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Pramit Pal Chaudhuri, Hindustan Times
June 02, 2009
It is politically incorrect to say, but the Indian government is doing much to prop up its farmers. In the long run, this is going to hurt both — them and the country as a whole. There is a heartwarming tendency among upper-middle class Indians to think that anyone who lives outside the city limits lives in quasi-destitution, is on the verge of suicide, at the mercy of moneylenders and the monsoon. Therefore, New Delhi is right to take money from the cities and give farmers loan waivers, tax exemptions and workfare schemes.

But here’s an iron law of economic development: policies that keep your people in the field ultimately keep them in poverty. Policies that help urbanise them make them wealthy. Except those floating on oil, all developed countries go through this transition. As Nobel economist Paul Krugman once argued, the miracle economies of Southeast Asia were little more than a repeat of the West’s farm-to-factory switch taking place over a very compressed period of time. Ditto the China story. On the other hand, India has, on paper, seen its urbanisation rate slow down over the years. The more handouts rural people are given, the less incentive they have to shift to urban areas. This means that the economy is growing well below potential — fields can never be as productive as factories or even call centres. Worse, it means depriving millions of what history has shown is the only real escape ladder from the mass poverty pit.

First, let’s understand that rural India is no monolith. Almost half of it doesn’t even do agricultural work. The National Sample Survey bizarrely classifies a man who spends even one day out of 365 on a field as a farmer. These 300 or so million people benefit from loan waivers only indirectly.

Second, no amount of government dole will get them out of poverty, for they are absurdly small. Ninety per cent of Indian farm holdings are less than two acres and don’t benefit from loan waivers. They are subprime borrowers. Welfare projects like the NREGA provide a welcome income supplement — but won’t get them out of poverty.

Third, the farmers who get the lion’s share of governmental assistance are far from destitute — they are flat screen-Ford Endeavour affluent. The 6 per cent who have 10-plus acres of land have annual household incomes comparable to middle-class urbanites. And they don’t pay income tax.

So, what’s the best way to get rural Indians off their handkerchief plots of desperation — and also lift the 100 million landless farm labourers — and help them prosper? Follow those countries that have ended mass poverty: move them to towns and cities. Obviously, people can’t be herded from one to the other. But incentives can be provided and barriers removed to make the move less traumatic. Right now, what New Delhi does only serves as an incentive to stay on the farm, sink further into poverty and hope more money will be doled out. The NREGA, especially after wage rates were raised by the states, may actually be drawing workers away from the cities.

India’s barriers to urbanisation are plenty. Most towns and cities are riddled with rental and tenancy laws that make finding a house a migraine-maker. Education levels are nightmarish in rural India. Small town municipal governance is a joke. Indian cities tend to think their job is to keep rural migrants away. The World Bank’s latest World Development Report rightly derides Mumbai’s absurd attempt to limit its population to 7 million. And rigid labour laws mean that many of the perfect transition jobs — like making textiles and garments — have migrated to Bangladesh.

Prime Minister Manmohan Singh likes to say he wants to replicate the South Korean urbanisation experience of the 1970s. Seoul put together a universal health and education system to make the transition easier. However, the Koreans also made it legally easy to convert farmland to industrial use. And they had an adrenaline-driven export sector to finance all this.

The first Singh government accomplished less than half its target in another urbanisation booster: infrastructure. However, it did a praiseworthy job in two urbanisation promoters: building rural roads and increasing rural telephony.

This is heresy to many, but rural life in India is half-decent by low-income country standards. Yes, Indian farmers kill themselves. But consider the figures: they are about 15 per cent of the country’s total suicides. Even assuming there are only 300 million Indian farmers, last year’s farmer suicide figure of 16,600 means that the average American is two times more likely to kill himself. The difference between poverty levels in rural India versus urban India is all of 1.1 percentage points.

No one is claiming rural Indian is a paradise: it is riddled with caste, stagnation, patriarchy and a crushing lack of choice. But the continuing policy of helping farmers with bailouts and dole-payments, something which has been going on now for 60 years, is only slowing rural India’s descent into poverty.

The answer lies in the flickering lights of India’s neglected towns and cities. The rural-dweller knows this. The last census showed that some 50,000 villages have been abandoned. This urban shift needs to be abetted, not treated as a tragedy or simply neglected. In fact, a simple measure of whether an economic policy is good for the rise of India is to ask the question: Does it boost the shift?