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Rural Economy, State and Public Policy

Exploring the Rural Crisis of Indian Punjab

Baldev Singh Shergill ( is a faculty member and Ramanpreet Kaur ( is a research scholar at the Punjabi University Guru Kashi College, Punjab.

The contemporary situation of Punjab’s rural economy has been a subject of serious concern. One of the important reasons for the disappointing outcomes in the state is the proliferation of the expenditure heads of public outlays by successive governments at different levels. Further, the rural sector has consistently lost its importance in the state’s public outlays, with a progressive diversion of public spending on the rural sector towards local-level administration, bypassing key sectors of rural development such as human resources development. This aspect has been a major driver of the unending rural crisis in the state. The evolving levels and patterns of the public expenditure on the rural sector over time are examined.

After its establishment as a new state in 1966, Punjab, or popularly the Punjabi Suba, evidenced a proactive role played by the Indian state to initiate rural development, and institutional and infrastructural development programmes. Especially a new technocratic-institutional model of agricultural development was initiated from the Third Five Year Plan onwards. This phase can be recognised as a model of state-led development where various institutional set-ups were created to advance the economy of the state as a whole.

Throughout the history of economic advancement, the role of the state in the economic progress across nations has been a contending issue (Mukherji 2009; Borcan et al 2017). The course of economic progress and its effect on the society depend on the socio-economic orientation of the developmental state. What the state wishes to organise for meeting the requirements of contemporary social development is reflective of the political action, will, orientation and vision of the elected government. The three actors—namely the state, the market and the society—work together for a nation’s economic and social progress despite their conflict and competition, and the diversity of their orientations and perspectives therein.

In the context of the structural transformation of the economy, public expenditure assumes a pivotal role for state-led development. Consequently, expenditure on the rural economy has also been an area of interest among economists and policymakers analysing the overtime structural changes in the public spending in correspondence to the dynamics of the rural sector growth. In tandem, the current article explores the role of public investment in the socio-economic developments of the rural sector of Punjab. The timeline for analysing the rural public expenditure begins from 1966, that is, the year when the Punjabi Suba came into being.

The political-economy perspective for understanding the priorities and choices of the state expenditure is discussed by Posani (2009). We live in a world with increasingly supranational regimes of economic and financial governance, wherein public policy is not an autonomous decision of the national government. Further, as per the Indian Constitution, issues such as agriculture, health and other infrastructural development, which form the lifeline of the rural economy, are kept under the purview of the state government. In the heterogeneous Indian society, the economic decisions and priorities, however, are not determined by the state government alone, but in conjunction with other social forces (including a bureaucratic bourgeoisie). In a nutshell, the complicated and ambiguous interaction between the principal internal factors of economic progress is continuously and increasingly influenced by various external factors, amongst which are local pressure groups that can force the state to rollback decisions and policies for an inclusive welfare of the residents. Several examples can be registered: implementation of social welfare schemes, rollback of fee hike in higher educational institutions, compensation for the farmers due to crop failure/loss, decisions on land acquisitions in the state are a few to mention.

Contemporary Rural Economy in Punjab

Punjab continues to be predominantly a rural economy with 62.5% of its total population still living in the rural areas and 39% of the total workforce being directly involved in agriculture and allied services (Census 2011). Therefore, the performance of the agriculture sector has always been the most important vehicle for the rural transformation of the state. The most remarkable turning point that is both celebrated and contested in the agrarian history of Punjab’s economy is the introduction of the green revolution in 1966–67, which brought the title of “food bowl” to the state. With this, Punjab’s contribution of wheat and rice to the national pool increased from 15.8% and 0.7% in 1960–61 to 21.6% and 1.6% in 1970–71, respectively. During this period the rural–urban differential in living standards tended to narrow down (Economic Survey of Punjab 1962 and 1972). In absolute terms, all categories of rural dwellers saw an improvement in their economic position. The rural Punjab of 1985 was much better off than the rural Punjab of the 1950s (Chadha 1986).

But after this rapid growth, agricultural production recorded its worst ever performance during the 1990s (Dhesi and Singh 2008). The declining trend continued thereafter suggesting that after nearly 40 years of adoption of the green revolution the agrarian sector is still in an acute state of crisis. The sector’s growth rate has remained below 2% between 2009 and 2013 with growth turning negative in 2009–10 and 2012–13. The failure of the green revolution brought several challenges for the agrarian sector and the rural areas in the form of soil erosion, water shortages, reduced soil fertility, unavailability of nutritious food crops for the local population, the displacement of vast numbers of small farmers from their land, rural impoverishment and increased tensions and conflicts (Shiva 1991).

