INDIAN ECONOMIC DEVELOPMENT · CHAPTER 5

Rural Development
Credit & marketing systems, diversification of agricultural activities, non-farm
employment, and organic farming — the levers that raise rural life in India.

22% 2/3rd 1969 1982

population below poverty line of population depends on agriculture bank nationalisation — credit turning point NABARD established (12 July)

90 lakh
SHGs, ~10 crore women (Dec 2023)

5.1 Introduction 5.2 Meaning of Rural Development 5.3 Process of Rural Development 5.4 Rural Credit — Need & Classification
5.5 Sources of Rural Credit 5.6 Critical Appraisal of Rural Banking 5.7 Agricultural Market System 5.8 Diversification of
Agricultural Activities 5.9 Non-Farm Areas of Employment 5.10 Sustainable Development & Organic Farming 5.11 Evaluation
of Rural Development Glossary & Revolutions at a Glance

5.1

Introduction

The majority of India's poor live in rural areas, where basic necessities are often out of reach. Around 22% of India's
population still lives below the poverty line.
Agriculture holds the maximum share of the rural economy, yet it has grown at a meagre 2.7% over the last fifty years
(3.2% during 2007-12).
The share of agriculture in GDP has been declining, and industry & services have grown in relative importance — but
the population depending on agriculture hasn't fallen at the same pace. More than 2/3rd of India's
population still depends on agriculture, which isn't yet productive enough to meet all their needs. This mismatch is
sometimes called a lag in structural transformation.
After the 1991 economic reforms, agricultural growth decelerated to ~3% p.a. during 1991-2012 — lower than in
earlier decades.
During 2014-15, the Gross Value Added (GVA) growth rate of agriculture and allied sectors was less than 1%.
Scholars attribute this slowdown to a decline in public investment since 1991, inadequate infrastructure, lack of
alternate employment in industry/services, and increasing casualisation of employment.

Big idea: Real progress for India is possible only when rural areas and rural people are developed, so that the overall growth
of India can be achieved.

5.2

Meaning of Rural Development

Rural Development refers to the continuous and comprehensive socio-economic process that attempts to improve all
aspects of rural life.

Since agriculture is the major livelihood source for more than two-thirds of India's population, development in
agriculture directly betters rural life. But rural development is broader than agricultural development alone — it
covers everything that raises the quality of life in villages, economically and socially.
Rural people make up about ¾th of the total population, yet have always lagged behind the overall progress of the
economy.
To reverse this trend, special rural development programmes began in the 1970s, alongside the provisions of the Five-
Year Plans.
This chapter builds around three pillars:
 CREDIT & MARKETING

Facilities that get funds and fair prices to rural producers

DIVERSIFICATION

Spreading activity beyond crop farming for stable income

ORGANIC FARMING

Eco-friendly technology for sustainable development

5.3

Process of Rural Development

Rural development aims at comprehensive change in rural life. Five areas need fresh initiatives:

PROCESS OF RURAL DEVELOPMENT

01 02 03 04 05
Human Infrastructure Land Reforms Alleviation of Productive
Resources Poverty Resources
Electricity, End exploitation
Literacy, female irrigation, credit, in land relations; Steps to improve Develop each
education, skill marketing, 'land to the living conditions locality's resources
development, village & feeder tiller'; widen of weaker to widen
health & roads, research land base; raise sections (~22% employment beyond
sanitation & extension productivity below poverty) farming

Fig 1 — Five pillars of the rural development process

Pillar Key objective

Human Resources Female literacy, education, skill development; affordable health & sanitation

Infrastructure Electricity, irrigation, credit, marketing, transport (village & feeder roads); agri-research and extension

Land Reforms End exploitation in land relations; "land to the tiller"; widen land base of the poor; raise productivity

Alleviation of Poverty Direct steps to improve living conditions of weaker sections

Productive Resources Develop each locality's resources to widen employment, especially beyond farming

Agricultural Productivity = output per hectare of land — a key yardstick for judging land reform success.

