policy initiatives for strengthening rural economic development in india · 2016-08-02 ·...

Policy Initiatives for

Strengthening Rural

Economic Development

in India:

Case Studies from

Madhya Pradesh and Orissa

Nandini Dasgupta, Ulrich Kleih,

Alan Marter and Tiago Wandschneider

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Policy Initiatives forStrengthening Rural Economic

Development in India:

Case Studies from




ii

© University of Greenwich 2004

The Natural Resources Institute (NRI) of the University of Greenwich is an internationally recognizedcentre of expertise in research and consultancy in the environment and natural resources sector. TheInstitute carries out research and development and training to promote efficient management and use ofrenewable natural resources in support of sustainable livelihoods.

Short extracts of this publication may be reproduced in any non-advertising, non-profit-making contextprovided that the source is acknowledged as follows:

DASGUPTA, N., KLEIH, U., MARTER, A. and WANDSCHNEIDER, T. (2004) Policy Initiatives for

Strengthening Rural Economic Development in India: Case Studies from Madhya Pradesh and Orissa.

Chatham, UK: Natural Resources Institute.

Permission for commercial reproduction should be sought from the Publications Manager, Universityof Greenwich at Medway, Central Avenue, Chatham Maritime, Kent ME4 4TB, United Kingdom.

This publication is an output from a project funded by the United Kingdom Department forInternational Development (DFID) under the DFID/World Bank Collaborative Programme for RuralDevelopment. The views expressed are solely those of the authors and not necessarily those of DFID orthe World Bank.

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Contents

Acronyms and Abbreviations vAcknowledgements vi

1 Context to the Study 1Introduction 1The Policy Context 1

Rural development and access to the rural non-farm economy 1Rural development, the rural non-farm economy and local governance 2

Definitions 3Choice of Study Area 3Research Approach and Methodology 4

Research approach 4Research design and methodology 4Small towns survey 6

Plan of Report 6

2 Assets Base and Access to Non-farm Livelihoods 7Introduction 7Socio-demographic Background Information 7The Household Assets Base 8

Access to education 8Land ownership 10Accessibility of common grazing land and pasture 10Livestock ownership 10Access to finance 10Social capital 11Infrastructure and physical assets 11

Employment and Income Patterns 12Madhya Pradesh 12Orissa 14

Constraints on Non-farm Livelihoods 15Conclusions: Sub-sector Overviews in Orissa and Madhya Pradesh 16

Primary production 17Agricultural and food processing 18Other primary processing 18Traditional manufacturing 18Modern manufacturing 18Services 19

3 Rural-urban Linkages and the Role of Small Towns 21The Need to Understand Rural-urban Linkages 21Small Rural Towns in the Local Economy 21

Urbanization levels and trends 21Economic activities in rural towns 22Profile of rural town enterprises and entrepreneurs 23

iii

Linkages between rural towns and the local village economy 24Constraints on enterprise development 28Business support service needs 30

Conclusions 31

4 Local Governance and Rural Non-farm Activities 35National Legislation 35Use of Discretionary Powers by the States 35

Power to the people 35Social relations and lack of empowerment 36Distribution of power among district-, block- and village-level institutions 38

Panchayat Raj Institutions, Promotion of Local Development and Impact on the RNFE 39

District-level institutions and promotion of local development 39Local representatives are poorly informed of their functions and responsibilities 40Overwhelming dependency on government funding 40Reluctance to use its fiscal powers 40Limited cognition of how to generate and manage own income 41Village Panchayats: their focus of activity 41The role of village-level committees 42District level and below: limited economic perspective 42

Panchayat Raj Institutions and Line Departments 43Other Institutions and the Rural Non-Farm Economy 43

Traditional institutions, user committees, co-operatives and NGOs 43Self-help groups 44Banks 44

Crowded Institutional Space at the Village Level 44Conclusions 45

5 Conclusions and Recommendations for Policies to Promote the Rural Non-Farm Economy 47Implications for Policies to Promote the Rural Non-Farm Economy 47Institutional Development 47Productive Investment 49The Enabling Environment 50Disengagement by the Public Sector 52

References 53

Appendix: Details of the Study Area 57

iv

Acronyms and Abbreviations

BDO Block Development Officer

BDS Business Development Service

CBO Community-based Organization

CMS Cirrus Management Services

CSS Centrally Sponsored Schemes

CYSD Centre for Youth and Social Development

DFID Department for International Development, UK

DPC District Planning Committee

DRDA District Rural Development Authority

NGO Non-Governmental Organization

NTFP Non Timber Forest Product

NRI Natural Resources Institute, UK

PRA Participatory Rural Appraisal

PRI Panchayat Raj Institution

RNFE Rural Non-Farm Economy

SL Sustainable Livelihoods

SME Small and Medium Sized Enterprise

SPSS Statistical Package for Social Sciences

v

vi

Acknowledgements

The authors would like to thank the members of the rural communities, the private enterprise sector, andthe local government institutions of Madhya Pradesh and Orissa for their patient and willing participation,for without their contribution, this study would not have been possible.

We are indebted to the following organizations for their collaboration during the different phases of thisresearch project: ActionAid, Cirrus Management Services, Centre for Youth and Social Development,Debate and Samarthan. In particular, the contributions by Richa Som, Yogesh Kumar, Surendra K. Jena,Amitabh Singh, Leena Singh, Amod Khanna, M. S. Ashok, Alok Rath and Gitanjali Jena are gratefullyacknowledged.

The project also benefited from substantial inputs by N. C. Saxena on policy issues in relation to thenon-farm economy. Design of the database and statistical analysis was ably undertaken by PhillipViegas. Valuable comments on earlier drafts of the paper were provided by our colleagues Junior Davis,Peter Greenhalgh and Felicity Proctor.

Last but not least, we would like to thank the UK Department for International Development (DFID)for funding this research through the DFID-World Bank collaborative programme on ruraldevelopment; Felicity Proctor for her role as overall programme manager; and DFID-India for theirsupport and frank exchange of ideas.

Context to the Study 11Chapter

Introduction

The purpose of this publication is to present thefindings of research concerned with improvedunderstanding and appropriate policydevelopment for the rural non-farm economy(RNFE) in India. The research was undertakenby the Natural Resources Institute (NRI) incollaboration with local partners1; with fundingfrom the UK’s Department for InternationalDevelopment (DFID) under a collaborativeagreement with the World Bank. The two Indianstates selected for analysis were Madhya Pradeshand Orissa.

Research objectives of this study sought toinform policy on two interrelated topics:

� sources of farm and non-farm income in ruralhouseholds; barriers to uptake of non-farmemployment; and opportunities which can betranslated into policy recommendations

� the effect of local governance on thedevelopment of the RNFE in particular andrural development in general; and theopportunities for making local governmentsmore responsive to local needs.

The Policy Context

Rural development and accessto the rural non-farm economy

As in many other developing countries, thenumber of poor people in rural areas of India

exceeds the capacity of agriculture to providelivelihood opportunities. Although populationgrowth is slowing, this is not expected to changethe situation significantly, and neither out-migration nor urban areas can generate adequatelivelihood opportunities for all those unable tomake a living from agriculture. For these reasonsthe RNFE has a potentially significant role in thelivelihoods of poor people in rural areas.

Over the past five decades, India has pursuedmany policies focused on poverty reduction andpromotion of economic growth. However, theirimpact on poverty has been limited, and growthin both the RNFE and agriculture has beenconstrained. These policies generally focused onsupply side components (Saxena, 2003),especially credit programmes, coupled withdecentralization. Interventions were intended toimprove livelihood opportunities by creating jobsor the conditions in which jobs are created. Therehas been relatively little focus on the factors thatdetermine poor people’s capacity to takeadvantage of these job opportunities. Review ofthe literature (Ellis, 1999; Barrett and Reardon,2001) and experience in India (Fisher et al.,1997) show that livelihood diversification can bedriven by two processes: distress-push – wherethe poor are driven to seek non-farm employmentfor want of adequate on-farm opportunities; anddemand-pull – where rural people are able torespond to new opportunities. In the formersituation, large numbers may be drawn intopoorly remunerated activities (but ones whichhave low barriers to entry), whilst the latter are

1 In Madhya Pradesh, the collaborators were Debate and Samarthan; in Orissa, they were ActionAid-India and the Centre for Youth andSocial Development (CYSD). In addition, Cirrus Management Services (CMS) undertook a small-town survey in both states.

more likely to offer a route to improvedlivelihoods. This research aims to provide moreinformation on access constraints faced by poorpeople seeking to work in the RNFE.

The literature highlights the role of assets asinfluencing the ability of households to engage innon-farm activities. These assets include: healthand nutrition; household demographiccomposition; education and skills; access tofinance and wealth; infrastructure; and socialcapital and networks. This study will examinethese in relation to income levels at thehousehold level. However, the way these assetsinteract to generate income is largely conditionedby government policies and institutions and thenature of local governance.

Rural development, the ruralnon-farm economy and localgovernanceIn 1993, the 73rd amendment to the Indianconstitution2 made it obligatory on all stategovernments to establish local governments inrural areas, in the form of a three-tier structureknown as the Panchayat Raj Institutions (PRIs).The objectives behind this decentralization wereto enhance democratic development and to speedup the sluggish rate of rural development andpoverty alleviation. This was also in line withdonor-thinking which saw top-downimplementation of policy as one of the causes ofweak governance. It was envisaged thatdecentralization would allow local politicians totarget local developmental needs and problems.

Blair (2000)3 conceptualizes the argument thatestablishment of local democratic governmentwill ultimately lead to reduction in poverty as afive-stage process. The expectations are thatthere will be:

� increase in participation � increase in representation� increase in empowerment � increase in benefits for all� decrease in poverty.

A review4 of the impact of decentralization hasshown that with decentralization (administrative,fiscal and/or political), the political participationof people increased but did not lead to theirempowerment. The traditional power structureswere left intact. This has led to the realizationthat a strategy to increase democraticdevelopment per se could merely redistributepowers and functions from the central to the locallevel. By itself such redistribution does notensure that the institutions of local governmentare able to advocate, facilitate or promote growththat is equitable or sustainable. Recent empiricalevidence from Africa underscores this thinking.Ellis and Mdoe (2003: 1367), based on researchin Tanzania, note that local governments could“make worse the public sector institutionalenvironment within which people attempt toconstruct their own pathways out of poverty”.Orr et al. (2001) and Ellis and Mdoe (2003)argue that in Malawi the present institutionalstructure does not foster the diversification ofrural activities. The situation could be furtheraggravated by fiscal decentralization as ruralassemblies would impose new business licencesand commodity taxes.

It is in this overall context that this research setsout to examine the role of the institutions of localgovernance and their impact on non-farmactivities; people’s awareness and perceptions ofthe powers given to them and to theirrepresentatives; and awareness among theconstituency and the local leaders of thedevelopmental roles and functions assigned toPRIs. An assessment of all stakeholder

2

Context to the Study

2 Government of India (1993) 73rd Amendment to the National Constitution sets out the mandatory provisions which the states wererequired to implement and identified areas of discretionary powers for the state governments.3 For a detailed discussion of Blair (2000) and a literature survey of the RNFE and local governance, see NRI Report No. 2672.4 Sri Lanka (Abeyawardana, 1996); Philippines (Carino, 1996); Thailand (Rigg, 1991); Bolivia (Gonzales, 1997; Grootaert and Narayan,1999); Bangladesh (Westergaard and Alam, 1995); and India (Manor: 1995; Aziz et al., 1996; Crook and Manor, 1998; Manor, 1999).

perceptions was fundamental to understandingthe extent to which the PRIs have created anenabling environment for rural developmentand/or created/maintained the institutionalblockages that hinder rural households frommoving out of poverty. The overall aim is toidentify opportunities for improving theinstitutional context for livelihooddiversification, RNFE growth and povertyreduction.

Definitions

The RNFE includes activities that are outsideprimary agriculture, forestry, animal husbandryand fisheries, whether carried out on one’s ownfarm or as labour on others’ farms. The maincriterion for identifying non-farm activity is –does the activity add value to the product,irrespective of the fact that the product has beengenerated as on-farm activity. For example, ifcleaning grain before it is sold fetches a differentprice from grain that has not been cleaned, theactivity ‘cleaning grain’ will be a non-farmactivity.

The Census of India classification of all workersinto nine ‘industrial’ categories, was notappropriate for this study. Hence, theclassification of sub-sectors developed by Fisherand Mahajan (1997) to represent the RNFE inIndia was used and includes: agro-processing,commercialized allied activities, mining,household and non-household manufacturing,

repairs, construction, trade, transport and otherservices (Fisher and Mahajan, 1997: 11).

The term ‘local governance’ in the study refers toboth formal and informal institutions ofgovernance. The former includes the PRIs, andthe latter includes the civil society organizations,the private sector and lending/donor agencies.This study adopts the definition of civil societydeveloped by Tandon and Mohanty (2000) andused by the DFID office in Madhya Pradesh.(DFID-MP, 2000). Civil society is defined as“the space independent of the state and themarket”. It is conceptualized as the sum total ofall individual and collective action intended forpublic good.

Choice of Study Area

The decision to focus on Madhya Pradesh andOrissa was taken at the national level followingdiscussions between DFID-India, the WorldBank and central government officials. Povertyreduction is at the core of this project and thestates selected are among the poorest in India asillustrated in Table 1.

In each state, two districts were selected for in-depth study. The selection of districts waspurposive in nature following wide rangingconsultations with government officials in Delhi,Madhya Pradesh and Orissa5. The districtsselected in Madhya Pradesh are Narsimhapur andBetul; Nayagarh and Bolangir in Orissa.

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5 For a more detailed discussion, see Dasgupta et al. (2002) .

Table 1: Concentration of poverty in selected states

State

Madhya Pradesh

Orissa

Bihar

All India

Percentage share of India’spopulation (2001)

7.91

3.57

10.69

100.00

Percentage of population living inpoverty (1999–2000)

37.43

47.15

42.60

26.10

Source: Government of India, Poverty Estimates for 1999–2000; Census 2001 Provisional Population Tables

Furthermore, Betul and Bolangir are in areasregarded as spatial poverty traps on the basis ofagro-ecological and socio-economic conditions(Singh and Binswanger, 1993), that is, forest-based economies, especially in the hilly regionswith a predominance of tribal populations andwith limited access to natural resources,information and markets.

Within each district, the criteria used to selectblocks and Panchayats were: (i) level of RNFEactivity; and (ii) level of access to roads. See theAppendix for details of blocks and PRIs selected.

Research Approach and Methodology

The aim of the research was to inform state andnational policies and macro-level donor policy.This required a holistic approach and ananalytical framework that allowed links to bemade between different policy levels. Thesustainable livelihoods (SL) framework providedthe structure for such an analysis and informedthe methodology developed for this study.

Research approachThe SL approach provides a framework foranalysing the diversification of rural livelihoodsfor policy development. It shows that alivelihood comprises assets, activities and accessto these (mediated by institutions and socialrelations), which together determine the livinggained by the individual and the household. Alivelihood is sustainable when it can cope with,and recover from, stresses and shocks andmaintain or enhance its capabilities and assets,both now and in the future, while notundermining its natural resource base. The SLframework is a valuable tool to judge theperformance of non-farm rural livelihoodpolicies. It is thus, a useful means to informpolicy interventions.

The social unit of analysis is the household, withthe starting point being the assets base uponwhich households draw. Assets are described as

stocks of capital (natural, physical, human,financial and social) that can be utilized directlyor indirectly to generate the means of survival orsustain its well-being at different levels ofsurvival. Access to these assets is mediated by anumber of contextual social, economic andpolicy considerations. Ellis (2000) made thedistinction between endogenous and exogenousfactors. He argued that social relations,institutions and organizations are factors that arepredominantly endogenous to the social normsand structures of which households are a part.The exogenous factors are trends and unforeseenshocks (e.g. floods) and impacts of policy (e.g.opening up the market for agricultural inputs tothe private sector) with major consequences forlivelihood viability. The interrelationshipsbetween assets, mediating processes andlivelihood activities are dialectic, complex anddynamic.

The SL framework was adopted for this studybecause it allows a holistic approach to theanalysis of a household’s capacities andconstraints in the access of resources to generatelivelihoods and, at the same time, allows thisanalysis to be linked to the wider contextualendogenous and exogenous factors operating atdifferent levels (state, national and global). Thisapproach combines participatory approaches tounderstand institutional structures, socio-economic processes and peoples’ perceptions,with objective quantifiable measures of income,economic links and livelihoods.

Research design and methodologyThe wider approach taken by the study team wasto move from an overall understanding ofhouseholds, communities and institutionalstructures to an in-depth understanding athousehold level. To this end research was carriedout in two phases. Fieldwork for Phase I wasundertaken between November 2001 andFebruary 2002. For the access component, aparticipatory rural appraisal (PRA) was carriedout to provide insight into common problems,

4


constraints and opportunities in the study area.Qualitative and participatory techniques, describedin Table 2, were used. Key issues assessed includedpredominant types of household assets, incomegenerating activities, social and gender-relatedissues, and constraints and opportunitiesencountered by the poorer households in taking upnew income generating activities.

Concurrently, for the local governancecomponent, an analysis of the formal andinformal institutions of local governance wasundertaken to assess the devolution of powers andfunctions, the relations between governmentfunctionaries and the elected representatives andtheir respective abilities to deliver public services.

