Fri, 22 Apr 2022

Rural Economy

In News

Prime Minister has recently urged lenders to finance rural businesses and projects aligned to national priorities like zero emission, health infrastructure, space, exports and start-ups.

About the News

  • Areas in the rural economy that needed support from financial institutions includes natural and organic farming, bee keeping, warehousing, food processing and agriculture logistics.
  • There is need to back these emerging areas including start-ups, exporters and sustainable infrastructure projects specially to get the covid-battered economy back on track and add much-needed jobs and livelihoods.

Rural economy in India

  • Census 2011: India is predominantly a rural country with nearly 8 per cent of country’s population and 72.4 per cent of workforce residing in rural areas.
  • Contribution in GDP: India’s rural ecosystem is large and growing steadily with rural economy contributing nearly half the nation’s overall GDP and employs nearly 350 million people or 68% of the total
  • Growth: Over the last five years, the rural ecosystem has grown ~10% per annum (p.a.)—and still has strong headroom for growth.
  • Sectoral contribution: Within the rural economy, agriculture holds the highest share of output (37%) while trade, hotels, transport, and communication are the next-highest contributors (16%), followed by manufacturing at 14%.
  • Skewed distribution: Nearly 60% of rural population is concentrated in six states with Uttar Pradesh having the highest rural population (~18 crore), followed by Bihar (~11 crore).

Why is rural economy important?

  • Source of investment: Agriculture is the largest sub-sector in the rural economy, contributing approximately 37% of total rural GDP with agri-tech start-ups attracting ~INR 6.6K Cr in private equity investments.
  • Enabler for future growth: With rural India becoming digitally savvy, with smartphone and internet usage increasing 30%+ CAGR in the last four to five years, which can act as a major catalyst for growth and development of economy.
  • Harbinger of Financial inclusion: Integration of Aadhaar and Aadhaar-enabled banking and payments systems have propelled rural financial inclusion improving the digital payment and digital commerce solutions among common people.
  • Locus of Community empowerment: FPOs and farmer producer companies (FPCs) helps in developing bargaining power and provide economies of scale in both public and private sectors.
  • Emerging Platform for start-ups: Rural economy in recent years has created an ecosystem which has drawn multiple new players into the market to offer technology-based solutions like offtake marketplaces, storage and transportation services, and agronomy advisory services.
  • New centre of finance: In FY20, the rural ecosystem accounted for ~43% of the total ~INR 130 lakh Cr expenditure. By volume, ~90% of rural payments to merchants were made in cash. As of March 2021, India’s gross loan portfolio was nearly INR 254K Cr, of which rural accounted for ~58%.
  • Generator of credit culture: Rural economy has attracted agri-credit at ~10% CAGR in the last five years, reaching ~INR 14 lakh Cr in 2019–2020. About 35% of agri-credit business comes alone from three states: Tamil Nadu, Andhra Pradesh, and Uttar Pradesh.


What are the Challenges faced by the rural economy?

  • Unemployment: It is one of the major challenges faced in India leading to not only migration but also feminization of poverty. As per ILO, about 400 million workers in the informal economy being at risk of falling deeper into poverty during the COVID-19 crisis.
  • Agriculture related: The problems related to agriculture includes lack of expected awareness, knowledge, skill and attitude, poor marketing facility, small size of land holdings, primitive technology and low adoption of modern technologies besides reduced public investment and absence of role for farmers in fixing the prices for their own products.
  • Economics problems: The economic problems related to rural areas are inability to adopt high-cost technology, high cost of inputs, under privileged rural industries, low income, indebtedness and existence of inequality in land holdings and assets.
  • Infrastructural: Poor infrastructure facilities like water, electricity, transport, educational institutions, communication, health, employment, storage facility, banking and insurance.
  • Administrative: The rural administrative problems consist of political interference, lack of motivation and interest, low wages in villages, improper utilization of budget, and absence of monitoring and implementation of rural development programme. 

What more can be done?

  • Expanding Farmers Producer Organisations (FPO): FPOs can act as a massive collective of distributed storage and primary processing (especially for high-value perishable goods). An integrated FPO effort will be quite instrumental in building the capacity of farmer groups especially the small farmers.
  • Expanding post-harvest infrastructure: With post-harvest losses amounting to 20% to 40% depending on crop variety, there is a need for government and private players to increase their investments in post-harvest infrastructure like warehousing and primary processing centres.
  • Improving access to robust data sources for real-time data and decision making: Access to reliable, real-time data for credit risk evaluation, weather forecasting, crop management, and enabling price transparency for the farmers.
  • Building trust with farmers: Improving digital awareness in the rural ecosystem and adopt new practices at scale. Technology-enabled and personalised credit risk analysis to help improve the financial inclusion of millions of farmers who are still outside the organised financial ecosystem.


India has seen a quantum jump in unplanned migrations from rural to urban areas and in order to improve socio economic conditions of vast majority of population in the country, there is a need to make rural economy stronger and create employment opportunities in rural economic activities. The improvement in economic conditions of rural households is also essential for reducing the disparity in per capita rural and urban income which has remained persistently high. This requires significantly higher growth in rural economy as compared to urban India. 

Question: Rural Economy is the backbone of Indian economy. Analyze.



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