5.4

₹ Rural Credit — Need & Classification

Growth of the rural economy depends on the timely infusion of capital to raise productivity in agriculture and non-
agriculture. Farmers face a long time gap between sowing a crop and realising income from its sale, so they borrow to
fund seeds, fertilisers, implements, and even family expenses like marriage, death, or religious ceremonies.

Credit needs of farmers are classically examined along two dimensions:

BY TIME

Short-term: up to 15 months — for seeds, fertiliser, wages

Medium-term: 15 months to 5 years — for livestock, implements
Long-term: above 5 years — for land improvement, tractors, wells
 BY PURPOSE

Productive: seeds, fertilisers, irrigation, machinery

Consumption: household needs, ceremonies, emergencies

An efficient and effective rural credit delivery system is crucial for raising both agricultural productivity and farm
incomes.

5.5

Sources of Rural Credit

With the growing modernisation of agriculture during the post-green revolution period, the requirement of agricultural
credit increased. Broadly, there are two sources from which farmers raise loans:

SOURCES OF RURAL CREDIT

NON-INSTITUTIONAL (INFORMAL) INSTITUTIONAL (FORMAL)

● Moneylenders — exorbitant interest ● Co-operative Credit

● Land Development Banks
● Relatives — interest-free, informal
● Commercial Bank Credit
● Traders & Commission Agents —
● Regional Rural Banks
crop mortgaged at low prices
● The Government (taccavi loans)
● Rich Landlords — exploit small/
● NABARD (apex bank, 1982)
marginal farmers & tenants
● SHG Bank Linkage (micro-finance)
→ leads to debt-trap
→ cheaper, more reliable credit

Fig 2 — Non-institutional vs Institutional sources of rural credit

Non-Institutional (Informal) Sources

These were the major source of credit at the time of Independence, and they exploited small and marginal farmers,
pushing them into a debt-trap.

Source How it works

Advance a major share of farm credit at very high (exorbitant) interest; accounts frequently
Moneylenders
manipulated without the borrower's knowledge

Relatives Informal, interest-free loans in times of crisis; usually returned after harvest

Traders &
Credit given against mortgage of crops, on condition the crop is sold to them at low prices
Commission Agents

Rich Landlords Lend to small/marginal farmers and tenants at high interest, exploiting them

Institutional (Formal) Sources

Nationalisation of Banks, 1969 — Banks were mainly serving big business and large industries (loans to industry nearly
doubled from 34% to 68% during 1951-68, while agriculture got less than 2%). To fix this, the Government nationalised 14
major banks (85% of deposits) in 1969, and 6 more in 1980. Objective: cheaper credit for farmers, and help for
small/marginal farmers to raise productivity and income.

Co-operative Credit: aims to free the peasantry from moneylenders, offering credit at low interest.
Land Development Banks: credit against mortgage of land, for permanent land improvement, buying implements, or
repaying old debts.
Commercial Bank Credit: played a marginal role before 1969, but expanded rural branches and direct farm
financing after nationalisation.
Regional Rural Banks: opened in areas with no banking facilities; focus on small/marginal farmers, agricultural
labourers, artisans, small entrepreneurs.
The Government: lends taccavi loans during emergencies/distress like famines or floods, at rates as low as 6%.
 NABARD: the apex bank coordinating financial institutions; also funds the non-farm sector to promote integrated rural
development.
SHG Bank Linkage: see below.

Self-Help Group (SHG) Bank Linkage for Micro Finance

Emerged because formal credit delivery was inadequate and a vast proportion of poor rural households couldn't offer
collateral.
Target groups: small/marginal farmers, agricultural & non-agricultural labourers, artisans.
SHGs promote thrift (small savings) from each member; pooled money is lent to needy members at reasonable interest,
repaid in instalments.
By May 2019: ~6 crore women in 54 lakh SHGs. By December 2023: ~10 crore women mobilised into 90 lakh
SHGs.
About ₹10,000-15,000 per SHG, plus ₹2.5 lakh per SHG as a Community Investment Support Fund (CISF), given as a
renovating fund for self-employment/income generation — collectively called micro-credit programmes.
SHGs have empowered women, though borrowings remain mostly for consumption; only a small share goes to
productive purposes.