In Phase II, based on the findings of Phase I, aquestionnaire-based household survey wasdesigned to include issues arising in both accessand governance components. The survey covered800 households in each state. The chulla6 wastaken as the means of defining the unit of thehousehold and not the physical structure of house.In the period, April–October 2002, thequestionnaire survey was carried out by local

collaborators in the same villages where the PRAand local governance survey had been undertaken.The survey design was based on a proportionaterandom sampling framework to reflect thepopulation size of the different villages. The datawere analysed using SPSS statistics software.

For the access component, the main objective ofthe questionnaire survey was to obtainstatistically valid data which could be used toback up the findings of the PRA. This includedinformation on household demography, socio-economic context, asset base, income sources andlevels, and perceptions of constraints on access toemployment opportunities outside agriculture.

For the local governance component, thehousehold survey examined the impact ofdecentralized government on local activities; therelationship between donor-funded projects andlocal democratic institutions; the links betweenline departments and PRIs; people’s awareness ofthe powers and functions of the formalinstitutions; and people’s perception of who arethe more effective agents of economicdevelopment.

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Table 2: Tools and techniques used for the PRA

Issue(s) purposes

Assessment of community (physical/natural) assets

Exploration of local resources and development

conditions and observation of physical, natural and

capital assets

Understanding of specific income generating

activities undertaken by individuals and small

organizations (key issues)

Gaining in-depth knowledge of specific issues,

structure and organizations

Following up and illustrating specific issues

Stakeholders perceptions

Income generation present, future and trend and

constraints

Tools used

Social mapping

Transect walk

Focus group discussions

Key-informant discussion/in-depth interview

Case studies/semi-structured interviews

Semi-structured interviews

Ranking/focus group discussion/service opportunity

map/seasonality calendars

6 A household is defined as all individuals whose food is produced from a single chulla – a stove made locally of mud used for cooking.The fuel used is generally wood or coal.

Small towns surveysAdditionally, following the analysis of Phase Iresults, it was concluded that it was important tounderstand the nature of the economic linksbetween rural settlements and the small anddistrict towns. A rural-urban linkage study was,therefore, also undertaken during Phase II. Thesurvey was structured around the enterprisesector, since an understanding of enterpriseactivity provides insights into the extent ofspatial economic linkages. Information wascollected on the type of economic activitydeveloped, the interaction between enterprisesand input suppliers and customers, and enterpriseemployment patterns. The views of entrepreneurson factors which have enabled and constrainedbusiness development, and their perceptionsconcerning enterprise support needs, were alsoelicited. These provided insight into policy andinvestment interventions which are likely tostimulate the growth of the rural town enterprisesector and thereby enhance local economicdevelopment.

Fieldwork was conducted in six towns. A total of183 structured interviews were carried out with

enterprise owners and managers and 30 semi-structured interviews with key informants in theenterprise and government sectors. Enterpriseswere randomly selected, although there was anexplicit attempt to include firms operating indifferent sub-sectors and to provide as balanced arepresentation as possible of the variety ofeconomic activities found in the six studylocations. (Table 3).

Cirrus Management Services (CMS)implemented the survey in collaboration withlocal NGOs7 and contributed to data processingand analysis.

Plan of Report

The study design and analysis in this report are atthree levels. These include analysis of access andconstraints to the RNFE at the household level;the meso-level analysis of the role of small townsand rural-urban links in the RNFE; and thevillage, district and state level analyses of localgovernance issues. The report is structured toreflect this multilevel analysis.

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Table 3: Population and location of study towns

Town

Betul

Gotegaon

Chichli

Patnagarh

Daspalla

Odagoan

District

Betul

Narsimhapur

Narsimhapur

Bolangir

Nayagarh

Nayagarh

Town population 2001

83,485

23,417

9250

18,685

<10,000

<10,000

Distance to districtheadquarters (km)

0

31

68

38

40

26

Distance to statecapital (km)

180

231

175

418

290

276

Source: Census of India (2001)

7 Debate and Samarthan participated in the fieldwork in Madhya Pradesh, while ActionAid and the CYSD assisted the research team in Orissa.

Introduction

Using the SL approach as the entry point (see

above), this section analyses the asset base of

households, their livelihoods and income

patterns, and constraints on entry to non-farm

livelihoods. In particular, an attempt has been

made to establish links between the capital assets

available to households, and how the latter are

able to make use of them in the face of external

factors such as the economic environment and

vulnerability context. However, first a brief

description of the socio-demographic background

is given. Although the same questionnaires and

approach were used for the surveys in both states,

the respective teams chose slightly differing

analytical methods for some topics.

Socio-demographicBackground Information

Table 4 provides some selected socio-economic

background data for the households in the four

survey districts, that is, two in Madhya Pradesh

(Betul and Narsimhapur) and two in Orissa

(Bolangir and Nayagarh). Interestingly, with 4.9

members per household, the average household

size is smaller in Orissa than in Madhya Pradesh,

Assets Base and Access to

Non-farm Livelihoods12Chapter

Table 4: Socio-demographic background information on Madhya Pradesh and Orissa

Sample size

Households interviewed (number)

Household composition

Female-headed households (%)

Average size of households (mean)

Average age of household heads (mean in years)

Total male adults per household (mean)

Total female adults per household (mean)

Total number of income earners per household (%)

Caste composition (% of households)

General castes

Other backward castes

Scheduled castes

Scheduled tribes

Madhya Pradesh (Betuland Narsimhapur)

799

4.8

5.9

44.76

1.8

1.6

41.0

17

27

14

42

Orissa (Bolangir and Nayagarh)

800

5.3

4.9

44.79

1.6

1.5

39.9

6

45

35

14

Source: Questionnaire survey (July 2002)

Note: The chulla was taken as the means for defining the household unit for the survey (see above).

where it is 5.9 members. This may be due tosocio-economic factors such as smallerlandholdings in Orissa or a higher level ofoutward migration, resulting in smallerhouseholds. Approximately 5% of householdsare headed by females in both states and theaverage age of the household heads is also almostidentical (i.e. 45 years). The figures for bothstates show that there are more adult malemembers in households than adult femalemembers, and that about 40% of householdmembers are income earners, indicating arelatively good dependency ratio.

The caste composition shows some markeddifferences, in that Orissa has substantially morehouseholds belonging to other backward castesand scheduled castes, whilst Madhya Pradesh hasa higher proportion of general/upper castes andscheduled tribes. However, these figures aremasking geographical differences within the twostates, for example, Betul District in MadhyaPradesh has a much higher tribal population thanNarsimhapur District. A key aspect is that theproportion of households from scheduled castesand scheduled tribes is around half of the total inboth states, indicating large numbers of very poorpeople.

The Household AssetsBase

Access to a number of key capital assets has beenexamined from an RNFE viewpoint. Access toland, other natural resources and livestock hasbeen included given that these assets are oftenimportant for the development of non-farmlivelihoods in rural areas. Agriculturalproduction is also important for the developmentof the non-farm sector in that spin-off effects arecreated as a result of upstream and downstreamlinkages (Davis, 2003; Haggblade et al., 2002;Reardon et al., 1998).

Access to educationSkills, knowledge and information are generallyseen as a prerequisite for households to be able to

take advantage of many new livelihoodopportunities. In addition, it is accepted thataccess to education is generally required for theformation of this type of human capital. As Table5 highlights, a major proportion of the rural adultpopulation in the survey areas is illiterate, but thesituation is significantly worse for women. Forexample, in Madhya Pradesh, about one third ofadult males and two thirds of adult females areilliterate. Of the households who are not literate,few have education levels beyond primaryeducation and very few household members haveobtained some form of formal vocational training.

The key issues in education are how to reduce thehigh level of illiteracy, and how to develop acurriculum that takes labour market requirementsinto account more effectively. Whilst themajority of children now go to school, some ofthe marginalized families are not able to sendtheir children regularly. For example, migrantworkers may take their children with them whenthey move to other districts or states. Agriculturalwage labourers sometimes consciously take thedecision to take children with them to the fields,arguing that this type of informal training isrequired as part of their education in order to beable to earn a livelihood later in life. On the otherhand, if children of migrant workers are leftbehind in their home village, then it is often theolder girls of the family who are required to lookafter their siblings, which is likely to compromisetheir education.

It was also reported that parents are becomingdisillusioned about the usefulness of educationgiven that young adults find it difficult to obtainjobs corresponding to their qualifications. In thiscontext, it appears important that in future thereis a better balance between academic educationand vocational training. Youngsters can beintroduced to the latter at the age of about 12years, where practical topics can be taught with aview to broadening their long-term skill base(e.g. animal husbandry, food processing, healthcare, information and communicationtechnology, mechanical repairs, etc.). Curriculumformulation for vocational education should also

8

Assets Base and Access to Non-farm Livelihoods

9


Table 5: Access to selected livelihoods assets in Madhya Pradesh and Orissa

Human capital – access to education

Illiteracy – % of total population

Illiteracy – % of female adults

Illiteracy – % of male adults

Primary education – % of total population

Primary education – % of female adults

Primary education – % of male adults

Social capital

Membership of self-help groups

(% of households with members belonging to self-help groups)

Natural capital

Land ownership

(% of households owning land)

Average size of land holdings*

(mean, acreage)

Access to forest land (% of households with access)

Access to common grazing land (% of households with access)

Livestock ownership (% of households owning animals)

Dairy cows

Non-dairy cows

Oxen/bullocks

Buffaloes

Calves/heifers

Goats

Poultry

Ownership of physical assets (% of households owning assets)

Tractor

Ox-cart

Plough

Irrigation equipment

Thresher

Flour mill

Motorcycle

Bicycle

Television

Radio

Sewing machine

Loom/spinning equipment

Access to electricity

(% of households having access)

Electricity at home (e.g. for lighting)

Electricity at farm (e.g. for equipment such as pumps)

Electricity for household industry (e.g. for mills)

Madhya Pradesh

n.a.

64

35

n.a.

13

18

11

58

8.4

35

19

34

24

44

20

40

10

16

6

38

42

27

7

2

11

41

25

14

9

0

83

22

2

Orissa

40

n.a.

n.a.

37

n.a.

n.a.

29

70

2.2

71

80

17

11

41

6

14

15

13

0

12

37

4

0

0

5

52

5

14

1

0

13

1

0

Source: Questionnaire survey (July 2002); figures have been rounded

*Only takes into account households that actually own land.

take into consideration the views and demandsexpressed by local entrepreneurs who arepotential employers.

Land ownershipReflecting the natural resources endowments of thetwo states, the average size (3.4 ha) oflandholdings is considerably larger in MadhyaPradesh. At the same time, it is important to notethat only 58% of rural households own land inMadhya Pradesh and that average farm size figuresin both states also tend to hide the fact that somefarmers may own quite substantial landholdings(e.g. 40–80 ha [100–200 acres] in a few cases),whilst a substantial proportion own less than anacre. The scale of landholdings broadly reflectscaste categories, for example, the general casteshave the largest holdings of fertile land, followedby the other backward castes. In tribal areas, thescheduled tribes are more likely to have access toland than the scheduled castes, who tend to havethe smallest landholdings or are landless.

In Orissa, 70% of rural households own land, butthe average size is only 0.9 ha (2.2 acres) (Table5). The land ownership patterns appear to be afactor contributing to distress-push diversificationinto other livelihoods options, includingmigration. On the other hand, rural communitiesin Madhya Pradesh are more likely to rely onagriculture in the foreseeable future. For example,there are fertile agricultural areas in Narsimhapurthat attract migrants from other parts of the stateor country.

Accessibility of common grazingland and forestsAccess by the community to these resources is animportant component of rural livelihoods, firstlythrough supply of fodder for livestock andsecond through provision of access to forestproduce (both timber, including fuelwood, andnon-timber products), for householdconsumption and marketing. Access to commongrazing land is available to the majority ofhouseholds in the areas surveyed in Orissa, butonly to one third of households in Betul District

and less than 10% in the agriculturally dominatedNarsimhapur. Access to common grazing is ofteneroded by encroachment, by either the wealthy orthe landless.

Livestock ownershipOwnership of animals is important in the RNFEcontext, as it often provides a secondary incomefor households and also represents one of theentry points into non-farm livelihoods. Bullocksand cows are the most commonly owned animalsin the villages. Whilst ownership of bullocks andoxen is similar across the two states, there aremarked variations in the ownership of cows. Inparticular, households in the agriculturally richerdistrict of Narsimhapur are more likely to owndairy cows (i.e. about 50%), whilst in the otherdistricts, this percentage is of the order of 12–20%. Nevertheless, there are factors that inhibitthe exploitation of the full potential of dairyproduction, most notably, the lack of anintegrated marketing and processing system. Inthis respect, lessons can be learned from otherstates such as Gujarat.

Although goats and poultry are usuallyconsidered a useful option for poverty reductionamongst marginal groups, ownership of suchlivestock is low. Constraints to livestockownership include the unavailability of pasture,particularly for the landless and marginalfarmers, inadequate veterinary support, and theamount of care required by poultry. In addition,larger-scale landowners reportedly discouragegoat herding in the villages for fear of damage totheir crops.

Access to financeCredit has been frequently stated by surveyparticipants as a prerequisite for entry into non-farm livelihoods. Information was sought onboth formal and informal credit institutions,however, it proved difficult to obtain a clearpicture since many villagers were reluctant todiscuss financial matters. Reasons for thisinclude the fear of association with a defaulter’sstatus in the case of formal banks, and in the case

10


of informal loan sources, fear that givinginformation might have negative repercussionson future loan availability from money-lenders.On the other hand, interviewees were moreforthcoming when asked for specific constraintsassociated with each loan source.

Whilst recognizing these caveats, it is apparentthat formal credit is, or has been in the past,accessed to a fairly wide extent in both states(e.g. 23% in Bolangir) from sources such ascommercial banks, co-operative banks, or ruraldevelopment schemes (e.g. Integrated RuralDevelopment Programme). At the same time, it isalso apparent that many households became debtdefaulters as a result of using credit for unviableenterprises. According to the study, formal loansare mostly taken out for agricultural production,and to a lesser degree for non-farm enterprises.

Despite substantial amounts of resources spentby the government on credit programmes andexpanding the rural banking network, the overallimpact on enterprise creation and povertyreduction has been disappointing. According toFisher and Mahajan (1997), reasons are that“rural lending has become standardized across allfinancial agencies, with no innovation oradaptation to the special needs of the localpopulation”, and that “lending has becomepoliticized, with local politicians using povertylending for extending patronage”.

It is, therefore, unsurprising that money-lendersand local landlords still play a leading role in thesupply of informal credit despite charging highinterest rates. This is partly because of difficultyin accessing formal credit, but also because ofties that can develop over time between thoseseeking credit and informal sector lenders (e.g.landowners or traders). Informal sector interestcharges are as high as 100% per annum,compared with only 12–13% in the formalbanking sector. However, the transaction costsassociated with formal credit may mean thatthere is little difference in real cost between thetwo sources of credit.

Social capitalDespite official promotion, membership of self-help groups was found to be relatively low in alldistricts. Expansion in the number of self-helpgroups represents a major current initiative bygovernment programmes. Self-help groups aredesigned to take into account the real needs ofthe poor through a multi-sectoral approach, withspecial emphasis on micro-credit and women asbeneficiaries. Other perceived benefitsassociated with membership of self-help groupsinclude support in cases of personal problems,access to information and better access togovernment services. However, functionalliteracy, skills and capacity building were onlyindicated as benefits by a few surveyrespondents, who also indicated that self-helpgroup procedures and time requirements wereconstraints to their usefulness. Other problemsincluded caste barriers, lack of awareness anddomination of self-help group activity by certainindividuals. In future it is important that inaddition to savings and credit schemes, grouppromotion places more emphasis on technicalskills and the development of market linkages(Adolph, 2003). Given the lack of critical massof small groups, the creation of self-help groupapex organizations also needs to be considered.

Infrastructure and physicalassetsMost of the equipment owned for productivepurposes is related to cultivation and includesploughs, ox-carts and irrigation equipment. Onthe other hand, ownership of physical assetsrequired for non-farm activities is distinctlysmall in the majority of the villages surveyed.This includes ownership of equipment such asflour mills, rice hullers and jaggery makingequipment.

Infrastructure such as roads, electricity supply,access to markets and access to information werecovered by the survey. With respect to roads,access as a whole is considered poor, partly dueto insufficient maintenance of the existing roadnetwork. The negative impacts arising from

11


limited road access include both socialcomponents (limitations to access to educationand health) and economic aspects (access tomarkets). Electricity was frequently mentionedas a constraint to both agriculture and the start ofnew non-farm enterprises. Villagers mostlycomplained about the reliability of the powersupply. Although the infrastructure may be inplace, shortage of power was frequentlymentioned as a constraint to farming (e.g. for theoperation of irrigation pumps) and post-harvestactivities, such as threshing and milling. Manyvillage businesses also reported that power wasonly available for a limited period of time perday. As a result, some owners of smallenterprises have bought generators or diesel-powered equipment (e.g. threshers).

