The Trickle Down Theory @ work

FIRST TIME IN 25 YEARS

• In 2011-12, total rural consumption was 12.9 lakh crore, against urban figure of 10.44 lakh cr

• Between 2010-11 and 2011-12, rural consumption grew at 19%, urban at 17%

• 27% of rural household benefited from NREGA

• About 1 out of every 2 rural households in India has a mobile phone

• More than 50% of country’s TVs, fans, mobiles and 2-wheelers are in rural areas Trickle-down theory at work in last two years

Given the large size of India’s rural population, the absolute value of goods and services consumed in this segment of the economy has always been higher and continues to do so. However, urban India has narrowed the differential during most of the last decade by growing at a faster pace, mainly after the economic liberalization process which started in 1991.
Interestingly, the NSSO data revealed that about 70% of total income of the labour force in the urban sector—most of which comprises migrants from villages—is remitted to their homes, thus adding to the overall spending capacity of the rural household.
The last two years, however, showed a reversal in the trend which could be seen as another testimony of the trickle-down theory of development economics.
Data shows that in 2004-05, the aggregate value of rural consumption was Rs 5.22 lakh crore, or about 57% of the country’s total consumption spend of Rs 9.15 lakh crore. By 2009-10, this had fallen to 55.2% and then again, by 2011-12, it rose marginally to 55.3%.
NREGA, introduced in 2006 and extended to all of rural India in 2008, and the government’s other social sector schemes fuelled job creation at an unprecedented scale and provided an opportunity to rural households to supplement their traditional farm income, the report noted. Nearly 27% of rural households availed employment under (NREGA) in 2009-10. This scheme, which is linked to retail inflation (that is CPI, or consumer price index), is also fuelling inflation in the country. However, the main reason why the inflation remains at an elevated level is the supply constraints in the economy.
For example, in India the demand for pulses, the main source of proteins, is rising at a much faster clip than the rise in total production of these food items. However, low productivity level for protein-rich foods and thus lower returns to farmers compared to returns from cultivating rice and cereals is forcing them to continue farming rice and cereals. This is contributing to inflation for retail consumers.