India’s Economic Reforms, Human Capital & Rural Development

Posted on Apr 19, 2025 in Economy

Impact of Reforms on India’s Industrial Sector

Key effects include:

Decreasing demand for industrial products:
- Cheaper imports have increasingly replaced the demand for domestic goods. Domestic manufacturers face significant competition from imports.
- Infrastructural facilities, including power supply, have remained inadequate due to a lack of investment.
Non-access to developed countries’ markets: A developing country like India often faces challenges accessing developed countries’ markets due to high non-tariff barriers.

Impact of Reforms on India’s Agriculture Sector

Key effects include:

Fall in public investment in Agriculture: During the reform period, government investment decreased, especially in areas like irrigation, power, and roads.
Removal of fertilizer subsidy: The removal of subsidies on fertilizers adversely affected small and marginal farmers because their cost of production increased.
Increased International competition: Indian farmers had to face increased international competition due to the reduction of import duties on food grains and the removal of minimum support prices, among other factors.
Export-oriented policy shifts: Prices of food grains increased partly because agricultural products were increasingly directed toward exports, leading to a rise in the production of cash crops over food grains.

Understanding Human Capital Formation in India

Human capital refers to the stock of skills and expertise of human beings in a country.

Human capital formation implies the addition to the stock of abilities and skills among the population of the country.

It involves acquiring and increasing the number of people who possess skills and expertise crucial for the overall development of the country.

Sources of Human Capital Formation

Investment in Education

Investment in education is considered a primary source of human capital.
Expenditure on education increases the efficiency and skills of human capital.
Education enhances the mental horizon of human resources and helps generate future profits.
Individuals invest in education to increase their skills and efficiency, resulting in higher earning capacity.

Investment in Health

Health is a vital input for the development of a nation, as much as it is for an individual.
It directly increases the physical and mental ability of human beings and produces a healthy labor force.
A healthy person contributes more to the nation’s GDP than a sick person.

On-the-Job Training

This type of training enhances the skills and expertise of human capital, increasing worker productivity.
It is training given to individuals by skilled workers while they perform their job.
Expenditure on such training programs enhances labor productivity.
This may take different forms, such as workers being trained within the firm under the supervision of skilled labor.

Investment in Migration

Migration means movement from one place to another.
People move in search of jobs where they can utilize their skills efficiently.
Expenditure on migration is considered a source of human capital formation as the potential earnings often outweigh the costs.
Migration involves costs like transportation and potentially higher living expenses.

Investment in Information Access

People spend to acquire information relating to the job market and educational institutions.
This information is necessary for making decisions regarding investment in human capital and for the efficient utilization of acquired skills.

Role of Human Capital Formation

Boosting Physical Capital Productivity

Physical capital formation depends significantly on human capital formation.
Physical capital can be utilized effectively only through the skilled and intelligent work of human capital in the economy.
Thus, human capital formation raises the productivity of physical capital, which is essential for economic growth.

Fostering Innovative Skills

Human capital formation not only increases the productivity of human resources but also stimulates innovation.
Education provides knowledge to understand societal changes and scientific advancements, thus facilitating inventions and innovation.
A larger number of skilled and trained personnel increases the possibilities for innovation.

Enhancing Participation and Equality

A higher rate of participation implies an increase in employment.
Human capital formation increases individual productivity, which enhances employment opportunities and promotes economic and social equality.

Improving Quality of Life

The quality of life improves due to quality education, health, and skill formation acquired by people.
Human capital formation enables individuals to enjoy a higher standard of living as they can generate better remuneration for themselves and contribute more to the nation.

Shaping the Growth Environment

Human capital formation influences the emotional and material environment conducive to growth.

Challenges in Human Capital Formation

Rising Population Pressures

A continuous rise in population adversely affects the quality of human capital.
The benefits of economic growth related to housing, hospitals, education, etc., are diluted by rising population numbers.
Rapidly rising population lowers the per capita availability of facilities and the capacity to acquire skills and expertise required for economic growth.

The Challenge of Brain Drain

The loss of resources through “Brain Drain” is a serious issue when educated and skilled manpower moves to other countries to work.
Countries like India can ill afford the migration of highly talented individuals with quality education who choose to offer their services abroad.

Deficient Manpower Planning

In India, there is often an imbalance between the demand and supply of human resources required for different categories of work.
Poor manpower planning leads to the wastage of the country’s scarce resources.

Lack of Primary Sector Training

The primary sector is crucial, but adequate training is often not provided to utilize resources effectively.
There are widespread inefficiencies in arranging on-the-job training programs, particularly in agriculture and allied activities.