It is clear that a combination of capital assets isrequired for households to be able to diversifyinto non-farm livelihoods. In particular, humancapital (i.e. skills and health) and access tofinance tailored to the needs of micro- and small-scale entrepreneurs, appear important. Access tofinance does not necessarily imply credit, sincepromotion of savings is often a more effectivestrategy, especially for the poor. Social capital inthe form of networks and self-help groups playsa more important role for marginalized groupssuch as women and lower-caste communitymembers. At the same time, a number offavourable exogenous conditions, largely beyondthe control of households, need to be in place.These include good quality infrastructure, theexistence of functioning markets (i.e. forservices, goods and labour), and an economicenvironment that is conducive to enterprisedevelopment.

Employment and IncomePatterns

An attempt was made during Phase I of thesurvey (i.e. PRA) to identify the different incomegenerating activities in rural areas. Thisinformation was used in the design of thequestionnaire section focusing on sub-sectors,

employment and income patterns. Thequestionnaire survey (Phase II) tried to capturedata for all income earning household membersregarding their sources of income (i.e. up to threesub-sectors) and the nature of their involvementin the sub-sectors (e.g. landowners or wagelabourers). The households were asked for dataon their current income (i.e. using 2001 as thebaseline) and the past (i.e. the mid-1990s), so thatany significant shifts could be discerned.

It is pertinent to reiterate here that though thesame questionnaire and approach were used fordata collection in both states, the differentpriorities of the local collaborators in the twostates resulted in different analytical approaches.Hence, the income and livelihood data for the twostates cannot be presented in the same format.

Madhya PradeshIn Madhya Pradesh, data from PRA findingsgenerated through village household lists andsocial maps, indicated that three out of eightvillages surveyed have a high degree of non-farmemployment (30–50%), whereas five villagesshow a lower level (10– 25%) (Som et al., 2002).This takes into account both full-time and part-time incomes from the non-farm sector.

The data presented in Table 6 indicate that theprimary sector (i.e. mainly agriculturalproduction) dominates the income sources ofhousehold heads and spouses alike. For small-scale and marginal farmers in particular, this is inthe form of cultivation on the family farm andagricultural wage labour on larger farms.

The household heads that declared themselves asincome earners have on average about 1.5sources of income, that is, jobs during the year,both on-farm and off-farm. In 2001, according tothe household survey, 49% of the householdheads in Madhya Pradesh had an RNFE incomesource, but it needs to be borne in mind that thesefigures are not based on monetary values butsimply on the basis of RNFE activities carriedout during the year.

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Amongst those spouses that responded, each alsohas about 1.5 jobs. In the tribal areas, collectionof non-timber forest products (NTFPs) isprimarily a female activity. Otherwise spouses(generally women), have a considerably lowerpresence in the RNFE sector than men (i.e. 19%in total, for those members of the household whoare income earners). Approximately two thirds ofhouseholds in the tribal-dominated Betul Districthad spouses (women) that declared themselves asincome earners (66%), whilst the correspondingfigure was only about one third in NarsimhapurDistrict (35%). This is explained by the greatergender equality found in tribal society thanamong other social groups in the rural areas.

Compared to the past (i.e. the mid 1990s), theextent of the RNFE has increased, albeit at arelatively slow pace. Amongst the incomeearning household heads, about 31% reportedthat they had income from RNFE sources in thepast compared to 49% in 2001. For spouses andother male income earners, the corresponding

figures are 12% and 19%, and 27% and 42%,respectively. Only 17% of other female incomeearners declared that they had RNFE incomesources in one form or another.

Amongst the different RNFE sectors, there arefew that stand out as more important sources ofemployment. The construction sub-sector (i.e.building and road construction combined)provides employment for 17% of householdheads but for the other main RNFE sub-sectors,including jaggery processing, trade, health andeducation, employment is below 5% ofhouseholds. The health sub-sector is moresignificant as it provides employment for bothmen and women (4–5%).

The collection of income data proved to bedifficult as households were often reluctant toprovide specific information. However, themean, net household income across the twodistricts in Madhya Pradesh is estimated at Rs21,200 per annum, compared to a median of Rs

13


Table 6: Household members activities by sub-sectors in Madhya Pradesh (2001) (expressed

as a percentage of all activities)

Sub-sector groups

Total respondents (numberout of 799 households)

Primary production

Agricultural and food processing

Other primary processing

Traditional manufacturing

Modern manufacturing

Services

Other

Total RNFE

Total (all jobs/all sectors combined)

Householdheads

732

102.5

5.6

0.5

4.2

20.6

15.6

2.7

49.3

152

Spouses

415

136.6

2.2

0.0

0.5

5.8

7.7

2.7

18.8

155

Other maleearners

352

109.7

6.5

0.6

0.9

12.8

19.3

2.3

42.3

152

Other femaleearners

125

131.0

7.1

0.0

0.0

1.8

7.1

0.9

16.8

148


Note: RNFE includes agricultural and food processing, other primary processing, traditional manufacturing, modern manufacturing andservices. Percentages can exceed 100% in one sub-sector group if individuals undertake several jobs (e.g. cultivation on the family farm,agricultural wage labour and collection of non-timber forest products (NTFPs)). The latter activity is common in Betul District, in particularamong women.

10,6008. Total average income of householdheads is of the order of Rs 16,700, compared to amedian of Rs 7200, whilst the average figures forspouses is Rs 4200, compared to a medianincome of Rs 2600. The median income reflectsa more representative picture for the majority ofhouseholds since means are affected by highrelative incomes earned by a very small numberof individuals.

Orissa

The current occupational characteristics ofhousehold heads in the two districts of Orissa areillustrated in Table 7, together with those in thepast (again defined as the mid 1990s). Theseshow that agriculture has been, and remains thepredominant activity, but there are clearlydiverging trends, since in Nayagarh, theimportance of agriculture has remained constant,whilst in Bolangir, it has declined. A group ofactivities that relate to construction (brickmaking, masonry work, road construction, etc.)have become increasingly important in Bolangir,whilst in Nayagarh, bamboo and wood-based

activities, mining and manufacturing aresignificant, as well as construction. In both areas,natural resource-based activities have tended tostagnate or decline. Trading is an area of modestbut growing importance in both districts. InNayagarh overall, there has been relatively littlechange in shares between different activities, incontrast to Bolangir.

Certain activities, notably crop production andNTFP collection, are open to, and undertaken byall castes. In contrast, a significant number ofother activities are constrained by casteboundaries, for example, those related tolivestock and associated products (e.g. milk anddairy produce, goat and animal rearing).

The number of activities undertaken byhousehold heads has increased in both districts ofOrissa, a pattern that is also reflected in theactivities of other household members. Growingdiversification in Bolangir appears to be drivenmainly by distress-push factors – given pooragricultural opportunities plus risk associatedwith the latter (also see above in relation to

14


Table 7: Major livelihood activities of household heads in Orissa (expressed as a percentage

of all major livelihood activities)

Crop production

NTFPs

Bamboo and wood

Building and construction

Trade

Mining and manufacturing*

Salaried employment+

Other

Present(2001)

57

4

2

24

6

2

2

1

Past(mid 1990s)

64

5

2

20

4

1

2

2

Present(2001)

63

2

9

7

4

6

2

7

Past(mid 1990s)

63

2

10

6

3

6

2

8


*Mainly metal manufacturing.

+School teachers, government employees, etc.

Bolangir Nayagarh

8 In 1993–94, the poverty line was set at Rs. 205.84 per capita per month (i.e. around Rs 2470 per year) for rural areas and Rs 281.35 forurban areas (Mehta and Shah, 2003).

landownership and small farm sizes). InNayagarh, diversification also occurs, but theposition is more mixed with both push and pullfactors driving diversification.

Spouses’ (wives) activities to some extent reflectthose of heads of households but there are alsosome interesting differences. For example, inBolangir, whilst agriculture remains the mostimportant income generating activity for wives,the gap is smaller in relation to other activities.Instead, livelihood diversification is largely infurther agricultural processing and livestock, andnatural resource-based activities, especiallyNTFP collection. However, these two groups ofactivities show contrasting trends. Those relatingto agriculture and livestock have increasedsignificantly over time, whilst NTFP collectionhas declined.

Table 8 indicates the range of incomes earnedacross the four main caste categories for majorlivelihood activities in the two survey areas inOrissa. Recognizing that income data may besensitive and that there are possibilities of mis-recording, conclusions need to be treated withcaution. Nonetheless a number of points can bemade. Overall, the table shows that incomes peractivity are substantially higher in Nayagarhcompared with Bolangir, tending to confirm the

assessment of relative resource endowment of thesurvey areas in the two districts. Amongstactivities in each district there are a number whichprovide roughly similar income levels, that isagriculture and a number of RNFE occupations. Anotable exception is provided by NTFPs, whereincomes are much higher in Nayagarh. Certainactivities (e.g. some types of trading and salariedemployment), provide very high incomes for thefew in a position to undertake them.

Overall, income disparity between caste groupstends to be highest in those occupations where thereis a need for initial capital, for example, in terms ofownership of assets (which may have beeninherited), or through human resource skills derivedthrough education (e.g. in order to access salariedemployment). These assets are most commonlyfound amongst members of the general castes.

Constraints on Non-farmLivelihoods

The main barriers to entry into the RNFE atmicro-level identified during the course of thesurvey, include limitations to most factors ofproduction, coupled with constraints onmarketing and the business environment. Socialand institutional constraints are also pervasive.Each of these areas is now considered in turn.

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Table 8: Major livelihood household income categories according to sub-sectors in Orissa

(Rs ‘000 per annum)

Crop production*

NTFPs*

Bamboo and wood products

Building and construction

Trade*

Mining and manufacturing

Salaried employment

4.3–7.2

0.7–1.1

3.7–7.5

5.2–7.1

3.6–91.8

4.8–8.5

8.5–42.0

6.6–12.8

2.0–7.0

5.0–11.0

5.0–13.0

7.7–21.2

6.5–19.2

20.0–70.0


*Activities undertaken by all caste groups.

Bolangir Nayagarh

Inadequate credit facilities are the result of avariety of factors constraining access, forexample, defaulter status and absence ofcollateral security amongst the marginalized,lack of information about credit sources,complicated bank procedures, and the prevalenceof corruption. However, credit, especially that inthe public programmes which often predominate,is often tied to specific areas of investment whichare ill-suited to the needs and capabilities ofrecipients. Investments, therefore, often lead todefault and potentially increased indebtedness.

Lack of market access includes the existence of‘predatory’ intermediary traders blocking theflow of information on market prices andmarketing opportunities, competition in theRNFE sector rendering it unprofitable for smallentrepreneurs, lack of organized collectivemarketing, inefficient government mandis (i.e.markets), the existence of unofficial mandis, andinability to store products of the RNFE sector.

Weak/inadequate managerial capacities andskills to initiate a potential RNFE arise from theinability to undertake structured analysis ofmarkets, unambitious RNFE planning whichfocuses on the village/cluster of villages as thetarget for RNFE promotion, low levels ofeducation inhibiting employment possibilities,and a pessimistic attitude toward starting newenterprises, in particular amongst wagelabourers.

Inadequate raw material supply, especiallywith respect to traditional RNFE activities, isrelated to depleting natural resources, andharassment faced by people during collection ofsuch materials.

Weak infrastructure facilities in the case ofroads stem both from inadequate initialinvestment and planning, and from subsequentlack of road maintenance that reducesaccessibility. Inadequate power supply inMadhya Pradesh is partly due to the loss of asubstantial source of power supply whenChattisgarh became a new state in 2002. In

Orissa, the principal problems arise from poorrevenue collection systems which have knock-oneffects in limited maintenance of powerdistribution networks, that as a result havebecome increasingly unreliable.

Market competition for traditional productsmanufactured in the villages arises fromcompetition with ‘modern’ substitute products,due to quality issues, consumer perceptions andrelative prices. This may include the productionof foodstuffs (e.g. gulli oil) or manufacturing oftraditional household goods (e.g. pottery, woodor bamboo items).

Caste and class barriers impact especially uponthe marginalized preventing them from takingadvantage of opportunities that may arise in theRNFE sector. Caste itself often defines whichactivities people can undertake, and lower castesare often excluded, especially in relation to foodproducts consumed by upper castes. Upper castesare more likely to engage in successful RNFEactivities because of better asset endowment,whilst at the same time trying to block access bythe marginalized in the village to agents ofgrowth, such as education, information and credit.

Weak business environments are common inrural districts and small- and medium-sizedenterprise (SME) representatives pointed out thatthere is still a plethora of regulations and lawsfrom before liberalization, which stifle thecreation of new enterprises in rural areas. Growthin both the on-farm and off-farm sectors dependson a regulatory framework which is conducive tobusiness at district level whilst protecting labourrights and environmental needs.

Conclusions: Sub-sectorOverviews in Orissa andMadhya Pradesh

The potential for the RNFE can be illustrated byassessing the characteristics and constraintsidentified above in the context of measureswhich might result in more effective

16


development. This section briefly reviews suchissues on a sub-sector basis. The sub-sectorclassification has been adapted from Fisher andMahajan (1997) and the main categories of theclassification include:

(i) primary production (e.g. crop production,milk production, rearing of animals, NTFPcollection)

(ii) agricultural and food processing (e.g.jaggery making, pappad bari making)

(iii) other primary processing (e.g. mining, bidi-rolling)

(iv) traditional manufacturing (carpentry)

(v) modern manufacturing (mechanical repairs,construction, etc.)

(vi) services (e.g. trade).

In this study, the non-farm economy was definedas comprising sub-sector groups (ii)–(vi).

Primary productionA thriving agricultural sector is important for thedevelopment of a RNFE and agriculturecontinues to form the backbone of the ruraleconomy. However, there are major differencesbetween the two states. As mentioned above, thelandholdings in Madhya Pradesh are larger thanin Orissa, which has implications for thedynamics of the sub-sector. In Orissa, agricultureis relatively undynamic, and in Bolangir inparticular, it appears to be a sub-sector in declinedue to fragmentation of plots, poor soils, erraticrainfall and limited irrigation. Madhya Pradesh,on the other hand, has a stronger agricultural baseand has proved to be dynamic in the past when itwas able to respond to market opportunities andestablish itself as India’s leading soyabeanproducing state. Narsimhapur district inparticular is renowned for its fertile soil and highyields, whilst Betul is a district with a largenumber of tribal households who tend to ownfarms. Nevertheless, agriculture in MadhyaPradesh is also undergoing change due todeclining farm sizes (because of growingpopulation density), decreasing soil fertility, andthe effects of liberalization (e.g. increasing

competition on the domestic soya oil market dueto imports). More diversification is required inthe future (e.g. into horticulture, floriculture,maize and pulses), and irrigation will play anincreasingly important role.

The collection of NTFPs is important for theinhabitants of tribal/forested areas (e.g. BetulDistrict), where it often provides a seasonalsecond income. In particular, women are engagedin the collection and selling of products such astendu leaves and amla. A major problem in manyareas is the declining natural resource base as aresult of encroachment on forest areas (despiteprotection measures that are theoretically inplace). Whilst markets for some products remainstrong, others are weak. In some locations (e.g. inOrissa), the continuing state monopoly in thetrading of certain NTFP products results inrelatively poor producer prices. Improvedmeasures for conservation are vital, but difficultto implement. Cultivation of certain species forproducts with a high market value might also beconsidered to counter the diminishingavailability of forest resources. There is alsosome scope for improving marketing, forexample, through better group organization,value addition and more effective linkages to thenational market.

Livestock ownership is generally limited, whichmay indicate scope for further development inthe sector. For the poor, goat and poultry keepingare the most realistic options (caste in any eventmay confine opportunities), but intensivecultivation in many areas may lead to conflictswith those producing crops. Common grazingareas are also increasingly becoming eroded, forexample, in Orissa by encroachment both by thewealthy and the landless. Dairying developmentis feasible because of strong consumer demandfor milk and associated products, but ownershipof dairy cattle is more likely to be an option forthe better-off. For all sectors, there is likely to begrowing pressure towards intensive feed regimesand availability of feed is central to potential fordevelopment. In addition, consideration needs to

17


be given to the marketing of products, includingcompetition from other states and countries.

Increased fish production can be promoted as aresult of better water harvesting and managementpractices (e.g. small-scale dams and ponds).However, many existing water bodies that werecommunally held are being taken over by therich, whilst others are being exploited forirrigation rather than fish culture. As withlivestock, feed availability is a key issue and thelogistics of supply of fish fry/fingerlings mayalso be problematic. The degree to which thepoor can be involved in such an enterprise islikely to depend heavily on the extent to whicheffective local institutions can be developed, forexample, to secure access to water bodies, toassure relevant inputs and to develop requiredexpertise.

Agricultural and foodprocessingProcessing industries in the survey areas havevariable access to markets, and agro-processingoverall was quite limited in Orissa. Theoverriding constraint in Orissa is the weakness ofthe agricultural sector which limits processingoptions, and often chronic poverty which limitslocal demand for processed products. Whilstjaggery making is thriving in parts of MadhyaPradesh and has an established market,production of pappad and bari was found to lacklinkages with the wider market and the customerbase at the village level is small. There are alsosocial barriers which inhibit the use of the locallyavailable, lower caste labour force, which in thecase of food products can represent an absoluteprohibition. A small number of grain mills wereencountered and some mill owners have startedto use diesel engines where shortage of powersupply was reported as a major constraint tobusiness.