One of the major reasons of the economic crisis in Punjab is that the larger part of the state’s economy depends on agrarian and allied activities and hence the slow growth rate in agriculture has hit the overall economy of Punjab. Institutional reforms, green revolution, failure of the state during the period of insurgency and the new economic reforms led to overstay in agriculture, stagnation in industrial development, low service sector growth due to imbalance among the sectors at one end, and unwillingness of the politicians, bureaucratic control and a nexus between politicians, bureaucracy and illegal traders at the other.

Simultaneously, the industrial sector has been showing several signs of fatigue. First, employment opportunities in the public sector are declining. Second, poor implementation of social security schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (MgNREGA) has failed to generate employment in the rural areas (Sharma et al forthcoming). Third, low employment is evidenced in the non-farm sector (Shergill et al 2015). Such developments have led to a crisis in both the rural and the urban economies of the state given the interactions and linkages between these two enclaves. The seriousness of the situation is manifested by the incidences of suicides among young farmers (with their wives and children) in the villages as well as the urban workers and educated youths. These facts indicate that the development story of the state is very much a delusion.

The Punjab economy in general and its rural economy in particular have been under serious economic crises since the mid-1980s (Singh and Singh 2002; Gill 2005; Gill and Singh 2006; Singh et al 2016). This situation would lead to the standard Keynesian policy in the form of public investment. But the character of the state has been changing from that of a welfare state to a neo-liberal one. And under the neo-liberal regime the political and ideological unwillingness to expand public investment are at the height. Therefore, there is a need to understand the changing priorities of the state since 1966 and consequently the crisis of the rural economy by examining the varying patterns and level of public expenditure on the rural economy over half a century. The present study will also provide some empirical evidence to understand macroeconomic aspects of the rural economy of Punjab.

Policies like tightening of public expenditure, opening up of economic activities and the withdrawal of state itself need to be put in some context. The appraisal of rural economy of Punjab has been a subject of serious concern and debate since its reorganisation. The process of economic development in Punjab from 1966 had involved continuous state interventions in three areas, namely land reforms, farm and services cooperatives and the local self-governments. But by the end of the 1980s the strategy for state intervention fundamentally changed from an institutional model to a technocratic one. During this time rural India had come to enjoy unprecedented political visibility and policy influence (Posani 2009).

This provides a background for understanding the trajectory of the socio-economic orientation that has been evolving over the last 50 years of economic transition of the region. Our interest to deal with the trends and patterns of public expenditure on the rural economy is for understanding the political economy of development. This exercise would be helpful to gauge the rural economic crisis. The burden experienced by the rural society, excepting the big landholders, is due to the low public expenditures of the state as well as the union government.

Macroeconomic Indicators

This article uses secondary data on various economic indicators from 1966–67 to 2014–15. These data are compiled from the various issues of the Statistical Abstract of Punjab, the Economic Surveys of both the Government of Punjab and the Government of India, and the reports on state finances published by the Reserve Bank of India (RBI). The term rural economy comprises of “agricultural and allied activities” and “rural development.” The framework for examining the rural economy of Punjab is based on Jha and Acharya (2011).

A crude indicator of economic progress is the changing pattern of economic activities. The growth pattern of the three sectors, namely the primary, secondary and the tertiary sectors, in terms of their relative contribution to the gross state domestic product (GSDP) are used as the indicators examining the development process of the economy. The predomination of agriculture is conventionally considered as the representation of a less developed economy. But in the case of Punjab, where more resources and workforce are involved in the primary sector, it is also expected that the contribution of the primary sector to GSDP would be greater than the other two sectors.

The contribution of the three sectors to GSDP from 1970–71 to 2014–15 is analysed in Table 1. The share of agriculture in GSDP declined from 57.4% in 1970–71 to 49.13% in 1980–81 and then further to 12.24% in 2014–15 (Economic Survey 2014–15). On the other hand, the share of the secondary sector increased from 15.7% in 1970–71 to 26.19% in 2014–15, while that of the tertiary sector increased from 26.90% in 1970–71 to 52.50% in 2014–15.

Development economists have often argued that the non-farm and/or service sectors are driving factors of economic progress. Such economic progress can lead to rural–urban migration. In Punjab, too, the structural transformation of the economy is in tandem with some transition in the urban demographics, but do not comply with the conventional conjectures about the relationship of demographic and economic transitions.

Table 2 shows population distribution across rural and urban regions in Punjab from 1981 to 2011. Though the rural population has been on the decline over the past four decades, the rural areas still accounted for 65.52% of the total state population in 2011. But, this predominant share of the state population contributes only 27.22% to the GSDP.

