was visible during 1980s has not been significant since the early 1990s. Study by Bhaumik (2002b) has shown that incidence of non-farm employment (male plus female combined), on all India bases, increased gradually during the period to , which actually halted between the period and But the situation seems to have changed during to when the trend shows an uptum.nss data show that the incidence of non-farm employment (on US-PS+SS basis) in all - India increased from 14.3 percent in to 21.7 percent in which remain at the same percentage in and it shows an increasing trend to 23.8 percent in Again it shows a sharp increase from 23.8 percent in to 32 percent in If we consider the incidence of non-farm employment separately for male and female workers, it can be clearly observed that the increase has been more significant in the case of male workers. NSSO data shows that 16.7 percent of rural male workers were engaged in non-farm employment in and this percentage increased to 22.2 percent in 1983 to 25.9 percent in It again shows a sharp increase from 28.7 percent in to 37.2 percent in For females, similar trend is visible but the magnitude of female workers participating in non-farm employment are lower than their male counterparts. Therefore, the share of female non-farm workers increased from 10.3 percent in to 12.2 percent in 1983 to 23

15 13.9 percent in The percentage share again shows an upturn from 16.8 percent in to 20.7 percent in Differential growth between sub-sectors within primary, secondary and tertiary sectors Recent literature particularly emphasises that whilst the common perception of the rural non-farm sector in India is one comprising largely of traditional village industries, in reality, the sector is diverse. Fisher et al (1997) identify 17 sub sectors which account for 80 percent of all RNF employment. The tertiary sector, itself contributing 60 percent of all RNF employment, includes retail trade, education, public administration, personal services, land transport, restaurants and hotels and medical services. The secondary sector includes many traditional sub sectors such as textiles, wood, pottery, food, tobacco, metal products, as well as repairs and construction. Important activities including manufacturing outside the household, trading and public services are each estimated to account for one fifth of RNF employment (Coppard, 2001). Fisher et al. (1997) argue that most non-farm enterprises are small, each providing employment for an average of 2.2 people, using basic manual technologies to produce simple, low quality outputs. There are also more productive, but fewer, small, medium and large enterprises which may invest in more advanced technologies to produce modem and higher quality products. Unni (1998) argues that the beginning of a structural change in employment away from agriculture towards the non-farm sectors is evident, both at all-india and rural- India levels. Bhaduri (1996) finds that during and , the share of the primary sector in GDP (mostly agriculture) and its share in total recorded employment fell, whilst those of the secondary and tertiary sectors have increased. Within the RNF sector, growth is found to be significantly higher in the tertiary (services) rather than the secondary (manufacturing) sector. However, the growth of RNF employment during this period is largely attributed to an increase in the proportion of casual workers in the unorganized sector, rather than full time employment or increases in the number of rural non-farm producers (Bhattacharya and Mitra, 1993; Visaria and Basant, 1994). Additionally, casual agricultural labourers report a much higher 24

16 incidence of RNF employment in a secondary or subsidiary capacity (Basant and Kumar, 19B9). When combined, overall growth in rural non-farm manufacturing employment is found to be modest, but consistent (except for the early 1990s) in both absolute terms and as a share of total workforce and greater than that of the agricultural sector. Employment in the tertiary sector has witnessed a higher growth rate. Such growth is considered to reflect a structural change away from agriculture and towards the nonfarm sector (arguably principally in the male labour force), thus signaling the current and future significance of the RNFE. Recent growth, however, has largely been attributed to an increase in the proportion of casual workers rather than full time employment, significant variation is found across states as well as between different sub-sectors. Papola (1992) estimates that over half of all manufacturing jobs are in rural areas. However, this subsector can be further disaggregated to household and nonhousehold, and traditional and modem manufacturing ( Mukhopadhyay et al, 1985; Visaria,1995; Samal,1997; Fisher et al.,1997 ) emphasising that the majority of high share subsectors in rural manufacturing are in traditional sub-sectors, many of which are household based and declining, with little capacity to create further employment. In contrast the sub-sectors also includes modem manufacturing industries, such as power looms, modem garments, furniture, ceramics and agro processing, many of which makes a large contribution to India s export market (Fisher et al., 1997).Visaria (1995) thus argues that overall growth in manufacturing is modest due to the continuing decline of household industry and substitution of capital for labour, particularly in food processing industry. He concludes that attainment of rural development appears to promote the expansion of non-household components of rural industry and a relative shrinkage of traditional household industries. Study by Jha (2007) reveals that though rural manufacturing is the most important industrial category in the non-farm sector, employment growth in it decelerated during the 90s. There are also evidences of manufacturing activities shifting away from the rural to urban sector in the country. Employment growth in the sectors like construction, trade, transport and business services are increasing but their growth is not autonomous. It depends on the different development and demographic factors 25