Other primary processingVery little activity was encountered in this sectorin the villages surveyed in Madhya Pradeshalthough quarrying was of local importance in

Orissa. The sub-sector appears to be concentratedin pockets (e.g. mining and quarrying), however,it has potential due to the natural resourceendowment in both states. Most NTFPs areconfronting problems associated with a rapidlyshrinking resource base as indicated above. Thuswhilst in some instances there may be scope toimprove value addition, raw material availabilityand quality are likely to constrain development.At the same time, the protection of workers isparticularly important in this sub-sector, forexample, in quarrying and bidi-rolling (also seeFisher and Mahajan, 1997).

Traditional manufacturingThis sub-sector is undergoing profound changesdue to competition with ‘modern’ products (e.g.plastics), lack of raw material andmechanization. Some of the professions needassistance to make the transition to ‘modern’manufacturing (e.g. traditional blacksmiths tomechanical repair, or carpenters making woodenagricultural implements to ‘modern’ furniture).For natural resources-based manufacturing (e.g.bamboo products), growing constraints on rawmaterial supply require flexible policies whichcombine resource conservation with improvedaccess, and which involve both manufacturersand the wider community. This type ofintervention, whilst necessary, is likely to bedifficult to implement because of caste and othersocial and institutional factors.

Modern manufacturingGrowing demand drives certain categories of thissector, such as road and cement-based buildingconstruction, mechanical repairs andmanufacturing of metal products. Constructionoverall appears to be the most common andsometimes the most dynamic sector, even inareas where other economic sectors may beconstrained (e.g. in areas of Orissa such asBolangir). Mechanization of agriculture andother sections of the economy also plays a role.Other categories such as tailoring facecompetition from industrially manufacturedproducts. Options to stimulate the sector include

18


the enhancement of the skill base, improvedinfrastructure, business support services andmarket linkages for those sectors that havepotential. Linkages with the large-scale corporatesector can be encouraged on a selective basis(e.g. input supply from more rural districts).

ServicesOn a national scale, the service sub-sector (e.g.trade, transport, telecommunications, catering,tourism, education and health) is growing rapidlyand has good prospects as a result of anexpanding economy and rising incomes (also seeFisher and Mahajan, 1997). At the local level inOrissa and Madhya Pradesh, the picture is lessclear. Whilst low entry requirements mean thatthe sector (in both rural and associated small

town locations) is accessible to the poor,including unemployed youth, margins andearnings are low because of the intensecompetition. In poorer rural areas, demand evenfor basic services is weak and the sector,therefore, has limited growth prospects. Thus it isthe more dynamic rural areas (e.g. parts ofMadhya Pradesh) that are more likely to have athriving service sector. In the past, the publicsector was a principal provider of opportunitiesfor new entrants into the labour market; however,the reverse is now happening in the wake ofliberalization. Despite these caveats, the tertiarysector as a whole has considerable potential foremployment generation, if not for generation ofsubstantial incomes.

19


The Need to UnderstandRural-urban Linkages

Whilst much of the research under this projectfocused on village level issues, it is recognizedthat small- and medium-size towns surroundedby a rural hinterland form an integral part of therural economy. In India, settlements with 5000 ormore inhabitants are considered urban (providedthey have a population density of at least 400persons per square kilometre and at least 75% oftheir male working population is engaged in non-agricultural and allied activities). In many otherdeveloping countries, the population thresholdused to distinguish urban from rural locationscan be 10,000 or even 20,000 inhabitants. Inthese countries, economic activity that is carriedout in relatively large settlements is, therefore,considered rural.

Irrespective of definitional issues, the need toconsider small- and medium-size towns instudies of the rural economy and interventionsaimed at developing it arises because mucheconomic activity in these locations is closelyinterrelated with the rural hinterland, forexample, through product, labour and financialflows. Furthermore, village households dependon, and interact with town centres in the pursuitof diversified livelihood strategies and activities.Finally, towns often offer an appropriate entrypoint for policy and investment interventions thattarget rural areas and households.

While generally benefiting from the growth oftheir hinterland, and the resulting expansion oflocal markets and surplus available forprocessing and marketing, rural towns can in turn

be instrumental in stimulating and sustaining anincrease in economic activity and incomes inthose areas. Their potential role in inputdistribution, financial service provision,agricultural processing, marketing andemployment creation is noteworthy. They canalso provide critical links to wider markets.

Yet small- and medium-size towns may fail tocontribute to the development of the localeconomy, and may even exacerbate existinginequalities, as a result of excessive socio-economic polarization within local societies,inadequate institutional frameworks and policyfailures at the macro-, meso-, sector- and micro-level (Hardoy and Satterthwaite, 1986; Douglass,1998; Tacoli, 1998; Satterthwaite, 2000). Policiesand interventions that promote integrateddevelopment of small- and medium-size townsand their hinterlands, whereby symbiotic roles areenhanced and negative linkages mitigated, mustbe based on a good understanding of the scale andnature of actual and potential inter-dependenciesbetween rural town networks and surroundingareas, and between different locations along theurban hierarchy.

Small Rural Towns in theLocal Economy

Urbanization levels and trends

An initial survey comprising 100 households infour villages of Bolangir district, Orissa, showedthat village households engage in much moreregular and intense interaction with blockheadquarter towns than with any other urbancentres, including district headquarters and state

Rural-urban Linkages and

the Role of Small Towns 13Chapter

capitals (Wandschneider and Mishra, 2003). As aresult, it was decided to focus research on theblock headquarter towns. A formal questionnairesurvey involving 183 enterprises was conductedin six towns – five block headquarters and onedistrict capital (see Table 3 for selected towns).This was complemented by 30 semi-structuredinterviews with key informants in the private andgovernment sectors in the same six locations.These differ in terms of proximity to other townsand size. Excluding Betul, which is a districtcapital with nearly 85,000 inhabitants, thepopulations of the other towns range from around5000 to 23,417 inhabitants. Findings from thesmall rural town survey are summarized inWandschneider (2003).

Madhya Pradesh and Orissa are overwhelminglyrural. Nayagarh has the lowest urbanization rateamong the four chosen districts and in the wholeof Orissa state, with less than 5% of thepopulation residing in urban centres, whilst Betulhas the highest of the study districts at around20%. Despite low levels of urbanization, there isa clear long-term growth trend in towns in bothMadhya Pradesh and Orissa: not only is thenumber of localities classified as urbanincreasing over time, but the population of mosttowns is also expanding at a faster pace than thatof villages as a whole.

Despite these similarities, there are alsosignificant differences across districts. In Betuland Narsimhapur (Madhya Pradesh), both theurban and rural populations are expanding and inboth districts the overall decadal populationgrowth between 1991 and 2001 was between18% and 21%, respectively. In contrast, inBolangir and Nayagarh (Orissa), the decadalgrowth of the rural population, which accountsfor the bulk of the district population, was under10%. In Orissa, urban population growth,therefore, seems to be occurring in the context ofrural stagnation, and partly may be aconsequence of lack of opportunities within thevillage economy, whereas in the two districts of

Madhya Pradesh economic opportunity may beexpanding both at the village and town levels.

Economic activities in ruraltownsServices, including trade and transport, constituteby far the most important area of enterpriseactivity in small rural towns, with nearly 75% offirms interviewed operating in this sector. Thedominance of services in the town economy iseven more pronounced than the data suggest sincethe survey did not cover public services such asadministration, police, health and education. Sometraditional and modern manufacturing firms arealso present in the six study towns and over 20%of interviewed units operated in this sector.Manufacturing activity in towns includes potterymaking, jewellery making, carpet weaving, brassutensil making, tailoring, carpentries, manufactureof leather shoes, and production of agriculturalequipment and implements. However, the range ofactivity is usually fairly restricted, although insome locations a considerable number of peoplecan be found in specific, often traditionaloccupations. Small towns generally host a fairnumber of professions linked to construction,often working as self-employed businesses,although some construction enterprises employseveral permanent workers.

Surprisingly, the number of agro-processingunits is generally limited, even thoughagriculture remains by far the main livelihoodactivity in surrounding areas. It is striking that noagricultural processing enterprise was found inthree of the six locations. In the other towns, thetype of agro-processing is a function of the majorcrops grown in the area, and includes rice, daland flour milling as well as edible oilmanufacture. One town also has a large dairy.The agricultural processing sector seems to beparticularly vulnerable to competition fromoutside producers, for example, many dal mills inOdagoan and sugar factories in Chichli, Betuland Nayagarh (relatively close to both Daspallaand Odagoan) have closed over the past few

22

Rural-urban Linkages and the Role of Small Towns

years. These firms were unable to compete due toproblems in procuring good quality produce,relatively low levels of local demand, difficultiesin accessing distant markets, and competitionfrom outside sources of supply.

Profile of rural town enterprisesand entrepreneursMicro and small units dominate the enterpriselandscape. The typical town enterprise wasestablished with an investment of under US$5000 and generates an annual turnover ofbetween US$ 1000 and US$ 10,000. Enterprisesemploy on average six workers, but in more thanhalf of the cases, the workforce consists of lessthan two workers, often unpaid family labour.The largest firms are usually found in activitiessuch as agro-processing, building or roadconstruction, brick making, motorized transportand grain wholesaling. The scale of enterpriseactivity tends to increase in towns located withinrelatively prosperous agricultural areas becauseof greater availability of raw materials forprocessing and marketing and higher localdemand for goods and services.

Given the nature of enterprise activity in thesurveyed towns, it is not surprising that less thanhalf have a telephone and that only one in ten hasaccess to piped water. Even though over 75% ofthe enterprises are connected to the electricitygrid, economic activity is often disrupted to alarge degree by daily power cuts that may last for4–6 hours. Agricultural processing and modernmanufacturing activities are disproportionatelyaffected by constant power cuts.

There is a clear gender pattern in the ownership ofrural town enterprises. Only one of the surveyedbusinesses, a beauty parlour, was owned andmanaged by a woman. The fact that men controlenterprise activity reflects acute cultural barriersand clearly defined gender roles in both thedomestic and economic sphere, which preventwomen from venturing into full-time businessactivities. Women belonging to upper stratafamilies hardly ever become involved in income

generating activities. In contrast, lower castewomen contribute to household economicactivities and engage in low-paid occupations,often on a seasonal and/or part-time basis, but theyseldom take on a managerial role in enterprises.

The typical rural town entrepreneur is areasonably well educated male, with an averageof 12 years of formal education. Formaleducation levels tend to rise with the technologyand capital employed, suggesting that educationis positively correlated with the value of assetsowned by the entrepreneur and his risk-takingability. Many of the entrepreneurs intervieweddecided to venture into business because they didnot manage to gain salaried employment ingovernment or the private sector.

Many entrepreneurs have benefited from on-the-job training as employees. This has allowed themto learn basic technical skills and gain anunderstanding of other important aspects of theactivity, ultimately enabling them to set up theirown independent businesses. Fewer have receivedformal vocational training, which is oftensponsored by government agencies, such as theDistrict Industrial Centres and the Khadi andVillage Industries Commission. Informal andformal training imparts specific technical skills,and as such was considered useful by almost allrespondents, but it rarely leads to an upgrading ofskills in areas such as marketing and management.

Whilst most entrepreneurs in the surveyedlocalities are Hindu, in towns in MadhyaPradesh, it is not uncommon to find Jains, Sikhsand Muslims well established in specificoccupations. For example, Jains are prominent ingrain and non-timber forest produce trading,whereas Muslims are often involved inmachinery repairs. The participation ofindividuals belonging to scheduled castes andscheduled tribes in the running of enterprises islimited and well below their representation in thepopulation as a whole, signalling acute caste-based inequalities in asset distribution and accessto economic opportunities. Scheduled castes that

23


own businesses are usually active in traditional,caste-defined occupations, such as themanufacturing of brass, copper and leatherarticles.

Over one-third of the surveyed rural townentrepreneurs own land. Average landholdingsize within this group exceeds 10 ha, which isrelatively high in the local context, althoughthere is considerable variation acrossrespondents. Interestingly, for most land-owningentrepreneurs, agriculture is a subsidiary activitycarried out on a seasonal and part-time basis, andsome do not engage in farming at all. This seemsto indicate that individuals with relativelysignificant landholdings are often able todiversify into non-farm enterprises which yieldhigher, more stable and less risky income thanfarming. Moreover, the fact that few landlessentrepreneurs become involved in agriculture byleasing land or as seasonal wage labourers, alsoseems to suggest that such options are ofteninferior to running a small town enterprise.

Enterprise formation is especially high in theovercrowded retailing and petty business sectors,where profits are reported to be declining due toincreased competition. Low entry and exitbarriers as a result of limited capital and skillrequirements explain the higher rate of newbusinesses in these activities. Small-scaletraditional manufacturing also entails lowinvestment levels, thereby attracting a significantnumber of entrepreneurs, with skills often passedon within the family from one generation to theother. Activities with higher investmentthresholds and management skill requirements,and which take longer to break even or involve agreater degree of risk-taking, are beyond thecapacity of most entrepreneurs.

Linkages between rural townsand the local village economyEmployment linkages

Most businesses in the six study towns absorblittle labour due to their small size. In addition, asignificant majority of the workforce is recruited

within the town itself, with most of the remainingworkers coming from nearby towns (Table 9).Consequently, very limited wage employmentopportunities are generated for householdsresiding in neighbouring villages. Therecruitment of labour outside the town is heavilyconcentrated in the few firms employing over 15workers.

The most striking feature of spatial employmentpatterns lies in the disparity between the numberof workers commuting from other towns andfrom neighbouring villages. This discrepancy ispartly due to differences in access to transport:unlike towns, villages tend to lack access toregular, nearby transport services, making itdifficult for residents to engage in wageemployment that entails daily commuting.Another important reason has to do withdifferences in the degree of specialization onnon-farm activities: villagers tend to rely on farmemployment and income to a much greater extentthan town dwellers, and are thereby less able totake employment in town enterprises.

Small towns as market outlets

Small rural towns constitute an important marketoutlet for local village producers, with more than20% of the enterprise units surveyed purchasinginputs from village households living within 25km of town (Table 10). In addition, nearly 50%buy inputs within the town itself, and these areoften produced in nearby villages. Evidence fromBolangir district (Wandschneider and Mishra,2003) confirms the significance of blockheadquarters as markets for local villageproduction.

Most village goods channelled to small ruraltowns is agricultural produce sold to agro-processing firms, wholesale traders and foodretailers. Villagers seldom supply inputs to town-based manufacturing enterprises, but in certainareas they may sell considerable volumes of alimited range of traditional manufactured itemsto wholesaling and retailing firms. For example,cloth traders and a co-operative society in

24


25


Tab

le 9

: P

lace

of

resi

den

ce o

f th

e w

ork

forc

e

Agr

icul

tura

l an

d fo

od p

roce

ssin

g (N

= 7

)

Min

ing,

man

ufac

turi

ng a

nd c

onst

ruct

ion

(N=

42)

Ser

vice

s (N

= 1

34)

Tot

al (

N=

183

)

Wit

hin

tow

n (%

)

43.7

81.5

82.3

69.6

Ano

ther

tow

nw

ithi

n 15

km

(%

)

54.1

10.3

17.3

27.2

Ano

ther

tow

n ov

er15

km

(%

)

0.8

3.3 0

1.2

Vill

age

wit

hin

15 k

m (

%)

1.1 0 0

0.4

Vill

age

over

15

km

(%

)

1.1 5

1.3

2.3

Sour

ce: Q

uest

ionn

aire

sur

vey

(Jul

y 20

02)

Tab

le 1

0:

Loca

tio

n o

f ru

ral t

ow

n in

put

sup

plie

rs

Agr

icul

tura

l an

d fo

od p

roce

ssin

g (N

= 7

)

Min

ing,

man

ufac

turi

ng a

nd c

onst

ruct

ion

(N=

42)

Ser

vice

s (N

= 1

34)

Tot

al (

N=

183

)

Wit

hin

tow

n (%

)

86 55 43 48

Vill

age

wit

hin

25 k

m (

%)

86 5 23 22

Vill

age

over

25 k

m (

%)

57 5 2 5

Tow

n or

cit

yw

ithi

n 50

km

(%

)

57 33 31 33

Tow

n or

cit

yov

er 5

0 km

(%

)

86 57 53 56

Out

side

Indi

a (%

)

0 0 0 0

Sour

ce: Q

uest

ionn

aire

sur

vey

(Jul

y 20

02)

26


Tab

le 1

1:

Loca

tio

n o

f cl

ient

s o

f ru

ral t

ow

n en

terp

rise

s

Agr

icul

tura

l an

d fo

od p

roce

ssin

g (N

= 7

)

Min

ing,

man

ufac

turi

ng a

nd c

onst

ruct

ion

(N=

42)

Ser

vice

s (N

= 1

34)

Tot

al (

N=

183

)

Wit

hin

tow

n (%

)

43 86 97 93

Vill

age

wit

hin

25 k

m (

%)

29

74 83 79

Vill

age

over

25 k

m (

%)

86 17 13 15

Tow

n or

cit

yw

ithi

n 50

km

(%

)

29 19 9 12

Tow

n or

cit

yov

er 5

0 km

(%

)

86 31 10 17

Out

side

Indi

a (%

)

143 0 0

0.5

Sour

ce: Q

uest

ionn

aire

sur

vey

(Jul

y 20

02)

Patnagarh buy sambalpuri sarees and lungi fromvillage handloom weavers; several traders inDaspalla procure leaf plates and cups fromhouseholds living in nearby forest areas; andbusinessmen in Chichli town contract outproduction of brass utensils to village artisans.