5.6

Critical Appraisal of Rural Banking

Rapid expansion of banking had a positive effect on rural farm and non-farm output, income and employment. After the
green revolution, credit facilities helped farmers obtain loans for production needs — with buffer stocks of grains,
famines became events of the past.

BENEFITS OF AN ORGANISED CREDIT SYSTEM

Adequate credit availability to farmers

Cheaper interest rates from formal sources
Rise in rural farm & non-farm output, income, employment

PROBLEMS FACED IN RURAL BANKING

Insufficiency — rural credit volume still short of demand

Dependence on informal credit — no collateral, no formal access
Inadequate coverage of institutional sources
Inadequate sanction amounts — loans diverted to unproductive uses
Less attention to small/marginal farmers due to lack of collateral
Growing overdues — poor repaying capacity, chronic default

To improve the situation: (i) banks need to shift from being mere lenders to relationship banking with borrowers; and
(ii) farmers should be encouraged to save (thrift) and use financial resources efficiently.

Pradhan Mantri Jan-Dhan Yojana (28 Aug 2014): promotes thrift habits and universal bank access. ₹1-2 lakh accidental
insurance cover, overdraft up to ₹10,000, old-age pension & government payments direct to bank accounts, no minimum
balance required. 40+ crore accounts opened, mobilising over ₹1,40,000 crore.

Case study — TANWA: Tamil Nadu Women in Agriculture (late 1980s) trained women in latest agricultural techniques &
organic farming, boosting productivity and family income.

5.7

Agricultural Market System

 Agricultural marketing is a process that involves assembling, storage, processing, transportation, packaging,
grading and distribution of different agricultural commodities across the country — in short, everything from sowing
to sale of the final produce.

Problems Faced by Farmers

Manipulation by Big Traders: before Independence, farmers suffered faulty weighing and manipulated accounts.
Lack of Market Information: farmers often forced to sell at low prices due to no information on prevailing market
prices.
Lack of Storage Facilities: unable to hold produce for a better price later — even today, more than 10% of farm
produce is wasted for lack of storage.

Government intervention became necessary to regulate the activities of private traders.

Benefits of an Organized Marketing System

Orderly, transparent marketing conditions facilitate sale of produce.
Better infrastructure — roads, railways, warehouses, godowns, cold storages, processing units — prevents distress
sales.
Protects farmers from exploitation by middlemen/intermediaries.

Measures to Improve Agricultural Marketing

Regulated Markets Infrastructure Co-operative Marketing Policy Instruments

Protect farmers from Roads, railways, Farmers pool surplus, Minimum Support
malpractices of sellers warehouses, godowns, sell collectively, share Price (MSP), Buffer
& brokers cold storages & proceeds by individual Stocks (FCI), Public
processing units share → better prices Distribution System
~27,000 rural periodic
markets still need to
be regulated

Fig 3 — Four measures the government has used to improve agricultural marketing

COOPERATIVE MARKETING — BENEFITS

Improves bargaining power — farmers sell together through one agency.

Satisfies immediate cash needs by providing credit.
Storage facilities let farmers wait for better prices instead of distress-selling.
Bulk transportation of produce is cheaper and easier.

Setback faced by cooperatives: inadequate coverage of farmer members, lack of link between marketing and processing
cooperatives, inefficient financial management.

Policy Instrument What it does

Minimum Support Price

Government fixes a floor "offer price" for crops like wheat, rice, maize, cotton, sugarcane, pulses
(MSP)

FCI buys wheat & rice at procurement prices; ensures supply regularity & price stability across
Buffer Stock
surplus/shortage years

Public Distribution System Ration/fair price shops sell essentials (wheat, rice, kerosene) below market price to weaker
(PDS) sections

Emerging Alternate Marketing Channels

Farmers Markets: direct farmer-to-consumer sale, cutting out middlemen — Apni Mandi (Punjab, Haryana,
Rajasthan), Hadaspar Mandi (Pune), Rythu Bazars (Andhra Pradesh, Telangana), Uzhavar Sandies (Tamil Nadu).
Alliance with national/multinational companies: contract farming — companies encourage cultivation of desired
quality produce, supply seeds/inputs, and assure procurement at pre-decided prices, reducing farmers' price risk.