17 generally associated with the development stage of the region. Moreover, these industries together are account for only 11 percent of rural employment in the country. Bhaumik (2007a) finds that, at the all-india level, in , the sectoral composition of non-farm employment has been such that wholesale and retail trade accounted for the highest percentage of male non-farm employment (24.78 per cent), which is followed by manufacturing, construction, services and transport, storage etc, in order of importance. For females, manufacturing has been extremely important (representing 50 percent of female non-farm employment), followed by services, wholesale and retail trade and construction. However, in case of male non-farm workers, the percentage shares of services, manufacturing, electricity, gas and water supply and mining and quarrying declined during to Among these sectors, the decline has been high in services (-9.42 percentage points). The sectors to gain are construction (7.94 points), wholesale and retail trade (3.54 points) and transport, storage etc (2.85 points). As regards female non-farm employment, marginal decline is visible in the share of manufacturing, wholesale and retail trade, services and mining and quarrying while the sectors to gain are construction and transport, storage etc (see Chart-2, la and 2.1b). Chart - 2.1a: Percentage distribution of workers into different Non-farm activities during , , and M H O H C O t O ^ N O c 30 L n> Mining and Quarrying Manufacturing construction Trde, hotel and Restaurant Transport, Storage and Communication Services i i i i NJ M l-» t-» O O US ID o o US US to -p. to CD t-* o to o cn o P» Source: Employment and Unemployment Survey of NSSO during , , and

18 Chart - 2.1b: Percentage distribution of workers into different Non-farm activities during , , and O Ui O UJ O O V MOV o o cnoor^t0in«frro<nr-io Mining and Quarrying Manufacturing construction Trde, hotel and Restaurant Transport, Storage and Communication Services o10 M O O 1 0 4* Rural Female Source: Employment and Unemployment Survey of NSSO during , , and Actually, non-farm sector encompasses a large number of activities, the success of which in a country as diverse as India, it requires frequent innovations in rural institutions depending on the changed perspective and socio- economic conditions of the people (Jha, 2007) Inter-State Differences Bhalla (1993b) and Chadha (1997) assess variation across states. Bhalla identifies Gujarat, Haryana, Jammu and Kashmir, Karnataka, Kerala, Maharashtra and Rajasthan as witnessing expanding non-farm employment between the 1961 and 1981 Censuses. Chadha finds significant expansion in male workers during the 1970s and 1980s in Punjab, Haryana, Gujarat, Himachal Pradesh, Rajasthan and Tamil Nadu, with modest growth in Orissa. Karnataka, West Bengal and Maharashtra. Fisher et al. (1997) found inter-state variation in the rural non-farm sector across the eight Indian states studied. The RNF sector was found to be more developed in Punjab, Tamil Nadu and Gujarat, and less so in Assam, Orissa, Andhra Pradesh, Rajasthan and Uttar Pradesh. RNF employment, particularly the tertiary sector, in Punjab was believed to be closely connected to agricultural development, whilst transformation of the rural economy in Gujarat was attributed to a rapid growth in rural manufacturing. 27

19 Inter-state variation is reflected in the 1991 Census, which records Kerala with the highest proportion of rural workers engaged in non-farm activities at 43.9 percent followed by West Bengal (26.5), Haryana (26.2) and Punjab (25.8). At the other ends of the spectrum like Bihar and Madhya Pradesh with 11.7 and 10.7 percent respectively (Fisher et al., 1997). Bhaumik (2007a) on the basis of NSSO data found that the incidence of rural nonfarm employment has not been uniform across the states of India. At all points of time (1983, to ), as regards male workers, this has been highest in Kerala and lowest in Madhya Pradesh. On the other hand, West Bengal and Kerala captured the first position interchangeably as regards incidence of non-farm employment for females. Maharashtra and Madhya Pradesh shared between them the lowest position in this regard at our chosen time points. There is considerable variation regarding the sectoral distribution of non-farm workers across the states. Study by Bhaumik (2002b) show that rural manufacturing sector absorbed more than 25 percent of male non-farm workers in Bihar, West Bengal, Gujarat, Maharashtra, Tamil Nadu and Uttar Pradesh in the year The trade sector has provided employment to percent of male non-farm workers in 11 states (Andhra Pradesh, Assam, Bihar, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab. Uttar Pradesh and West Bengal). The service sector played an important role in providing employment to male non-farm workers in Assam, Andhra Pradesh, Bihar, Haryana, Karnataka, Madhya Pradesh, Maharashtra and Orissa (in absorbing more than 20 percent workers in each state).the construction sector has been absorbing more than 20 percent of male non-farm workers in Rajasthan, Haryana, Kerala and Punjab. Transport, storage etc., has absorbed more than 10 percent of male non-farm workers in all the states except Madhya Pradesh and Orissa. In the case of female non-farm workers, it is observed that rural manufacturing sector in Bihar, Orissa, Tamil Nadu, Uttar Pradesh and West Bengal absorbed more than one-half of female non-farm workers. Even in all remaining states, this sector alone provided employment to more than 25 percent of female nonfarm workers. The service sector has been important from the point of view of female employment in Assam and Punjab (absorbing more than 50 percent of female nonfarm workers) while more than 20 percent of female non-farm workers are involved 28