Small towns as intermediary marketcentres

The impact of small rural towns upon localproduction patterns and income levels dependslargely on the extent to which they intermediatebetween village producers and non-local sourcesof demand. These locations are often too small toconstitute significant final destination marketsfor goods produced in their vicinity, and whilethey also act as local distribution centres,channelling goods and services to nearbyvillages, the areas serviced tend to be relativelysmall and characterized by high poverty levels.Hence the strategic importance of non-local,especially urban, markets.

Unsurprisingly, product flows from villages tostudy towns are particularly significant for goodsthat are subsequently exported to distant markets,such as pulses and grains (Gotegaon), soya andmilk (Betul), handlooms (Patnagarh) and brassutensils (Chichli). In addition, business volumesin the leather shoe and jewellery sub-sectors(produced in Daspalla and Patnagarh towns,respectively) are relatively significant because asignificant share of local production ischannelled to outside markets.

Despite these examples, data on client location(Table 11) reveal that rural town enterprises inthe study areas are much more reliant on localthan outside markets. In addition, manybusinesses selling to non-local markets havelimited or no backward production linkages tothe local village economy, as in the case ofmodern manufacturing industries in Betul,leather shoe and carpet making in Daspalla, andjewellery making in Patnagarh. It is also the caseof motorized transport businesses, which oftenhave a customer base beyond the local area, and

construction firms, which frequently undertakework in other blocks within the district.

The survey further reveals that little value isadded at town level to village production that ischannelled to outside markets. While someagricultural processing takes place in Betul,Gotegaon and Patnagarh, such activity is eithermarginal or non-existent in the other three studytowns. Moreover, most locally availableresources are processed at village level throughthe use of very simple technologies (e.g. bambooand sal leaves), transformed outside the block ordistrict (e.g. minor non-timber forest produce), orleft unexploited (e.g. medicinal plants).

Finally, key-informant views indicate thatentrepreneurs in towns are not channellingcritical market information and technologiesback to village producers, and thus fail to act asinnovation catalysts in key sub-sectors of thelocal economy, many of which are facingdeclining returns and difficulties in competing inan increasingly integrated domestic market. Forexample, sambalpuri saree retailers in Patnagarhsupply a limited range of designs to traditionalweavers. Contractors of brass utensils in Chichlihave neither the capital nor the necessary skillsand marketing contacts to promotediversification towards decorative items andornaments. In Daspalla block, the governmenthas been promoting a shift to mechanicalstitching among women involved in leaf platemaking, but little product innovation is takingplace, through the introduction of decorativestitches, for example.

In sum, the surveyed towns seem to be playing arelatively limited role in linking the villageeconomy to downstream markets. As discussedbelow, a poor business environment and a weaklocal entrepreneurial base limit the potential roleof rural towns as intermediary market centres. Itshould also be noted that the rural town and itsenterprise sector do not evolve in isolation fromdevelopments in the hinterland economy andother urban locations. A weak local agricultural

27


base undermines the development of a strongagribusiness sector supplying inputs and servicesto farmers, processing their produce, andmarketing it beyond the town and its immediatevicinity. Proximity to larger urban centres servedby better marketing and other economicinfrastructure is another important factor,limiting the ability of smaller towns to attractinvestment and compete in the wider marketplace (e.g. Jabalpur near Gotegaon, Kantabanjinear Patnagarh and Gadawara near Chichli).

Small towns as distribution centresfor imported goods

Small rural towns rely on outside input supplysources to a much greater extent than localsources (Table 10). About 30% purchases inputsfrom towns or cities situated within 50 km andover 40% from towns or cities located at agreater distance. Many small firms also procurenon-local inputs from retailers and wholesalerswithin their own town or nearby locations. Manyof the goods imported are often traded withintown and the local area, with very little valueaddition.

Imported goods often pose no threat to existinglocal production and sometimes are even criticalto certain economic activities, not only withintown but also in surrounding villages. Forexample, artisans such as weavers, jewellers,leather shoemakers, brass utensil makers andstone carvers, rely on raw materials brought fromother regions of India; local farmers require seedand agro-chemicals that are produced elsewhere;and mechanics source spare parts that are notavailable locally. However, certain importedgoods can undermine the competitiveness ofvillage level production, for example, vegetables,rice, flour, wood, garments, shoes, steel utensilsand furniture can be cheaper and/or of betterquality than local products. In other cases, thecompetition posed by imports may pre-emptinvestment in particular activities, such as themanufacturing of agricultural tools andmachinery. Only one small manufacturer ofagricultural equipment and one producer of

agricultural implements were identified in the sixtowns. The development of these activities isconstrained by a relatively weak local demandand competition from firms located in largerrural towns and cities, where enterprises are moreable to supply wider markets and enjoyeconomies of scale.

Supply sources vary with the type of location andinputs. Not too distant, medium-size locationstend to play a greater role for smaller towns,which normally import modest volumes ofrelatively unsophisticated goods. Larger andmore distant locations gain prominence as thesize of the town increases and consumptionpatterns become more sophisticated. Hence,while Daspalla is essentially supplied by othersmall- and medium-size towns within a 150 kmrange, Betul has diversified links with industrialcities within and outside Madhya Pradesh.

Constraints on enterprisedevelopmentA strong and dynamic small town enterprisesector, well linked to the surrounding villageeconomy and wider markets, is essential to thedevelopment of the rural economy. Strategies andinterventions aimed at developing the localeconomy must, therefore, address the constraintswhich inhibit enterprise development in smalltown centres.

Many respondents had some difficulty inidentifying ways in which the wider economiccontext impacts upon their business. Thisdifficulty arises because very small firmsemploying few or no workers, using simpletechnologies, and catering for highly localizedmarkets generally have limited growth potentialirrespective of the policy, regulatory, institutionaland infrastructural environment. The scope forexpansion is limited even where local incomesand demand are rising, since the activitiesdeveloped are usually characterized by low entrybarriers, thus as profits increase so does thenumber of competing firms.

28


It is also important to stress that the analysis iscentred on the constraints experienced byexisting enterprises. Given that constraints andneeds vary across activities and enterprises, moredetailed information is required for effectivetargeting of specific sub-sectors. Opinions arealso only a reflection of the existing enterprisestructure. For example, the views ofentrepreneurs operating in the service andtraditional manufacturing sectors are much betterrepresented than those of agro-processing firms.A sub-sector focus would be required toovercome this bias.

Leaving aside these caveats, intense competitionwas the most cited constraint to businessdevelopment, with 60% of responses, whilst lowand stagnating demand is of special concern tomany units in the traditional manufacturingsector (Table 12). These enterprises are exposedto strong competition, both in local and moredistant markets. Locally, producers of non-tradable goods and services (e.g. barbers andlocal transport service providers) compete withother local suppliers, whereas producers oftradable goods and services (e.g. weavers andcarpenters) face competition from both local andoutside sources. Businesses which rely on distant

29


Table 12: Factors constraining enterprise investment and activity (% of responses)

Intense competition

Poor access to finance

Poor road network

Unreliable power supply

Poor local availability of rawmaterials

Low or stagnating demand

High cost of raw materials

High cost of transport

Poor connection to the railway

Poor road transport services

Distance to markets

High taxes

Government bureaucracy

Scarcity of skilled labour

Corruption

Inadequate local repair services

High cost of electricity

High labour costs

Poor access to water supply

Other

Agriculturaland food

processing(%)

14

29

0

57

14

14

0

0

0

43

14

57

0

14

29

14

29

14

14

29

Mining,manufacturing

and construction(%)

50

48

21

33

24

33

19

5

5

7

12

10

12

17

5

12

7

5

0

10

Services(%)

65

43

30

19

18

18

14

18

18

12

10

9

8

5

7

5

4

2

4

27

Total (%)

60

44

27

24

19

18

15

14

14

12

11

11

9

8

7

7

6

3

4

23


markets (e.g. agro-processing firms and manytraditional manufacturing units) have to competewith non-local suppliers of similar products orclose substitutes.

Nearly 45% of respondents viewed poor access to

finance as a constraint to the development of theirbusiness. Personal funds constitute by far the mostcommon source of investment and working capital,followed by advances and loans from relatives andfriends. One in five entrepreneurs used bank loansto initiate their business activity, but less than one inten has accessed formal credit for working capitalpurposes, an indication that banks (and governmentschemes) are reluctant to fund current expenditures.In order to circumvent this problem, someentrepreneurs overestimate physical capital needswhen applying for bank or government loans anduse the surplus as working capital. Entrepreneursoften complained about lengthy and bureaucraticbanking procedures and the cost of side paymentsrequired to facilitate the loan approval process.Generally speaking, the smaller the enterprise, thegreater the difficulty in accessing formal credit dueto lack of collateral, inadequate accountancysystems and poor cash flow.

Other constraints to enterprise activity mentionedby a significant proportion of respondents includepoor road connections and unreliable power

supply. As mentioned earlier, inadequacies in the

power supply system, characterized by chronicshortages and voltage fluctuations, are particularlyproblematic for agro-processing and modernmanufacturing firms, and remain a significantobstacle to the future development of these sectors.

Surprisingly, few entrepreneurs complained abouthigh taxation, government bureaucracy andcorruption. Part of the explanation may lie in thesmall scale and informal nature of most enterpriseactivity, where interaction with governmentagencies is kept to a minimum, and the fact thatonly 18% of firms surveyed reported paying taxesis revealing. However, India is renowned forhaving a complex and largely ineffectiveregulatory policy system which discouragesenterprise modernization and expansion, placesan undue burden upon complying firms, andencourages evasion and corruption (Fisher andMahajan, 1997). Orissa and Madhya Pradesh areno exceptions to the rule.

Business support service needsImprovements to the external environment underwhich town enterprises operate (policies,regulations, institutions, infrastructure,agricultural surplus, etc.) certainly provide themost effective path towards the development ofenterprise activity in a given area. Still,enterprises can also benefit from interventionswhich address internal constraints. Survey

30


Table 13: Business support needs (% of responses)

General management

Financial management

Employing skilled staff

Marketing and market linkages

Development of business plan

Developing new products and services

New technology

Vocational training for staff

Computing

Past (%)

41

34

30

19

54

9

4

12

0

Present (%)

45

47

37

30

28

26

12

13

6

Future (%)

44

44

38

36

28

26

14

12

5


respondents were, therefore, asked to identify thetype of support services (excluding finance) thatwould have contributed most to the developmentof their business, as well as their present andfuture support needs (Table 13).

Once again, many enterprise owners andmanagers found it difficult to express their needs.Many enterprises have limited requirements dueto the small scale of their business and thelocalized nature of markets serviced. Entry costsare low but so are the opportunities for expansionand the scope for improving businessperformance through better managementpractices, the development of new products, theintroduction of new technologies and/orimproved market linkages. Examples of this typeof business include small vegetable retailingstalls, tea houses, bicycle repair workshops,rickshaw transport activities and barber shops.

Given the above, it is noteworthy that over 40%of the businesses interviewed identified the needfor skills upgrading in general and financial

management. Support in business plan

development is another area where assistance isgenerally required, and whilst especiallyimportant during the early investment stages, it isalso relevant for those entrepreneurs planning toexpand or diversify their activity and consideringapplying for bank loans. These findings confirmthe perception that entrepreneurial andmanagement skills in the study towns arerelatively scarce.

Over 30% of respondents felt the need forsupport in recruiting skilled staff, which suggeststhat at least for some activities there is arestricted supply of relevant skills. It issurprising, therefore, to learn that a much smallernumber regarded vocational training foremployees as relevant. One possible explanationfor these apparently contradictory views is thattrainees might be absent from the workplace fora considerable time period. The lack of reputabletraining service providers may be anothercontributing factor.

Approximately 30% of respondents were of theopinion that support in the marketing spherewould make a significant contribution to thepresent and future development of their business,although fewer thought that such services wouldhave made much of a difference in the past. Asimilar pattern emerges regarding thedevelopment of new products and services,although not many expressed an interest inservices aimed at the adoption of new

technologies, in line with the simple nature ofmost enterprise activity. Firms already cateringfor distant markets, with potential to sell non-locally, and/or exposed to outside competitionare especially interested in accessing marketingand product development services.

Interestingly, enterprise owners and managers hadmixed perceptions regarding the preferred type ofservice provider. Government agencies andinstitutions were widely favoured for marketingand market linkage services, whereas the privatesector was generally seen as best placed toprovide support in technology and business plandevelopment. Opinions concerning the deliveryof training and product development serviceswere more or less equally divided between publicand private providers. NGOs were disregarded asrelevant service providers, which reflects theirnegligible presence in rural towns and theperception that they work essentially with villagehouseholds. In an environment wheregovernment agencies and institutions have analmost complete monopoly over the delivery ofenterprise development services within smallrural towns, it is revealing that such a highproportion of respondents seemed to favour ashift towards private provision. These viewshighlight the need for more pluralistic enterpriseservice delivery models.

Conclusions

Small rural towns in Madhya Pradesh and Orissainvariably act as local administrative and servicecentres, and as critical local distribution pointsfor production and consumption goods imported

31


from outside areas. They were also found to playa role as market outlets for village production,but their importance as such varies considerablyacross locations, depending on the extent towhich local production is being channelled tooutside markets.

The impact of ‘exports’ (i.e. sales to distantmarkets) on local economic development isparticularly significant when the benefits aredistributed over significant segments of the ruralpopulation and translate into increased demandfor locally produced goods and services. Thisissue was not fully explored in the survey, butthere are several indications that at least in somecases ‘exports’ may not be contributing much tothe development of the local economy. Forexample, although considerable numbers ofweavers are involved in handloom production,and despite the critical importance of theassociated income for the survival of thehouseholds involved, this tends to be a part-timeactivity characterized by low and decliningreturns. Leaf plate making constitutes anotherexample of an exporting activity which generatescritical but very low and seasonal income forpoor women in some forest pockets. In contrast,significant sales of grain, soyabean, pulses andmilk can inject significant income into the localeconomy and generate considerable demand foragricultural labour, production inputs andconsumer goods.

The importance of rural towns in mediatingbetween village producers and markets outside thelocal area is particularly noteworthy whenexported goods undergo further processing attown level, and when such producers are linked totown enterprises for accessing raw materials,credit and/or other support services. Examples ofsuch linkages were found during the fieldwork,but there is potential for strengthening theseprocesses, even in areas characterized by arelatively poor agricultural base. Limited localavailability of entrepreneurial and business skills,alongside an adverse investment climate, wereidentified as significant constraints to an increasedmarket intermediary role by rural towns.

Rural towns are clearly failing to createsignificant wage employment opportunities forthe population living in surrounding areas. Townfirms rarely employ workers from nearbyvillages as a result of their limited labourabsorption capacity and poor local transportlinks. Rural towns can offer an avenue for localeconomic diversification into non-farmactivities, but mainly through enterprisedevelopment and self-employment, essentiallybut not exclusively involving ‘low-return’activities. Nonetheless, the latter often generategreater returns than farming, and provide a morestable source of income throughout the year forthe entrepreneurs involved.

There are a number of reasons why localentrepreneurs may prefer to locate in townsrather than villages. First, rural towns have widercatchment areas than villages, therefore enablingthe development of activities such as trading inagricultural inputs, retailing of consumer goods,repair services and construction. Second, theyconstitute a suitable operational base foractivities which benefit from the regularmovement of goods and people, such as transportservices, restaurants and hotels. Third, eventhough much artisanal manufacturing activity isbased at village level, there is evidence that sometraditional and small-scale activities are attractedto small towns, where artisans can enjoy easieraccess to imported inputs and outside markets;shoe and jewellery making are two examples.Finally, improved access to local raw materialsand outside markets provides some scope forscaling-up wholesaling and processing activities.Clearly, the ability of towns to attract investmentand certain types of economic activity is partly afunction of their size. Enterprises in larger townstend to enjoy better access to skills, technology,transport infrastructure and services, publicutilities, repair services and other supportservices. The smaller towns in our sample do notdiffer much from large villages, and this partlyexplains why they have failed to attractinvestment into activities such as themanufacturing of simple agricultural tools andprocessing of locally available agricultural and

32


non-timber forest produce. Size considerationsaside, a poor agricultural base and competitionfrom suppliers in other locations within oroutside the district, may also inhibit thedevelopment of processing activities at the blockheadquarters level.

Interestingly, data on enterprise ownership signalacute gender and caste inequalities, an indication

that enterprise development in small rural townsmay not offer a natural route for improved accessto employment and income generationopportunities for women and disadvantagedcastes. This issue merits further research, but theemerging picture suggests that small rural townsreproduce – rather than radically alter –economic and social dynamics at the villagelevel.

33


National Legislation

In 1993 the National Parliament in India passedthe 73rd and the 74th amendments related toestablishment of local governments in rural andurban areas, respectively. These amendmentscontained some provisions that were mandatorywhile others were of a discretionary nature.Mandatory provisions were to be incorporatedinto the state act as such.