Note: In 2020 Parliament passed three Agriculture Acts to reform marketing, but these were repealed in 2021 following
opposition from a section of farmers.
 Despite decades of reform, agricultural markets are still dominated by private traders — moneylenders, rural political
leaders, big merchants and rich farmers. Government agencies and consumer cooperatives handle only about 10% of
agricultural produce; the rest passes through the private sector.

5.8

Diversification of Agricultural Activities

Agricultural diversification relates to changes in cropping patterns or a shift of workforce from agriculture to other
allied activities.

Why diversify? Agricultural employment is concentrated in the Kharif season; in the Rabi season, gainful work is hard to
find where irrigation is inadequate. Depending exclusively on farming is risky — price fluctuations and monsoon failure
can wipe out income. Diversification reduces this risk and provides supplementary gainful employment in the off-season,
raising overall income and giving rural people a more sustainable livelihood.

Diversification of Crop Production Diversification of Productive Activities

Shift from single-cropping to Shift of workforce from

multi-cropping; food grains → agriculture into allied activities
cash crops; subsistence → (livestock, fisheries) & non-farm
commercial farming sectors

Fig 4 — Two types of diversification

Term Meaning Examples

Food Grains Grains grown for human consumption Rice, wheat, maize, pulses

Grown for direct sale in the market rather than family

Cash Crops Cotton, jute, coffee, sugarcane
consumption/livestock

Subsistence Growing crops only for one's own use, without any surplus for Small food-grain plots, still dominant
Farming trade in India

A multi-cropping system reduces dependence on one or two crops, minimises risk from price fluctuation and monsoon
failure, and can raise farmer income.

Diversification of Productive Activities

Since agriculture is already overcrowded, a major share of the rising labour force must find alternate employment in
non-farm sectors. This provides alternative avenues of sustainable livelihood and raises income levels.

DYNAMIC SUB-SECTORS

Agro-processing, food processing, leather industry, tourism — healthy growth linkages

SUBSISTENCE, LOW-PRODUCTIVITY SEGMENTS

Traditional household industries — pottery, crafts, handlooms — have potential but lack infrastructure & support

5.9

Non-Farm Areas of Employment

 1 2 3 4 5
Animal Dairying Fisheries Horticulture Information
Husbandry Technology
Breeding, raising Catching, processing Cultivating fruits,
Breeding, rearing & using dairy or selling fish & vegetables, tuber Computers &
& caring of farm animals for milk aquatic animals crops telecom to store &
animals products transmit info

Fig 5 — The five non-farm areas of rural employment

1. Animal Husbandry

Animal Husbandry (Livestock farming) is that branch of agriculture concerned with the breeding, rearing and caring
of farm animals.

Livestock = domesticated animals raised (generally in an agricultural set-up) to produce labour and commodities such
as cattle, goats, etc.
India owns one of the largest livestock populations in the world; provides stability in income, food security,
transport, fuel and nutrition without disrupting other food-producing activities.
Supports over 70 million small and marginal farmers, including landless labourers; a significant number of women
also find employment in this sector.
In India, poultry has the largest livestock share (61%), followed by cattle & buffaloes (22%), sheep & goats (16%), and
pigs/others (1%). India had about 303 million cattle (including 110 million buffaloes) in 2019.
Silver Revolution (1969, lasted 9 years) — immense growth of egg production using advanced methods, making India
the world's third-largest egg producer, after China and the USA.

Poultry — 61%

Cattle & Buffalo — 22%

Sheep & Goats — 16%

Others (Pigs etc.) — 1%

Livestock

Fig 6 — Distribution of poultry & livestock in India, 2019

Evaluation: Numbers are impressive, but productivity per animal is low vs other countries. Needs improved technology,
better breeds, veterinary care, and credit facilities for small/marginal farmers and landless labourers.