Low Academic Standards

Educational facilities in India have not always developed at the pace required for economic growth.
There can be a mismatch between the required skills and the available academic standards.
Consequently, the skills, training, and expertise obtained by human capital may be insufficient to meet the desired standards for economic growth.

Growth of India’s Education Sector

Expansion of General Education: During the planning periods, the number of educational institutions providing elementary education increased roughly fivefold, and the number of students increased tenfold. In 1951, only about 18.33% of the total population was literate. By 2011, the literacy rate had increased to 74.4%.
Elementary Education Development: Elementary education covers students from class 1 to class 8 (age group 6-14 years). The number of primary and middle schools has considerably increased. However, challenges remain, such as ensuring universal enrollment and retention.
Secondary & Senior Secondary Education: Initiatives like Navodaya Vidyalayas were established to impart modern education of good standard to talented students from rural areas, providing boarding facilities. The Central government established Kendriya Vidyalayas for the benefit of children of transferable employees.
Higher Education Expansion: After independence, higher education has shown significant growth. As of recent data, the total number of colleges for general education in the country was 39,071. Higher education includes general, technical, managerial, medical, and other professional education forms.
Vocationalisation of Secondary Education: In February 1988, the Central government launched a plan to introduce vocational subjects into the education system. Vocational courses have been introduced in areas like agriculture, trade, commerce, engineering, technology, health, and medicine.
Technical, Medical & Agricultural Education: The number of institutions providing technical and professional education has increased significantly since independence. Many research centers have also been established, e.g., IITs, Agricultural Research Institutes, Indian Statistical Institutes, National Physical Laboratory, etc.

Note: Expenditure on education and health makes substantial long-term impacts and cannot be easily reversed; hence, government intervention is essential. The role of the government includes ensuring that private providers adhere to stipulated standards and charge appropriate prices. In a developing country like India, with a large population below the poverty line, many cannot afford basic education and healthcare. Basic healthcare and education are considered rights of citizens, making it essential for the government to provide these services free of cost for deserving citizens and those from socially oppressed classes.

Understanding Credit Needs in Rural India

Credit is essential for rural development. Needs are categorized by duration:

Short-Term Credit Requirements

Required to meet short-term needs.
Loan period typically ranges between 6-12 months.
Used to buy inputs like seeds, tools, manures, fertilizers, etc.

Medium-Term Credit Requirements

Required to meet medium-term needs.
Loan period ranges from 12 months to 5 years.
Used for purchasing machinery, constructing fences, digging wells, building cattle sheds, etc.

Long-Term Credit Requirements

Required to meet long-term needs.
Loan period ranges between 5-20 years.
Used for purchasing land, heavy machinery, and making permanent improvements to land.

Key Aspects of Rural Development

Rural development is the process targeting the betterment of rural areas.

It focuses on action plans for the development of rural areas lagging in the country’s overall progress.

Key Issues in Rural Development:

Development of human resources (education, health, skills)
Land reforms
Infrastructure development (power, irrigation, transport, communication)
Access to finance (credit)
Improved agricultural marketing systems
Poverty alleviation measures

Challenges in Rural Development

Lingering Challenges

The Challenge of Rural Credit

Rural credit refers to providing credit facilities for farmers and others in rural areas. Access to loans contributes significantly to the growth of rural economies.

Need for Credit: The need arises because many farmers, especially poor ones, lack surplus funds to invest in agricultural improvements. There is often a time lag between sowing crops and harvesting/selling them. Farmers borrow during this period to meet their consumption and production requirements.

Non-Institutional Credit Sources

These are traditional sources of rural credit in India:

Includes moneylenders, landlords, traders, relatives.
Often charge very high rates of interest, leading to exploitation of farmers.
May acquire land from farmers who fail to repay loans.
Can force farmers to sell their crops to them at low prices as part of loan conditions.

Institutional Credit Sources

Cooperative Credit Societies

These societies aim to provide credit to farmers at reasonable interest rates. They contribute significantly to rural credit.
Objectives:
- To free farmers from the clutches of moneylenders.
- To advance credit at low rates of interest.
- To spread credit facilities across the country.
- To ensure a timely and continuous flow of credit to rural areas.

RRBs and Land Development Banks

Regional Rural Banks (RRBs) and Land Development Banks (LDBs) were set up to enhance credit facilities in rural areas.
LDBs typically grant credit against the mortgage of land.
These banks provide credit for purchasing agricultural inputs, farm machinery, land improvement, construction, etc.

SBI and Commercial Banks

The State Bank of India (SBI) was established in 1955 with a focus on rural credit.
After the nationalization of major banks in 1969, commercial banks significantly increased their role in advancing rural credit.
Commercial banks directly help farmers by expanding their branch network in rural areas.
They also provide indirect finance through agents or by financing primary agricultural credit societies.