The discretionary provisions gave choices to thestate governments, for example, the extent ofpowers that could be given to the different levelsof the Panchayat. Each state government hasadopted the discretionary provisions to varyingdegrees in their state acts. The different use ofthese provisions has implications for howinstitutions function; and the combinedimplementation of mandatory and discretionaryprovisions will determine the overalleffectiveness of these institutions of localgovernance. Therefore, two principal questionsaddressed here are:

� Has the varying use of the discretionarypowers by the states created structures whichmake a significant difference in the way localcommunities participate in local governancein the two states? – this question isfundamental because the level ofrepresentation and empowerment of theconstituency largely determine the extent towhich local government works for thecommunity

� Do the powers and functions devolved undermandatory and discretionary provisionsenable the PRIs to promote local

development, particularly rural non-farmeconomic development?

Use of DiscretionaryPowers by the States

It is mandatory on all states to create a three-tiered structure with local governmentinstitutions or Panchayats at district, block andvillage levels. Discretionary powers have beenused by both Madhya Pradesh and Orissa todevolve more power, functions andresponsibilities to the village community than isrequired by national legislation through thecreation of an additional layer at the villagecommunity level. The states have also useddiscretionary provisions to distribute power tothe three statutory levels in different magnitude.

Power to the peopleState legislations in Madhya Pradesh and Orissacreated the fourth layer at community level. InMadhya Pradesh, it is referred to as the GramSabha and in Orissa as the Palli Sabha. MadhyaPradesh devolved some of the powers andfunctions from the Gram (village) Panchayat tothe Gram Sabha. It also created eight standingcommittees in each village to carry out thefunctions devolved to them. This was in additionto the three standing committees under the GramPanchayat. Similarly in Orissa, five additionalstanding committees were created to support thePalli Sabha.

Our survey and analyses at the village level showthat in Madhya Pradesh, where state legislationhas given substantial powers and functions to the

Local Governance and Rural

Non-farm Activities14Chapter

Gram Sabha, there remains a number of issuesfor consideration:

� there is considerable confusion among thevillagers as to the designated functions of thevarious committees

� individuals are members of a committeewithout being fully aware of its functions,role, responsibilities and affiliation (PRIcommittee or project-based committee)

� a multiplicity of legislations bringing inchange has added to the misunderstandings

� Gram Sabha meetings are called at shortnotice making it difficult for individuals toattend

� there is little feedback from the Sarpanch

(Head of Gram Panchayat) on the outcomesof meetings.

Consequently, the participation rate of thecommunity in local democratic processes hasdeclined and is almost negligible leaving theSarpanch and the Secretary to take most of thedecisions.

In Orissa, the survey shows that the village levelcommittees have yet to be set up so the decision-making is left to the Sarpanch and the Naib

(Deputy)-Sarpanch.

This loss of confidence in the localrepresentatives in Madhya Pradesh and delay insetting up the village-level institutions in Orissa

are unfortunate. Given that in both states theparticipation rate in the local elections in 2000was between 85% and 93% (household surveydata), most of the community feel let down bythe current situation. Further to this, andaccording to our survey, nearly 40% ofhouseholds in Madhya Pradesh and about 30% inOrissa feel that elected representatives have toomuch vested interest to work for the people.

Social relations and lack of empowerment

Empowerment of individuals and communitiescan take place through: (i) improvedrepresentation in political systems; and (ii)higher accountability between leaders and theirconstituency through greater awareness of rights.The institutional assessment in Phase I examinedthe membership profiles of all Panchayats. Itshows that at all three levels women, thescheduled tribes, scheduled castes and otherbackward castes are represented as required bynational legislation. However, our findings showthat this does not improve representation athigher levels, whilst the reasons for this varieswith the socio-political and economic structureof the district.

Representation

In Madhya Pradesh, in Narsimhapur District, allcaste groups are well represented and the localeconomy is grounded in agriculture. The

36

Local Governance and Rural Non-farm Activities

Madhya Pradesh

Janpad (Block Level)

Gram Panchayat (Village Level)

Gram Sabha

Zilla Panchayat (District Level)

Orissa

Panchayat Samiti (District Level)

Zilla Parishad (District Level)

Gram Panchayat (Village Level)

Palli Sabha

Figure 1: The Panchayat Raj Institutions in Madhya Pradesh and Orissa

common response of the traditional powergroups to the emergence of the PRIs is that of co-option. This co-option is either throughbecoming members of the new institutionsthemselves or by backing a certain candidate inconstituencies which are reserved for the sociallydisadvantaged groups. In the first instance, thereis no dilemma in accountability as the electedmember represents the interests of his/hercommunity. In the case of the latter, where theleader has been co-opted by providing the initialsupport to run the election campaign, it meansdiminished accountability towards theconstituency, which is socially and economicallydeprived. Consequently, the source of power inthis district still lies in the traditional mix ofupper caste, higher economic class and/orlandholders (potential to provide employment toothers).

Betul District of Madhya Pradesh is lessheterogeneous and dominated by tribalcommunities. The rural economy is forest-basedwith long-term, long distance migration, whichmeans that village leaders have limited controlover households (since the latter are oftendispersed and household members may not bepresent due to migration). Literacy and politicalactivism have allowed the elected representativefrom the scheduled tribes to achieve leadershipof their community and some degree ofempowerment. This democratic structure hastaken root more easily where the previous powerrelations were not tied to economic controls.However, it was noted that at the district andblock levels, these representatives find it hard towork independently as the traditional powergroups have strategic influence and highercapacity to deliver.

In Bolangir and Nayagarh Districts of Orissa, theelected representatives from the scheduled castesand tribes are virtually excluded fromparticipation and discussions in the Gram Sabhaand Palli Sabha. The traditional power groups(upper caste and landowners) use the socialbarriers of untouchability and caste-distance to

ostracize leaders of minority groups at Panchayatmeetings (i.e. forcing these leaders to sit on thefloor at the margins of the gathering or refusingto let them join the other elected members at thetable). To avoid social humiliation, these leadersstop participating in Panchayat activities, whicheffectively leaves decision-making in the handsof the upper castes and landowners.

Awareness levels

Knowledge of local institutions and the rightsthey bestow are an important source ofempowerment. Our survey findings show that inBetul less than 3% of the people are aware of therole and functions of the Gram Sabha and GramPanchayat (Table 14). This awareness ispositively correlated to landownership (0.34) andhousehold income (0.21); but less stronglyrelated to household’s level of education (0.19).In Narsimhapur, the majority are somewhataware (53%) and 19% are fully aware of the roleand functions of the Gram Sabha and GramPanchayat. Overall, 63% of all upper castemembers in the two districts of Madhya Pradeshare somewhat aware of the functions andresponsibilities of the Gram Sabha and the GramPanchayat. They argue that “there are no(government) programmes for us, so we have toknow the system to get a share of funds comingto the village”.

In Orissa, the district of Bolangir was selected asit represented a drought-prone, marginal districtwith high levels of poverty. In this district thelevels of awareness of the Gram Panchayat andhow it functions are higher (33% fully aware)than Nayagarh (25% fully aware). About 15% ofthe people in Bolangir are somewhat aware of itsfunctions, and of the functions of the committees;whilst in Nayagarh only 6.5% are somewhataware. This could perhaps be explained by highlevel of donor and NGO activity in Bolangirrelating to awareness raising, training and skillsdevelopment, information dissemination onavailability of credit, rural livelihoodsdevelopment and improved watershedmanagement.

37


Distribution of power amongdistrict-, block- and village-levelinstitutionsIt was important to look at the distribution of powerto identify the appropriate agency for interventionin support of the RNFE and local economicdevelopment. Examination of the two importantfunctions of institutions at all levels revealed thatthe true centre of power has not changed withgreater discretionary devolution to the community.The two functions are: (i) preparation of annualplans and budget; and (ii) re-allocating funds madeavailable by the central and state governments tothe lower levels of the hierarchy.

The findings show that:

� although the Gram Panchayat and the GramSabha/Palli Sabha select the projects and

beneficiaries for the different CentrallySponsored Schemes (CSS), they are strictlyconstrained by the monies allocated to them bythe District Panchayat, whose Chief ExecutiveOfficer is appointed by the government, and isgenerally the District Collector (a civilservant), and by the District RuralDevelopment Authority’s (DRDA) choice ofactivities to be promoted in a particular districtunder the scheme being implemented

� block-level bodies are merely the channellingagencies of the village-level plans forwardedto them; they consolidate the plans andforward them to the district-level institutions

� the budgets submitted by the GramPanchayats can be changed at this level; thefinal decisions about funds, projects andschemes are with the District Planning

38


Table 14: Peoples’ awareness of the Gram Sabha as an institution (% of households)

Level of awareness

Of the overall role of the Gram Sabha

Not aware

Somewhat aware

Fully aware

That it has been created by legislation

Not aware

Somewhat aware

Fully aware

How it functions

Not aware

Somewhat aware

Fully aware

Functions of the Gram Sabha

Not aware

Somewhat aware

Fully aware

Functions of committees

Not aware

Somewhat aware

Fully aware

Narsimhapur

24.7

53.2

18.7

43.0

26.3

21.1

34.4

45.6

20.0

45.6

38.4

15.7

66.0

24.5

10.0

Betul

59.7

37.6

02.7

86.0

11.3

02.7

87.2

09.8

03.0

86.6

11.6

01.8

91.1

07.3

01.6

Bolangir

21.3

46.0

32.7

54.5

30.8

14.7

39.0

47.7

13.3

33.5

50.8

15.7

50.2

38.8

11.0

Nayagarh

24.0

50.6

25.4

75.8

18.3

5.9

51.2

36.8

12.0

57.3

31.7

11.0

76.0

19.3

4.7

Source: Questionnaire Survey (July 2002)

Madhya Pradesh Orissa

Committee (DPC), who can, and do override,the recommendations of the DistrictPanchayat, the elected body. This is possiblebecause the DPC has greater administrativeinfluence than the District Panchayat. In bothOrissa and Madhya Pradesh, the DPC isheaded by a Minister of State (generally aregional leader) nominated by the stategovernment, with the District Collector as themember Secretary

� the DPC has considerable financial andadministrative powers over line departmentsand their functionaries

� disbursements of funds transfer directly fromthe District Panchayat to the GramPanchayats and/or Gram Sabha

� block-level institutions are the implementingarm for projects implemented by the linedepartments; our study shows that thedominant players at the block level are thefunctionaries of the line departments.

Panchayat RajInstitutions, Promotion ofLocal Development andImpact on the RNFE

The second principal question addressed by thisstudy is whether the local government institutionshave been able to promote local development9 andwhether they have had any beneficial effect on theRNFE by enabling forms of supportive governance;and what role can they play in any futureintervention. The findings are summarized below.

District-level institutions andpromotion of local developmentThere are a number of reasons why these PRIsare limited in their ability to initiate anysubstantial change. Despite the wide rangingpowers given to the district-level authorities,they work within the confines of the CSS andprojects. The developmental focus of these

schemes is narrow and sub-sectoral, with a lackof attention to issues of markets and marketing ofproduce. Initiatives under these schemes arelimited in their perspective as they envisage onlysmall increases in income to raise householdsabove the poverty line. Special schemes forsupporting small-scale village and householdindustries, still concentrate on traditional itemsfor which the market has declined followingchanges in consumer preferences. Most CSS arefounded on small-scale improvement, with littlescope for scaling up. They also emphasizeemployment generation, income creation andalleviation of hardships. While all theseobjectives are important, such schemes do notprovide an impetus to local economic growth.

Additionally, the funds disbursed to theseinstitutions prescribe the activities and target groupsfor the scheme as a whole. As such it may not beappropriate to the whole district. However, neitherthe DRDA nor the members of the DPC, show anyinitiative to differentiate needs and capacities belowthe district level. While the Directors of thedifferent DRDAs admit the need to identify newmarkets and new products, few attempts have beenmade to identify emergent sectors to promote. Theycritically recognized a lack of expertise at thedistrict level to undertake such an initiative. In thefour districts studied, none had initiated anysignificant change in activity in the last 5 years.

Theoretically, the block-level institutions andparticularly the Block Development Officer(BDO) are the main agents for delivery of ruralservices. However, our analysis shows it is theweakest strata in the hierarchy. The BDO, agovernment appointee, is a low level functionarywith limited human resources capability. There isconsiderable literature noting the lack of co-ordination in the activities of different linedepartments, and the consequent low impact ofschemes and slow pace of change in rural areas.Technically, the BDO is placed to help improve co-ordination of schemes and activities of line

39


9 The term local development is used to imply expansion of economic activities, increase in productivity, improved infrastructure, morediverse livelihood opportunities and options and an overall improvement in the social and economic well-being of the local population.

departments at the block level. However, as a lowranked functionary, the BDO is not automaticallyadvised, and has no prior information from the linedepartments of their schedule of activities.Furthermore, although he has the authority to askfor it, the BDO feels unable/hesitant to do so.

The system of reservation (though desirable froman equity point of view) can have adverse effectson promoting long-term development. The seatsheld by women and members of other backwardcastes are allocated by rotation among differentconstituencies. In practice, this implies that awoman or a scheduled caste/tribe elected to aPanchayat will normally have a term of 5 years,with no prospect for re-election. This does notencourage a long-term perspective to development.Short-term perspectives and self-interest dominate,with little concern for the community at large.

Local representatives are poorlyinformed of their functions andresponsibilitiesThe ability to function effectively for the peopledepends partly on how well informed the localrepresentatives are of their own powers andresponsibilities; and partly on whose intereststhey represent (this has been discussed above).Interviews with representatives from all levels ofthe PRI show that the majority is unfamiliar withthe role they are expected to play. At the districtlevel, the members hardly participate in theprocess of planning and fund allocation under theCSS. Most seemed unaware of the proceduresand regulations. Consequently, the functionariesare able to bypass them and limit their function torubber-stamping. A similar situation exists at theblock level.

At the village level, an important power devolvedto the Gram Panchayat is the right to levy tax onproperty, business, markets, fairs and for theservice provided, for example, street lighting orpublic toilets, among others. However, only asmall number were aware of this fiscal power.

Further, there is considerable confusion amongthe elected members as to what functions thedifferent committees under the Gram Panchayatare expected to perform. Again, the membershave made little effort to inform themselves.

Three reasons explain the situation. Thoseelected members who represent the traditionalpower groups rely on the old, established links toserve their requirements, and as such they do notsee the need to be involved in administration andgovernance. Secondly, a large number of electedmembers are not interested in good governance,since they see politics as potential enterprise foreconomic gain. Thirdly, for those who may beinterested, the large number of amendmentsthrough which power has been devolved, makesaccess to such information complex. Thus, thebody of elected members has not reallycontributed to improving governance orpromoting local development.

Overwhelming dependency ongovernment fundingA review of money received and ‘own source’funds shows the overwhelming dependency ofPRIs on government funding. The use of most ofthese funds is not audited and as such they areoften a source of corruption. The availability ofthese funds also discourages any effort togenerate local revenue. Tables 15 and 16 show theactual funds received by the PRIs in NarsimhapurDistrict. Similar data for Betul, Nayagarh andBolangir Districts were not available.

Reluctance to use its fiscalpowersNone of the Gram Panchayats studied used theirfiscal powers to levy new taxes. This trend is alsonoted by Girglani (1994) and Vyasulu (2003).The argument given by the Panchayat membersin Madhya Pradesh and Orissa is that it isdifficult to levy taxes on your own constituency,especially when you live in the community. In

40


10 For detailed discussion and list of taxes that Panchayats can levy in Madhya Pradesh see Dasgupta et al. (2002). For a wider discussionsee Girglani (1994).

reality, PRIs can provide services, but thesewould generally benefit the poor, which is oflittle interest to the better-off (i.e. those exertingpower within the new system).

As seen above, a considerable amount of fundsflow to the PRIs from government. The PRIsoften act as contractors for such projects, thusproviding scope for enrichment of Panchayatmembers. Further, the PRIs tend to reduce theirdependency on internal resources such as taxes,revenue from common pool resources, etc., andinstead try to mobilize funds from outside, aspeople are less likely to request a social audit (i.e.accountability of PRI) if they are not asked topay taxes.

Limited cognition of how togenerate and manage ownincomeInterviews with Panchayat members showed thatfew had any clear vision for increasing their ownsources of income. The lack of interest could bepartly explained by the reasons discussed above(i.e. local politicians still expect the stategovernment to collect tax and then transfer therevenue to the PRI).