2. Dairying

Dairying is the branch of agriculture involving breeding, raising and utilisation of dairy animals for milk and dairy
products.

Due to the successful implementation of Operation Flood (the White Revolution), India ranks first in the world in
 milk production.
Milk production: 17 million tonnes (1950-51) → 102.6 mt (2006-07) → 165.4 mt (2016-17) → 198.4 mt (2019-20).
Operation Flood was started by the National Dairy Development Board (NDDB) in 1970, under the guidance of
chairman Dr. Verghese Kurien, to create a nationwide milk grid.
Farmers pool their milk by grade; it is processed and marketed to urban centres via cooperatives, assuring fair price
and income.
Gujarat is the success story of milk cooperatives, followed by Madhya Pradesh, Uttar Pradesh, Andhra Pradesh,
Maharashtra, Punjab and Rajasthan.
Meat, eggs, wool and other by-products are also emerging as important diversification sectors.

3. Fisheries

Fisheries refer to the occupation devoted to catching, processing or selling of fish and other aquatic animals.

Inland sources contribute ~65% of total fish production; the balance 35% comes from the marine sector (sea, oceans).
Total fish production accounts for 0.9% of total GDP. Major fish-producing states: West Bengal, Andhra Pradesh,
Kerala, Gujarat, Maharashtra, Tamil Nadu.
Fishing communities regard water bodies (sea, oceans, rivers, lakes) as a life-giving "mother" or provider.
Although women aren't much involved in active fishing, they form 60% of the export-marketing workforce and 40% of
internal marketing — needing more cooperative/SHG credit access.
Problems: widespread underemployment, low per-capita earnings, absence of labour mobility to other sectors, high
illiteracy and indebtedness.
Blue Revolution (Neel Kranti Mission): launched 1985-90 during the 7th Five-Year Plan to develop, manage and
promote fisheries, aiming to double farmers' income. Pioneer: Hiralal Chaudhuri.

4. Horticulture

Horticulture is the science or art of cultivating fruits, vegetables, tuber crops, flowers, medicinal & aromatic plants,
spices and plantation crops.

Contributes nearly one-third of the value of agricultural output and 6% of India's GDP.
India is the second largest producer of both fruits and vegetables in the world — a world leader in mangoes,
bananas, coconuts, cashew nuts and several spices.
Golden Revolution (1991-2003): a period of tremendous rise in production of fruits, vegetables, flowers etc. Nirpakh
Tutej is considered the Father of the Golden Revolution in India.
Great scope for women's employment: flower harvesting, nursery maintenance, hybrid seed production, tissue culture,
food processing.

Evaluation: A successful, sustainable livelihood option that needs investment in electricity, cold storage, marketing linkages,
small-scale processing units, and better technology dissemination.

5. Information Technology

Information Technology (IT) refers to the branch of engineering dealing with the use of computers and
telecommunications to retrieve, store and transmit information.

Government uses IT to predict food-insecurity/vulnerability areas to prevent or reduce emergencies.

Circulates information about emerging technologies and their applications, prices, weather and soil conditions for
different crops.
Acts as a tool for releasing creative potential and knowledge embedded in society; has employment-generation
potential in rural areas.
Goal: make every village a knowledge centre providing a sustainable option for employment and livelihood.

5.10

Sustainable Development & Organic Farming

There's been a rise in awareness of the harmful effects of chemical-based fertilisers and pesticides. Conventional
agriculture relies heavily on chemicals that enter the food supply, penetrate water sources, harm livestock, deplete soil
and devastate natural ecosystems. Organic farming is one eco-friendly technology developed in response.

Organic farming is a form of agriculture that relies on techniques such as crop rotation, green manure, compost and
biological pest control — avoiding synthetic chemical fertilisers and genetically modified organisms.

Produces safe, healthy food without adverse impact on the environment.

A whole system of farming that restores, maintains and enhances ecological balance.
Global demand for organically grown food is rising, to enhance food safety worldwide.