20 in this sector in Andhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra and Uttar Pradesh. As regards employment of female non-farm workers in wholesale and retail trade the most important states are Gujarat, Haryana, Karnataka and Maharashtra (employing more than 20 per cent of them).the construction sector made significant contribution in Gujarat and Rajasthan only. In the post reform periods, the emerging sub-sectors in terms of employing additional workers, we found that for rural males, the sectors emerging fast in the post reform periods are construction, wholesale and retail trade while manufacturing and services are the emerging sector for the females. The picture obtained in this regard varied across the states (Bhaumik, 2007a).For rural males construction has been emerging fast in Haryana, Kerala, Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, West Bengal, Bihar, Karnataka and Orissa; whole sale and retail trade in Gujarat, Karnataka, Tamil Nadu and West Bengal; manufacturing in Haryana, Maharashtra and Uttar Pradesh; services in Assam and Madhya Pradesh and transport, storage etc., in Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh, Kerala, Maharashtra and West Bengal. On the other hand, for female workers, the emerging sectors are manufacturing in Bihar, Haryana, Rajasthan, Uttar Pradesh and West Bengal; construction in Assam, Madhya Pradesh, Rajasthan and Tamil Nadu; whole sale and retail trade in Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu; services in Assam, Haryana, Kerala, Punjab and West Bengal; and transport, storage etc., in Assam and Karnataka. Numbers of factors are responsible for such variationsinfrastructural facilities like assured power/electricity, road, level of urbanisation, literacy, several social and demographic factors and economic policies are important in this regard. Recognising the role of RNFS in any agriculture based labour surplus economy, past researchers have attempted to identify the factors which promote the expansion of this sector. So, we now consider in the next section the determinants of RNFS Intersectoral linkages and determinants of non-farm employment In traditional development theory like in Lewis model, economic development is a process where labour is transferred from agriculture to the modem sector or urban industries; urban industries are considered as the main engine of economic development. This has been the dominant development strategy in most developing 29

21 countries, particularly in Asia, during 1950s. For example, in India, during the 2nd five year plan, the policy of large - scale industrialisation received the top most priority. However, since early 1960s, most developing countries found the Lewisian strategy ineffective in so far as generation of employment is concerned. Several studies conducted to understand the employment generation by urban industries in the Asian developing countries clearly shows the failure of Lewisian mechanism. For example a study by Amjad (1988) show that of the total increased workforce, hardly 2-3 percent got employed in large-scale manufacturing sector during 1960s and 1970s in countries such as India, Pakistan, Bangladesh, Sri Lanka, Philippines, Burma, Indonesia, Thailand and so on. Therefore, the study envisaged the limited role of large-scale manufacturing sector in employment generation in a large number of developing countries. In this situation, the emphasis has been shifted towards employment generation within rural areas. Thrust is on the generation of employment within rural areas. Since mid- 1960s the policy of development of agriculture for expansion of both income and employment in the countryside was adopted through the introduction of green revolution technologies. The inadequacy of such a policy started becoming apparent since mid-1970s onwards. Study by Bhalla (1987, 1993b) on labour absorption in Indian agriculture showed declining elasticity of agricultural employment with respect to output from mid 1970s onwards. Therefore, alternate employment avenues, outside agriculture is needed and greater importance given to the rural non-farm sector. In the literature, the presence of rural non-farm sector and its contribution in the process of economic development were examined both at the theoretical and empirical level. Two theoretical models with contrasting conclusions were developedi) Hymer-Resnick model (1969) ii) Ranis-Stewart model (1993). A simple algebraic model developed by Hymer and Resnick (1969) shows that the rural non-farm sector would decline in the process of economic development. They postulate a self-sufficient economy in the pre-colonial era where peasants use only labour to produce two types of goods, food and some simple non-agricultural produce, to serve their own needs, defined as Z-goods sector. The sector consists of the 30