Village Panchayats: their focusof activityThe Gram Panchayat and the Gram Sabha focuson developing small-scale infrastructure (e.g.village roads, culverts, cleaning local waterbodies) projects and other facilities in the villageunder Employment Assurance Schemes, where

41


Table 15: Funds available to Gram Panchayats in Narsimhapur District, Madhya Pradesh, by

block (actual amount received in Rs)

Receipts

Own source

Funds from the State FinanceCommission, Centrally and StateSponsored Schemes

Total

Jhoteshwar(1988–99)

Nil

497,027

497,027

Manegaon(2000–01)

Nil

211,844

211,844

Thalwada(2000–01)

Nil

487,851

487,851

Batesara(2000–01)

2594 (1%)

229,172

231,766

Source: Collected by the study team from records made available by Gram Panchayats

Table 16: Funds available to Janpad Panchayats and Zila Panchayat in Narsimhapur District

Madhya Pradesh (actual amount received in Rs)

Receipts

Own source

Funds from the StateFinance Commission,Centrally and StateSponsored Schemes

Total

Janpad PanchayatChichli block

(2000–01)

2,350,356 (16%)

11,541, 621 (84%)

13,891,977 (100%)

Janpad PanchayatGotegaon block

(1999–00)

390,034 (3%)

14,229,292 (97%)

14,619,326 (100%)

Zila PanchayatNarsimhapur

District (1999–00)

1,615,192 (0.71%)

212,500,040 (99.29%)

228,652,324 (100%)

Source: Collected by the study team from the respective PRIs

they have demonstrated their capability to executesuch projects. However, these projects are chosenon an ad hoc basis for employment generationwith little or no systematic planning on an annualbasis. With some planning, annual construction ona more systematic basis could have a cumulativeeffect and lead to some overall improvement invillage infrastructure. However, since the aim ofthe schemes is employment generation, such aperspective has not been adopted by the PRIs.

Survey data from Madhya Pradesh and Orissashow that only 8–9% of households think thatPRIs have had any positive benefit on ruraleconomic activity. Whilst Panchayat activitiesinclude some that directly impact upon economicactivity, for example, promotion of agriculturaland other marketing activities, and improvingaccess to NTFPs, these generally promote wageemployment rather than, for example,infrastructure to improve production andmarketing more directly. Other areas where someimpact is felt cover social and service functions,notably welfare support, nutrition and healthcare. The latter arises in the range of Panchayatcommittees that interface with governmentprogrammes and schemes. Overall there is littlesign of activities assisting resource managementand marketing, and effects on the RNFE arenegligible. Furthermore, the PRIs are perceivedby the people as having only a welfare role. Thus,the lack of involvement in promoting economicactivities is reinforced by people’s perception ofPRIs as welfare institutions.

It is important to note that Panchayat membersdo not see generating employment andimproving economic opportunities as part oftheir role, although considerable power has beengiven to manage local natural resources. Thepromotion of economic development isconsidered a function of the government, morespecifically of the line departments. Co-operatives, some NGOs and a few self-helpgroups are involved in expanding economicactivities, these are more active in some districts,for example, in Bolangir, than in others.

The role of village-levelcommitteesThere are a wide range of committees operatingat village level. However, only 5% of thecommunity in Orissa and 6% in Madhya Pradeshparticipate in these committees. The majority ofhouseholds (70% in Orissa and 80% in MadhyaPradesh) consider themselves to be unaffected bycommittees’ operations or perceive any benefitfrom them. One key reason is the minimalresources generally available to specificcommittees. Secondly, most villagers reportedthat they felt they had little control over thedecision-making or activities of the Gram Sabhacommittees. These committees have, therefore,had little direct effect upon economic activity,including those in the non-farm sector.

District level and below: limitedeconomic perspective Overall, there is a lack of an integrated approachto management of local economic developmentat district level. The PRIs do not consider it theirrole nor do they appear to have the capabilitiesfor understanding economic issues and analysis,nor for promoting wider economic development.The CSS, the main vehicles for development,generally focus on small-scale income generationand employment and on alleviation ofdeprivation. They are sub-sectoral in approach,concentrating on small-scale improvements inproduction, crop management and protection.Such an approach leads to a patchy pattern ofchange rather than cumulative change. Thefunctionaries, now part of the local governmentinstitutions, are preoccupied with targets ratherthan in effecting real change in productionpatterns and productivity. The vision andexpertise necessary to identify emergent sectors,new markets and products are absent at this level.

Panchayat Raj Institutionsand Line Departments

This study underscores some of the findings inother studies in India which show that line

42


department officials generally tend to ignore theelected members. Decentralization in both MadhyaPradesh and Orissa also included administrativedevolution. Administrative decentralizationinvolved transfer of functions and functionariesfrom the state sector to Panchayats sector with theaim of facilitating and strengthening the PRIs. Thisstudy shows that the government officials continueto exercise more power over decision-making thanelected members by limiting information sharingand by minimizing the role of the DistrictPanchayat to that of rubber-stamping.

The allegiances and loyalties of these officialsremain with their departmental line managers toensure career progression. Manor (1995) has notedthat authority to discipline should move to the localauthorities. The state act in Madhya Pradesh hastried to address this by shifting some of the controlof the reward system to the District Panchayat, butthis is not working because elected members are notaware that this power has been devolved to them.This underscores the need to change the attitudesand motivation of both bureaucrats and electedmembers.

Other Institutions and theRural Non-Farm Economy

Other institutions operating in villages were alsostudied to assess the role they play in the ruraleconomy. These are: (i) traditional institutionsbased on caste/tribe lines; (ii) project or scheme-based institutions or committees; (iii) co-operatives; (iv) civil society organizations; and(v) self-help groups facilitated by banks, NGOs,government schemes and donor projects.

Traditional institutions, usercommittees, co-operatives andNGOsThe traditional institutions have a high degree ofacceptability within the community, but they haveclosed membership, are influenced by castedynamics and no longer play a significant economicrole. The project-based institutions are resource-rich, but are bound by their own objectives and are

directed by project officials. Committees have beenformed under different government schemes anddonor-aided projects. They are involved in worksuch as forest protection, improving access to cleanwater and better sanitation; enabling self-helpgroups to generate income, usually in the non-farmsector; management of schools and overalleducation programmes in the village. The civilsociety organizations have the information and thecapacity to facilitate, but they are not linked witheach other or any other organization. Each operatesin the space that they have created in village society.

Most of these institutions are formal in nature andhave clearly defined objectives. But there is a lackof convergence in the functioning of theseinstitutions. Neither do these institutions sharetheir plans and objectives with other institutionsnor do they pool resources to create synergies inthe village. In some cases the institutions havebeen found to duplicate the work of the PRIs (e.g.project committees). They all work independently,with no formal links with the PRIs. There is a clearlack of complementarity and wastage of resources.Our study showed that about 70% of thehouseholds were totally unfamiliar with the rolebeing played by the different actors/projects.

This implies that the life of these institutions andthe benefits that accrue to members are limited tothe lifetime of the project. It is necessary todevelop links with the established localgovernment institutions to ensure sustainability.However, there is a fear that a certain amount ofindependence will be lost if links are made withgovernment institutions. The lack ofaccountability in the PRIs is an additional factor.

Self-help groupsAs in the rest of India, an increasing number ofinitiatives are working through self-help groups inthe study area in both states. The higher profile ofself-help groups and the greater involvement ofpeople in their activities stem from their widerranging mandate, availability of resources andmore participatory approach in their operation.Self-help groups have become a popular

43


instrument for development as they are expected toreach the poorest of poor. However, it is generallyaccepted that self-help groups often do not includethe poorest of poor, as they are generally sociallymarginalized, can mobilize few resources of theirown, and/or do not have enough savings to join.Moreover, the intrinsic bias of implementingagencies makes it difficult to reach them.

Members of these groups have taken up non-farmactivities. However, they are not alwayssustainable as they do not receive adequate and/ortimely advice from line departments; for example,goat rearing is a popular option, but there is highmortality rate among the young animals asveterinary advice is not always available.

BanksNearly 60% of the community felt that banks hadmade the highest contribution in developing non-farm activities. NABARD, the apex bank forrural micro-finance, has for the last decade beenpromoting non-farm activities. However, itsimpact has been limited, as access to formalcredit is constrained by the need for collateral; isconditional on a clean record of repayment; andcomes with considerable paperwork, oftenbeyond the capability of small borrowers. Oursurvey data showed that few households have aclean record of repayment, even if they couldprovide collateral, having defaulted at some timeor the other. This makes most poor householdsineligible for formal credit.

Crowded InstitutionalSpace at the Village Level

This research has shown that there are a largenumber of actors who have invested at the villagelevel to initiate change and growth. They tend torely on the project-specific user groups toimplement their objectives. This implies that thebenefits accruing from these projects are limitedto the lifetime of the project. However,sustainability could be enhanced if these projectsdeveloped links with the local governmentinstitutions. This raises the question as to who

would be the best partner for local development,the PRIs or the user committees promoted by linedepartments and external donor projects?

There is conflicting theoretical and empiricalevidence on this. Those who support usercommittees as partners in development argue thata multiplicity of committees is a means forgetting more benefits from government.Furthermore, villagers see this as an opportunityto ensure the development of their villagesthrough the involvement of a large number ofgovernment departments. The bureaucracy toofavours these committees, as they are able tohave a greater say in the implementation of theirprogrammes through these committees.Moreover, these are more amenable tobureaucratic controls than the PRIs. Committeesalso create a broader leadership base and providean opportunity for more people to be involved indecision-making through membership.

Moreover, user committees can focus on thegroup/project’s objectives and can deliver betterresults. It is expected that in the long run, membersof these committees would seek greater power andopt to stand for election to the PRIs. Currently, theuser committees and other parallel institutions areconsidered imperative for ensuring greaterparticipation by the local community.

Those who advocate the involvement of the PRIsargue that benefits of projects dependent on usercommittees are short lived and are not sustainablebeyond the life of the project. The livelihoods baseof the poor remains only marginally improved.Some social capital may be created throughawareness-raising, but evidence shows that most ofthis social capital is held by the rich, leading tofurther entrenchment of their powers. Though NGOinvolvement may extend the benefits to the poorergroups, there is no guarantee that this will happen.

Empirically, our study shows that nearly 89% ofhouseholds think that neither PRI committees noruser groups are considered functionally effective.In Betul District, opinion is split as to who wouldbe the better partner in development projects,

44


with 4% support for each group. In NarsimhapurDistrict, 35% think that the Gram Sabhacommittees are the more appropriate partners asagainst 23% supporting user groups. In Orissa,the community on balance favoured by a smallmargin the user groups to the PRIs. These resultsshow that there is no obvious trend or support forone or the other. Clearly the opinions of thecommunities reflect their own experience andhence preclude any generalization.

Conclusions

Clearly a considerable amount of power hastheoretically been devolved in both states and itappears that the Gram Sabha in Madhya Pradeshis stronger than its counterpart in Orissa.However, in Madhya Pradesh, people at thegrass-roots level are over-burdened, not onlywith the number of committees, but also with theimposition of an increasing number of powers,functions and responsibilities, of which they arenot fully cognisant. In reality, in both states,decision-making at the village level is still firmlywith the Sarpanch, who in most instancesrepresents the interests of the traditional powergroups (landowners and upper castes). There hasbeen an increase in people’s participation in localelections and in their representation, however, ithas had no apparent impact on the politicaldecision-making at the village level.

The provisions for reservation and positivediscrimination and the discretionary devolutionof power to the community have not ipso facto

led to representation and empowerment. Thisfeature together with peoples’ low levels ofawareness of institutions means that there hasbeen little or no empowerment. Thus, althoughsome changes are taking place, the overall pathof development is skewed to serve the interestsof the traditionally dominant groups. It is,therefore, important at policy and project levelsto identify drivers that could be used to empowercommunities if local government institutions areto act for the people. However, these driverswould differ in each district concerned. In Betul,

where independent leadership is emerging, theseleaders could be involved in designing localdevelopment programmes. In predominantlyagricultural districts, the rural elite are the maineconomic actors, that is, the main source of wageemployment and hence there is a need to ensurethat policy interventions do not have adverseeconomic impacts.

The new hierarchy of institutions created bylegislation has tended to re-enforce the powers atdistrict level, and (in theory at least) at villagelevel. As such the block-level institutions havebeen marginalized to a degree. The real authorityremains vested at district level through powersand responsibilities granted to bodies such as theDPC and DRDA. The new legislation hasreinforced the power relations they wereexpected to change. Additionally, at the districtlevel, it is government functionaries who havemore power than the elected representatives withthe District Collector still the real centre ofcontrol. Thus, the varying use of discretionarypower has not made any significant difference inthe way local communities participate in localgovernance in the two states. In neither state hasrepresentation and empowerment improved toany noteworthy extent. The power structureembodies top-down relations limiting scope forlower level initiatives for any substantial changein the way rural economy is managed. As the realpower resides with the District Collector, his/herinvolvement will be crucial to any policyintervention at least initially, although in thelonger term, there is a need for more realdevolution of authority.

Local government institutions have had verylittle effect on rural non-farm livelihoodopportunities. They have provided no supportivegovernance for the development of suchactivities as they do not consider it their role topromote or enhance livelihood opportunities.Promotion of livelihoods is considered thedomain of the line departments. However, PRIshave proved better at executing smallconstruction projects and delivering welfare

45


services, and it is important to build on thesestrengths. If local government institutions are toact as agents of local economic development,their capacities for understanding local economicissues and planning have to be strengthened. TheCSS, with their emphasis on small-scaleimprovements and poverty alleviation, do notprovide the impetus to local growth and thedistrict-level development agencies lack theexpertise or the vision to initiate any significanteconomic change at district level and below. Itwill be necessary to focus policy on district-levelinitiatives to improve co-ordination and theenabling environment for economic growth.There is scope to explore the possibility ofprivate-public partnerships where the formerwould provide the expertise to identify emergentsectors and potential markets.

There are a large number of players at the villagelevel, but only a limited number contribute topromoting non-farm activities. Co-operativesand banks appear to have made the highest inputinto developing non-farm activities. The RNFE’sdiversity combined with the multi-sector andgeographically dispersed nature of the supportthat is required, provides in itself a strongrationale for developing flexible and wide-ranging institutional coalitions. As seen above,the large numbers of institutions that havealready invested resources (human and financial)at the village level have yet to create linkages andsynergies. Ideally the local governmentinstitutions could help to develop such linkagesand coalitions to provide support for rural non-farm activities. However, there are twodifficulties to achieving this: (i) the poorcapability of local government institutions andthe general lack of confidence in them; and (ii)different institutions have different agendas.

Realistically, user groups/committees willremain important partners in rural development,

while the PRIs in both Madhya Pradesh andOrissa attempt to understand the powers andfunctions devolved to them. This means that thelow accountability to constituencies andcontinued domination of PRIs by traditionalpower groups will have to change before they areconsidered as partners by the donor agencies.However, in the longer term, to ensure thesustainability of these projects, PRIs will have tobe involved.

According to Blair (2000) (discussed above),decentralized governance will lead to reductionin poverty only if there has been an increase inparticipation, representation, empowerment andenhanced benefits for all. Our findings show thatparticipation in the electoral process has beenquite impressive, with nearly 90% turnout. Alldisadvantaged groups are represented as requiredby law. However, the politics of co-option andostracism of these representatives from decision-making means that in reality there has been littleor no increase in representation. Hence, noempowerment and only a small percentage havebenefited. This leads one to conclude thatdecentralized institutions so far have not had anysignificant impact on poverty reduction. Theissue of growth and poverty reduction throughdecentralized government in India has beenfurther complicated because elected members donot see themselves as economic actors.

In policy terms, it is important that the capacityof PRIs to participate in development projects bestrengthened. This means a more focusedprogramme of capacity building than has beenimplemented in the past by the stategovernments. This would need politicalcommitment from the government and supportfrom donors. The link between PRIs and project-based user committees needs to be both betterunderstood and where appropriate, strengthened.

46


Implications for Policiesto Promote the Rural Non-Farm Economy

Policy implications for the rural non-farmeconomy (RNFE) development centre upon twokey issues: (i) a stronger emphasis on policies todiminish poverty; and (ii) a focus upongeneration of rural growth through both supplyand demand-side policy innovations. Therequirements are for quite radical, sustained andlong-term interventions that ultimately breakwith many of the policy preoccupations of thepast. Given a long timeframe before likelyimpact, there is also a need for interim short-termpolicies that can alleviate poverty and/or providesafety nets to the poorest. The most immediateoption is through food or cash for workprogrammes that are more effectively targetedboth upon the poor, and upon productiveinfrastructure.

If poverty alleviation and growth are to betackled effectively, there appear to be four broadpolicy areas that link and interact with eachother, which can have positive impacts upon boththe RNFE and agriculture:

� institutional development for more effectivelocal governance for economic developmentand to mobilize producers and savings

� ongoing investment both to reduce supplybottlenecks and to promote demand

� development of an enabling environment forprivate enterprise

� constructive disengagement by government atall levels coupled with wider deregulation.

The first three of these policy conclusions arisefrom the research undertaken for this study,whilst the fourth is also informed by the work ofothers (notably Saxena, 2003), particularly withrespect to the macro- (national and state-level)policy components. Each is considered in moredetail below.

Institutional Development

Policies that effectively tackle poverty throughpromotion of the RNFE and agricultural sectorswill need to incorporate significant areas ofinstitutional development and innovation,particularly in terms of institutional process andinstitutional structures. Over the past decade,much effort has been expended in India ondecentralization through the PRI programme, butits effectiveness to date, especially with respectto economic development, is highly questionable(Dasgupta et al. 2003). PRI structures wereintended to empower rural populations includingthe poor and women and to provide mechanismsfor local development, but in practice they havetended to reinforce local power elites and littleeconomic activity has been generated. Realauthority remains focused at district levelthrough bodies such as the DPC and DRDA, anda pivotal role continues to be played by theDistrict Collector, rather than through electedbodies and representatives. Neitherrepresentation nor empowerment (especially forthe poor and women) has changed to anysignificant degree, and most electedrepresentatives lack the will and capacity toimplement initiatives that could support theRNFE or rural livelihoods more generally.