Aspect Conventional Farming Organic Farming

Chemical fertilisers, synthetic pesticides, HYV Crop rotation, green manure, compost, biological pest
Inputs
seeds control

Soil health Erodes soil fertility over time Sustains and improves soil fertility

Labour
Lower Higher — more employment generated
need

Initial yield Higher Lower in initial years

Shelf life Longer (sprayed) Shorter

BENEFITS

Economical — substitutes costly chemical inputs with cheaper, locally produced organic inputs
Generates income through exports (rising global demand)
Provides healthier food with more nutritional value
More employment — India has a comparative advantage due to abundant labour
Safety of environment — pesticide-free, sustainable production
Sustains soil fertility through animal manure, compost, farmyard manure

CHALLENGES

Less popular — needs awareness-building & a supportive agriculture policy

Lack of infrastructure and marketing facilities
Low yield in the initial years vs modern farming; hard for small/marginal farmers to scale
Shorter food/shelf life vs sprayed produce
Limited choice of off-season crops

Organic food commands 10-100% higher prices globally; many countries now have ~10% of their food system under
organic farming, and retail chains/supermarkets carry "green status" organic sections. Case study: in Maharashtra, 130
farmers (initiative by Kisan Mehta of NGO Prakruti, 1995) grow cotton organically on 1,200 hectares under IFOAM standards.

Despite the limitations, organic farming aids sustainable development of agriculture, and India has a clear advantage in
producing organic products for both domestic and international markets.

5.11

Evaluation of Rural Development

The rural sector will continue to remain backward until spectacular changes occur. Four changes are especially needed:

1. Stress on Diversification — make rural areas more vibrant through dairying, poultry, fisheries, vegetables and
fruits.
2. Rural & Urban Linkage — connect rural production centres with urban and foreign (export) markets, for higher
returns on investment.
3. Better Facilities — develop infrastructure (credit, marketing), state agricultural departments, farmer-friendly
agricultural policies, and constant appraisal/dialogue between farmer groups. The aim: achieve the full potential of
the rural sector.
4. More Emphasis on Sustainable Development — invent or procure alternate eco-friendly technologies suited to
different circumstances.
 Saansad Adarsh Gram Yojana (SAGY), Oct 2014: MPs identify and develop one village from their constituency as a model
village (by 2016), and two more by 2019 — covering 2,500+ villages, facilitating village development plans in health, nutrition
and education.

QUICK REFERENCE

Revolutions at a Glance

Revolution Sector Period Key fact

White Revolution India ranks 1st in world milk production; led by Dr. Verghese
Dairying Started 1970
(Operation Flood) Kurien / NDDB

Poultry / 1969, 9
Silver Revolution India became world's 3rd-largest egg producer
Eggs years

Blue Revolution (Neel 1985-90 (7th

Fisheries Aimed to double farmers' income; pioneer Hiralal Chaudhuri
Kranti Mission) Plan)

India became world leader in mangoes, bananas, coconut,

Golden Revolution Horticulture 1991-2003
spices; Father: Nirpakh Tutej

? Key Terms Glossary

Agricultural Productivity
Output per hectare of land.

Taccavi Loans
Government loans given during emergencies/distress (famines, floods), at interest as low as 6%.

Cooperative Marketing
A system where farmers pool their marketable surplus and distribute sale proceeds on the basis of each individual's share.

Subsistence Farming
Growing crops only for one's own use, without surplus for trade.

Cash Crops
Crops grown for direct sale in the market rather than family consumption (e.g. cotton, jute, coffee, sugarcane).

Food Grains
Grains grown for human consumption (e.g. rice, wheat, maize, pulses).

NABARD
National Bank for Agriculture and Rural Development — the apex bank coordinating rural credit institutions, est. 12 July 1982.

SHG
Self-Help Group — a micro-finance model where members pool savings (thrift) and lend to each other at reasonable interest.

MSP
Minimum Support Price — the floor price the government guarantees to pay farmers for specified crops.

Buffer Stock
Food grain stock maintained by the FCI to ensure price stability and supply regularity.

PDS
Public Distribution System — network of ration/fair-price shops selling essentials below market price to the poor.

Detailed study notes compiled from Chapter 5 — Rural Development · Indian Economic Development