22 household or village production of handicrafts and services, including some textiles, garments and food processing for village consumption. However, as the subsequent colonial era increasingly linked the rural economy with the world economy, rural economy gets opportunity to make profit from the export of cash crops in the world markets, having an alternative use for rural labour. On the other hand, consumption of imported manufacturing goods became possible with their increasing income. These imported products were of higher quality and fulfilled a wider range of needs than Z- goods. Consequently, labour was induced to move out of the production of Z-goods and into the production of cash crops for export. Consequently there was a decline of the Z-goods sector and an expansion of both export and import. The Hymer-Resnick displacement (H-R displacement) process is illustrated below (see Fig-2.1). Ab Z in quadrant I represent the production possibility curve (ppc), as the fixed supply of labour is allowed to shift between the production of non-traded Z goods and the production of non-domestically consumed Ae goods. Cash crop exports Ae are exchanged for imports (M), through the international exchange at some terms of trade Op0 (quadrant IV). Using a 45 line to project OM imports onto the horizontal axis (in quadrant II), Z M then represents the consumption possibilities curve, corresponding to the production possibilities curve Ae Z, given the terms of trade, Op0. A price consumption curve is constructed in quadrant II representing the locus of all tangencies between the consumer indifference map and alternatives terms of trade. Given terms of trade Op0, equilibrium at time zero is then established at (1) for consumption and (1 ) for production; production of Ae is then given by Oa* and that of Z goods by OZ*, representing Z displacement of Z Z*, compared with a no trade position. If the terms of trade improve to Op' in quadrant IV), the consumption possibilities curve shifts out to Z M', and the consumption equilibrium to (2) (2 ), showing further Z displacement by M goods, as the substitution effect overcomes the income effect and shifts consumption towards M. If Z is assumed to be an inferior good, both the price and income effects are negative and there is substantial displacement in response to further improvements in the terms of trade. The decline of Z good activities does not depend on the inferiority of Z goods. However, if Z is not an inferior good, at some point the income effect is likely to overcome the substitution effect and the price-consumption curve will turn up, ceasing the Z displacement. 31

23 Figure - 2.1: Unfavourable colonial case (Hymer and Resnick) Source: Ranis and Stewart (1993) Ranis and Stuart (1993) model proposed a distinct point of departure from the Hymer- Resnick model saying that its pessimistic conclusions were based on rather restrictive assumptions as applied to the colonial period. They relaxed these assumptions and analysed a more positive role of Z-goods sector both in the colonial and post- colonial period. Instead of considering Z-sector as homogeneous sector as in Hymer-Resnick model, they consider the heterogeneity of Z-sector composed of both traditional nonagricultural activities carried out in individual households or at the village level called Zt sector and the other non-traditional sub-sector with modernising process of production called Zm sector. They also assume that in the post colonial era, an emergence of a modem industrial sector predominantly located in the urban centre, called the U-sector was initially devoted to replace imports. This is known as Udisplacement. The agricultural sector was assumed to compose of two sub-sectors: the agricultural cash crop export sector (Ae) and a domestically oriented food producing agricultural sector (Ad). With these assumptions, Ranis-Stewart shows that in the colonial period, with favourable changes, agricultural productivity increases. This in turn release more land and labour for their use in the non-agricultural sector together with increasing possibilities of the consumption of non-agricultural goods. As a result, the displacement of Z by M goods, predicted by Hymer-Resnick model is weakened and the production of Z goods increases. 32

24 In more favourable post-colonial era, the rural industrial sector faces relatively more favourable conditions, both from the perspective of demand, via linkages with agriculture, and of supply, via the dynamics of investment and the adoption of new technology. In this situation, ZM gradually displaces ZT and the Z goods sector retains a substantial and likely growing importance at least until the labour surplus has been eliminated. Figure Favourable colonial case Source: Ranis and Stewart (1993) In the above figure -2.2, as agricultural productivity increases, more labour and land are released, permitting an outward shift of the production possibilities curve Ae Z to Ae Z, thereby also leading to an outward shift in the consumption possibilities curve, Z M, to Z M, m the second quadrant. Z is now increasingly made up of ZM which is much more dynamic and innovative in character than the Zr it replaces. As a consequence of both these quantitative and qualitative shifts, the displacement of Z by M goods, predicted by H-R, is considerably weekend and indeed, may not occur, as modernizing rural industries are better able to compete with imports. Therefore, Ranis and Stewart clearly focused the important role of the non-farm sector in the development process. There are several other views on rural non-farm employment growth, various hypotheses put forwarded in last three decades, like: 33