NABARD’s Role

The National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 as an apex institution to coordinate the activities of other financial institutions involved in rural credit.
It strengthens the credit delivery system and promotes rural development.
It provides refinancing assistance to banks and monitors/evaluates projects financed by them.
It also supports the non-farm sector in rural areas.
It coordinates the functioning of different financial institutions involved in rural credit.

Self-Help Groups (SHGs) & Micro-Credit

Formal credit sources are sometimes inadequate or inaccessible, especially for the poor.
SHGs promote saving habits among members, who make regular contributions.
From this pooled money, credit is given to needy members, repayable in small installments at a reasonable interest rate.
SHGs have significantly contributed to the empowerment of women. This approach is also known as a micro-credit program.

Critical Evaluation of Rural Banking

Access to banking credit often requires collateral security, which poor and marginal farmers may lack, leaving them excluded.
Sometimes, relaxed policies regarding loan recovery can lead to problems for banks (e.g., rising Non-Performing Assets – NPAs).
Farming families may struggle with consistent saving habits, potentially leading to lower deposit mobilization in rural bank branches.

The Challenge of Agricultural Marketing

Agricultural marketing is a process involving assembling, storage, processing, transportation, packaging, grading, and distribution of different agricultural commodities across the country.

Government Measures for Marketing Improvement

Regulated Markets

Established to create transparent marketing conditions benefiting both farmers and consumers.
This measure aims to protect farmers from exploitation by middlemen.
Market committees often oversee these markets, ensuring farmers get reasonable prices for their produce.
There is strict vigilance on the use of proper scales and weights.

Cooperative Marketing Societies

Under this system, farmers join together to form marketing societies.
They sell their produce collectively, benefiting from collective bargaining power to secure better prices.

Warehousing Facilities

The government has provided storage facilities (warehouses) to help farmers store their goods safely.
This encourages farmers to store their produce and sell it when market prices are more favorable, rather than being forced into distress sales immediately after harvest. Warehouses are operated by entities like the Central Warehousing Corporation (CWC) and State Warehousing Corporations (SWCs).

Agricultural Diversification Strategies

Agricultural diversification is an essential component of economic growth and rural development. It represents a shift from traditional agriculture towards a more dynamic and commercial sector. This involves changing the product mix towards high-value commodities or activities with greater market potential.

Diversification can be driven by changes in technology, consumer demand, trade patterns, government policy, and improvements in infrastructure like transportation and irrigation.

It includes two main aspects:

Change in cropping pattern: Shifting from subsistence farming or traditional crops to high-value crops, horticulture, floriculture, etc.
Shift of workforce: Moving labor from agriculture to allied activities (like livestock, fisheries, forestry) and the non-agriculture sector (rural industries, services).

Need for Agricultural Diversification

Risk Reduction: Diversification is needed because depending exclusively on traditional farming for livelihood carries significant risks (weather, pests, price fluctuations).
Sustainable Livelihoods: Diversifying into new areas provides more productive and sustainable livelihood options for rural people.
Addressing Seasonal Unemployment: Much agricultural employment is concentrated in the main cropping season (e.g., Kharif). During the off-season (e.g., Rabi), especially in areas with inadequate irrigation, finding gainful employment is difficult. Diversification offers alternative income sources.

Animal Husbandry

In India, the farming community often uses a mixed crop-livestock system. Cattle, goats, and poultry are widely held species.
Livestock production provides increased income stability, food security, transport, fuel, and nutrition for the family without disrupting other food-producing activities.
Livestock farming is often combined with crop farming, especially in rural areas, to supplement income.
It is particularly important in arid or semi-arid regions with limited irrigation facilities.
Poultry farming accounts for a significant share of livestock-related income.
Government initiatives like “Operation Flood” facilitated the pooling of milk production by farmers, enabling efficient collection, processing, and marketing through milk cooperatives at fair prices.
Gujarat is often cited as a success story in implementing milk cooperatives, a model emulated by many other states.

Fisheries Sector

Fishing communities often regard water bodies (seas, oceans, rivers, lakes) as their primary source of livelihood (‘mother’ or ‘provider’).
Coastal states like Kerala, Maharashtra, Gujarat, and Tamil Nadu have significant populations dependent on fisheries. Inland fisheries (rivers, lakes) are also important.
Major problems faced by fishing communities include unemployment/underemployment, low earnings, indebtedness, and lack of access to education and healthcare.
There is a need to increase credit facilities for the fishing community, potentially through cooperatives and SHGs.
Updating fishery technology and making it accessible to the fishing community is crucial for improving productivity and income.