Conclusions and Recommendations

for Policies to Promote the

Rural Non-Farm Economy15Chapter

A number of policy options are available whichcould redress these institutional weaknesses.There is scope for policies which seek to upgradethe PRIs where possible, and to simplifystructures where this can enhance theircapabilities. There are also opportunities toimprove the quality and direction of parallelgovernment bodies and agencies. Finally policiescan be pursued which engage a wider range ofinstitutions working in collaboration with eachother, including CBOs, NGOs, local financialinstitutions and the private sector.

Some Gram Panchayats have demonstrated acapacity for small-scale development of localsocial facilities and services. These capabilitiescould be developed further by policies whichencourage a more systematic choice of village-level projects and which include, for example,infrastructure with more direct economic valuefor the community. This type of development canbe combined with policies promoting moreeffective real decentralization of authority, andprogressive simplification (if not elimination) ofmany of the committee structures that haverecently been introduced at village level(Dasgupta and Marter, 2002). Village PRIs (e.g.the Gram Sabha and Palli Sabha), could also berationalized such that where possible smallerunits are avoided, since experience to dateindicates that it is the larger PRIs that have beenthe most active, especially those able to taprevenue from market licensing (Kumar, 2003,personal communication).

Reform of village-level PRI bodies needs to becoupled with similar capacity building of theDistrict Rural Development Authorities thatselect the activities funded in the district(Dasgupta et al. 2002). This component is neededfor a wider promotion of change within local linedepartments, not only for upgrading of skills, butalso to induce a crucial change in mindset towardsreal delegation of authority to elected PRI bodies.This also implies policies which seek to diminishthe current concentration of power amongstDistrict Collectors and a few local officials.

The types of expertise required amongstfunctionaries at the district level includeseconomic components such as the capacity toidentify emergent sub-sectors, new markets andproducts. At all three levels of the PRIsthemselves, capacity building of electedmembers is needed to improve theirunderstanding of local economic and planningissues, linked to a much stronger emphasis on theimportance of their role as facilitators ofeconomic as well as welfare activities. Similarcomments apply to PRI bodies and other localauthorities in small urban centres where there isa particular need for more capacity to promotethe local business environment (Wandschneider,2003; Kleih et al., 2003).

However, whilst PRI structures can be reformedand improved, it is questionable whetherdecentralization closely aligned to governmentinstitutions alone can provide sufficient genuinelocal autonomy. Further policies are, therefore,required which promote much more flexibleapproaches that embrace a range of institutions,are more inclusive, and which focus at least asmuch on economic functions as upon socialobjectives. This type of innovation is also neededbecause of the RNFE’s diversity and the multi-sector and geographically dispersed nature of thesupport that is required. One option is for localgovernment institutions to develop such linkagesand coalitions (Dasgupta et al., 2002), butflexibility is desirable depending upon therelative strengths of other local bodies andinstitutions.

Economic functions are likely to be better servedby non-PRI bodies that include producers andother entrepreneurs. There is a need for policieswhich promote flexibility in choices ofappropriate (existing) institutions, and for a long-term strategy that avoids overloading such bodieswith multiple functions in the early stages.Finance, whilst important, is only one of anumber of interlinked and complementaryfactors that include the organization of both inputsupply and marketing.

48

Conclusions and Recommendations for Policies to Promote the Rural Non-farm Economy

For finance itself, there is scope to move awayfrom public sector provision via purely credit-based bodies and towards policies whichpromote local savings through a range ofpossible institutions, which may subsequentlytap parallel funding to extend loan capacity. Thisapproach is similar to that intended for the self-help groups, although the latter only representone option (Adolph, 2003). Other CBOs, NGOsor producer and marketing bodies may beequally, if not more, appropriate. Input supplyand marketing of outputs represent two keyadditional areas where local producer bodies andother institutions can play a role (Marr, 2003). Byorganizing bulk purchase of inputs and sales ofoutputs, such groups internalize costs and are ina much stronger position to negotiate with bothsuppliers and buyers. A strategy of progressivelybuilding up such activities from a relativelysimple initial base is desirable, given currentlimitations in local skills and experience.

Much of the policy initiative and implementationrequired for institutional development is at stateand district level, where flexibility to engagelocally appropriate bodies can more easily beimplemented. Government agencyresponsibilities are likely to become increasinglythose of facilitation, including theencouragement of coalitions of institutions (e.g.NGOs, CBOs, the private sector, etc.) as a meansof promoting commercial capability at the locallevel (Marter, 2003). To achieve such relativelyradical innovations will require effective driversto both initiate and sustain change: these maycome from within administrations (e.g.progressive administrators), and/or be assistedfrom elsewhere (e.g. aid agencies and perhapsNGOs or even the private sector).

Productive Investment

Many policies which promote investment and thedevelopment of the RNFE are relatively long termwith respect to achievement of impact. As notedearlier, there is thus a need for interim measures thatcan tackle poverty and/or provide safety nets to thepoorest, notably through food or cash for work

programmes and upon productive infrastructure(Marter 2003). Examples include investment inrural and district-level roads, and also waterinfrastructure, with the use of labour intensiveapproaches as far as is feasible. There is also scopefor ongoing programmes linked to maintenance,especially where these can operate in theagricultural off-season. More effective targetingsystems to ensure that benefits reach the poor are anessential component, this being in part a function ofmore autonomy and representative bodies at locallevel (as described above under policies forinstitutional development). The need to improvetargeting also reinforces the case for strengtheningcapacity at grass roots level in economicunderstanding and participatory planning.

There is also considerably wider scope for bothpublic and private investment (e.g. through jointventures) which can free up supply constraintsproviding a more viable environment for bothagriculture and the RNFE (Kleih et al., 2003).These initiatives can also stimulate demand,since local wage employment in infrastructurecan have multiplier effects on local markets.Arguably the latter are at least as important as theformer. Coupling investment with more localautonomy to decide the most appropriatestrategies, for example, use of labour intensivemethods, can further increase the scale ofmultipliers. This is especially important given theneed to expand demand components in thecontext of low purchasing power associated withpoverty. This comment applies in particular tostates (e.g. Orissa) or districts (e.g. Bolangir andBetul) where there are high concentrations ofscheduled tribes and scheduled castes – bothgroups being virtually synonymous with acutepoverty.

Urban centres can play a pivotal role as localmarkets or access points to longer distancemarkets for the RNFE, and also as conduits forraw materials that may be needed from outsidethe locality (Wandschneider, 2003). However,study findings indicate that smaller centres inpractice provide only limited facilities both formarketing and input supply. Equally they

49


generate relatively little employment forassociated rural localities. The reasons for suchlimited impact are partly because the smallestcentres simply lack much critical mass tostimulate enterprise and employment. However,a key aspect for all urban centres is the relativestrength of agriculture in surrounding regions. Ina number of cases in the survey areas, agricultureis weak and rural localities are characterized bychronic levels of poverty.

Thus whilst part of the answer for improving thelevel of urban enterprise may lie in policiespromoting investment in improved infrastructure,including both transport and power supply, thereare also wider policy needs. Policies are requiredwhich strengthen local agricultural performanceand which stimulate local (rural) demand (cashfor work being one example). There may also bea case for more selective investment initially inlarger centres which have more existing linkageswith the RNFE, and hence greater potential forimmediate impact.

Further policies to promote investment could beavailable through selective facilitation of jointventures through major domestic (and possiblyinternational) corporations, which may beappropriate given their capacity to invest, notonly in physical assets, but also via theirmanagerial capability, and access to markets.Such investments can act as a stimulus to widereconomic activity in both the RNFE andagricultural sectors. Policies are required whichencourage major companies both to invest andalso to take on additional productive roles, forexample, through inputs to training to raise localskill levels and also commercial capabilities,especially in marketing.

The Enabling Environment

The enabling environment for enterprise is a keyarea impacting on the development of the RNFE,and one where a number of policy initiatives aredesirable, both for rural locations and associatedurban centres. Such initiatives will involve thereshaping of public sector roles towards

facilitation rather than intervention, and acorresponding change in mindsets ofadministrators coupled with capacity building (asnoted under institutional development above).The required change of mindset at district level tocreate a more business conducive environmentcan be linked to increased local fiscal capacity toraise revenue for infrastructure development,notably district roads, but also marketinfrastructure including possibly storage capacity.Additional skills are needed in management,finance and banking (Kleih et al., 2003).

At district level, there is scope for policies whichcan support and stimulate business development(Saith, 2001). In addition to more BusinessDevelopment Services (BDS), competentsupport units for rural enterprise development arerequired at local government level. In particularthe small- and medium-scale private sector needsto be encouraged to become better organized, forexample, in the business forum, and toparticipate in district planning committees (Kleihet al., 2003).

A flexible approach is desirable that can adapt tolocal institutional capacity, work with existingagencies where possible to strengthen the BDSand raise capabilities, for example, in analysis ofmarket opportunities and associated alternativesfor local enterprise at sub-sector level. Besides anenabling infrastructure, this involves improvedplanning at block level, and better linkages withresearch institutions and the industrialmanufacturing sector (e.g. pharmaceuticalindustries requiring medicinal plants as input).This may be particularly important for some‘traditional’ RNFE sectors where demand isstatic at best and where it may be more realisticto encourage diversification, rather than tocontinue to support manufacturing of productswhere demand is increasingly constrained (Kleihet al., 2003). Such support can also assist inraising local business capability, for example, toidentify scope for the introduction of newtechnologies, input and design improvements,together with manufacturing capacity at the locallevel. These strategies relate both to the needs of

50


rural areas and also to associated small urbancentres. For small towns, a key requirement is thedevelopment of local expertise in financialmanagement, business planning and marketing(Wandschneider, 2003).

Policy measures are also needed to addressweaknesses in markets – both for inputs andoutputs of the RNFE. Some raw material supplymarkets can be improved through thestrengthening of local governance institutions forimproved management of natural resources,whilst there is a more general need for theencouragement of more efficient raw materialsupply markets. In some cases this approachrequires disengagement by government bodies(see below). Improved market access,particularly for small-scale RNFE producers, canbe assisted through enhanced access toinformation on market prices and marketingopportunities (e.g. more transparency throughpolicies promoting information kiosks at blocklevel), creation of storage facilities at thePanchayat level/cluster of Panchayats, andreforms of local mandis (Kleih et al., 2003).

These types of activities require policies andapproaches that go beyond private/publicpartnerships and include NGOs, the bankingsector, training agencies, not-for-profitcompanies, co-operatives and self-help groups(i.e. the encouragement of coalitions noted underinstitutional development above). A keycomponent is the better representation of ruralSMEs to ensure that their needs are included inthe reshaping of business environments. One ofthe more difficult aspects of policy will be toidentify the most appropriate institutional base tofurther improvements in the enablingenvironment. In some locations, progressiveelements within the DRDAs may be appropriate,but elsewhere alternatives will be needed.

Below district level, there are opportunities torationalize and improve the capabilities of localpeople and institutions, especially with respect toeconomic functions, but such policies willnecessarily be fairly long term. A range of

capacity building and training components willbe needed. Confidence raising and empowermentwill be needed for the poor, especially women,and choices need to be made over the degree towhich existing caste and gender barriers can bemodified or simply accommodated (Marter,2003). The latter comment applies to both ruraland small urban areas, since caste and genderconstraints in such towns appear virtually thesame as in surrounding rural areas(Wandschneider, 2003). Other needs can be metpartly through training in basic organizationalskills and also vocational training, especially foryounger entrepreneurs, for the necessarytechnical skills, development of basic businessenterprise, and generation of capacity to assessmarket opportunities.

All these activities will need to overcome thebias towards formal education that is widelyheld, in comparison to vocational training. Amechanism that can help to do this is to linkvocational training directly to private sectorpractical experience (via attachments) and torealistic business and marketing opportunitiescoupled with input credit options if feasible. Theproblem is that in the short and possibly mediumterm, local business environments are likely toremain weak. However, the recent trend towardscreation of Rural Development Cells by largecorporations (e.g. Hindalco in Sonbhadra, UttarPradesh), might represent an alternative (Kleih et

al., 2003). Given their resources, suchcorporations are able to invest in skill buildingand promotion of the RNFE in rural areasthrough intensive operational support processes.The first policy need, therefore, is for analysis ofthe performance of the Rural Development Cells,particularly the degree to which operationalsupport activities are converted into free standingenterprise.

Many of these suggestions raise questions as tothe source of training resources and trainersthemselves. A presumption by some is that publicsector provision (as in the past) is the answer.However, the range of required skills, includingmany commercial components, suggests that

51


more diverse approaches may be needed,including the private sector (Kleih et al., 2003).Findings for small urban centres also show that astrong preference exists amongst many localentrepreneurs for private sector provision oftraining and advice on technology and businessdevelopment (Wandschneider, 2003). There mayin fact be scope for policies which promote notjust public/private partnerships, but also coalitionapproaches in training, and in the development oflocal production and marketing agencies, thatinclude NGOs, CBOs and hybrid bodies such asnot-for-profit companies, etc.

Disengagement by thePublic Sector

Findings of research presented in this studyprovide numerous examples which point to theneed for more flexible approaches on the part ofgovernment bodies, including real delegation ofauthority to local institutions (Dasgupta et al.,2002), and a move towards facilitation ratherthan direct participation by government. Ineconomic terms, direct intervention bygovernment agencies has often been unhelpful,for example, with respect to input supply (such asloan programmes directed towards inappropriateinvestments) and marketing (such as continuedpromotion of sales from traditional industrieswhich face declining consumer demand) (Kleihet al., 2003; Marter 2003). There has also been afailure to meet the business development needsof both rural and small urban areas (Kleih et al.,2003; Wandschneider, 2003). These findings alsopoint to the need for engagement of a widerrange of institutions to support development ofthe RNFE, including much wider involvement ofthe private sector.

These essentially micro-level conclusions areechoed by other researchers who have assessedthe macro-policy environment. To date, national

and state-level policies for poverty reduction andeconomic growth in India have generally entailedsubstantial levels of government intervention,despite moves towards liberalization in the1990s. The focus has been essentially on supply-side components (Saxena, 2003), especiallycredit programmes, coupled withdecentralization (via PRIs). Subsidizedprogrammes and government direction ratherthan reliance on the operation of markets are stillcommonplace. Whilst many such policies havebeen pursued for 40 years or more, their impacton poverty has been limited, and growth in boththe RNFE and agriculture has been constrained.

Liberalization policies and programmes,therefore, need to be revived and extended,especially in areas that affect small- andmedium-scale enterprise, which are often subjectto the greatest restrictions. There is substantialscope to progressively rationalize the regulatoryenvironment to remove restrictions andtransaction costs where these arise in bothagricultural and RNFE production, andespecially in marketing systems (Saxena, 2003).Selective privatization as a long-term objectivealso needs to be rejuvenated, especially wherethis can improve key areas of infrastructure, themost obvious being electrical power generationand distribution. In the short- and medium-term,the main options for electric power may lie inprivatizing elements of distribution, for example,the purchase of power units by consumer groupswho subsequently take responsibility fordistribution, as has happened in some parts ofOrissa (Andrew Barnett, 2003, personalcommunication). In other sectors, there is also aneed for a reduction in subsidies, especially thosethat distort (and often constrain) more rationalpatterns of agricultural production. These moveswill need to be prompted at national level, butwill also require real commitment from stategovernments (Saxena, 2003).

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Wandschneider, T. and Mishra, P. (2003) TheRole of Small Rural Towns in Bolangir District.A Village Level Perspective. NRI Report No.2750. Chatham Maritime, UK: NaturalResources Institute. Website:http://www.nri.org

Westergaard, K. and Alam, M. M. (1995) Localgovernment in Bangladesh: Past experience andyet another try. World Development, 23 (4):679–690.

55

References

Details of the Study Area 1Appendix

State

Madhya Pradesh

Orissa

District

Narsimhapur

Betul

Nayagarh

Bolangir

Block

Gotegaon

Chichli

Betul

Bhimpur

Odegaon

Daspalla

Gania

Khanapada

Belpara

Patnagarh

Puintala

Titlagarh

Panchayat

Manegaon

Jotheshwar

Batesera

Thalwada

Devgaon

Janthapur

Adarsh Dhanora

Palaspani

Policy Initiatives for

Strengthening Rural

Economic Development

in India:

Case Studies from




Enterprise development, trade, finance, and empowerment are central to the improvement of

people’s livelihoods in developing and transition countries. The Enterprise, Trade and Finance

Group together with the Livelihoods and Institutions Group at the Natural Resources Institute

apply practical solutions to rural and economic development through research, consultancy and

training activities. Our teams have a substantial experience in agricultural and development

economics, marketing and market research, commodity and international trade, financial

service development, and social and institutional development. Core areas of expertise include:

• Microfinance, Enterprise Development and Poverty Reduction

• Ethical Trade and Corporate Social Responsibility

• Improving the Performance of Agricultural Markets

• International Marketing and Trade

• Community Participation in Policy Formulation

• Social Impact Assessment

• Institutional Analysis and Capacity Building

The Institute is also able to arrange the following services: programmed study tours; training

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For further information please contact:

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Kent

ME4 4TB

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