Consequently, the primary sector’s ability to absorb the state’s workforce has been declining over time (Table 3). The share of the workforce in this sector declined from 63.6% in 1971 to 43.20% in 2011. On the contrary, the share of the workforce in the secondary sector increased from 13.28% in 1971 to 20.23% in 2011. Similar changes occurred in the service sector that absorbed 23.12% of the workforce in 1971, which increased to 34.64% in 2011. Though the secondary and the tertiary/service sectors evidenced an increase in workforce engagement, yet the primary sector continued being the mainstay of employment in the state.

Changing Patterns of Public Expenditure in Punjab

This section of the paper provides a macro picture of public expenditures in Punjab, which would help in understanding some basic issues regarding the developmental model of Punjab.

Table 4 shows the activity-wise/sectoral share of public expenditure in the rural economy under the various plan periods. One of the salient issues is the declining share of the agriculture and allied activities since the Seventh Five Year Plan. The share of expenditure on agriculture and allied activities was 10.29%, 11.73%, and 10.69% during the Fourth, Fifth and Sixth Five Year Plans, respectively. After that the shares declined to 7.91%, 5.40%, and 4.62% during the Seventh, Eighth and Ninth Five Year Plans, and fell further during the Tenth, Eleventh and Twelfth Five Year Plans. Notably, that was also the period of agrarian crisis and economic distress of farmers in Punjab. Significant allocations were also made towards irrigation and flood control. But this share continued to increase only up to the Ninth Five Year Plan. From the Tenth Plan onwards, this started declining. First to 7.10% during the Tenth Five Year Plan from the 10.88% during the Ninth Five Year Plan, and then to 5.72% and 5.31% during the Eleventh and the Twelfth Five Year Plan, respectively. On the other hand, the share of the allocation of the plan expenditures on rural development has largely remained below 5%, excepting for the 10.86% during the Tenth Five Year Plan. Overall, the share of plan outlays on the rural economy in general has been fluctuating between 12% and 20%, despite the pressing needs to improve the poor economic conditions of the state and that of the agrarian sector per se.

Public expenditure, on the one hand, can be broadly classified under non-development and development expenditures. Non-development expenditure does not play any role in increasing productive assets. But economists have often argued that non-development expenditures can drive demand in the economy and hence shove the economic activities indirectly. On the other hand, development expenditure includes expenditure on economic services and social services. Expenditures on economic services can directly influence the growth rate by driving the development of economic activities and services, such as agriculture and allied activities, industry and minerals, power, transport and communication development, among others.

According to Table 5, non-development expenditure was found to be higher than development expenditure, particularly between 1966–67 and 1970–71 and again from 2000–01 to 2015–16. The overall priority was given to non-development expenditure by the state during different political regimes. Development expenditures, however, received higher priority from 1980–81 to 1990–91, potentially due to the separatist movement in Punjab. The data also shows that the expenditure on social services received higher priority in the total development expenditure than that on economic services.

Expenditure on economic services has remained low for almost over half a century. In 1965–66 it was only 15.72% but rose during the 1980s. In the 2000s when the performance of the Punjab economy went worse and there was a dire need to increase public investments, the state seems to be inattentive towards this with the share of economic expenditure declining to 19.86% by 2015–16. Moreover, grants were allegedly distributed unplanned by office-bearers at various political levels, including the chief minister of the state during Sangat Darshan programmes (Hindustan Times 2013).

Public Expenditure for Rural Development

Table 6, however, shows that from 1990 to 2016, when the state economy was badly trapped in crisis, the share of public expenditure on the rural economy remained very low. In 2015–16, for instance, it was only 6.07% of the overall budget expenditure of the state. Capital expenditure, which is likely to contribute to the capital formation in the state, presents a rather grim picture with its share declining from an already low 3.77% in 1990–91 and only 1.07% in 2015–16. The state with such expenditure priorities can only expect the economic crisis and debt traps to deepen further.

Historically, the strategy of economic planning in India has emphasised on rural development programmes under its proclaimed objectives of economic growth with social justice. It began with an emphasis on agricultural production and consequently expanded to promote productive employment opportunities for the rural masses, especially the poor, by integrating production, infrastructure, human resources and institutional development measures. This strategy has been integrated into the rural development process in Punjab, too. The evolution of the strategy for rural development in the state can be viewed in terms of the evolving level and pattern of public expenditure on the various schemes and programmes of rural development from 1965–66 to 2014–15, as presented in Table 7.

Expenditure on local-level administration retained almost similar importance in 2014–15 as it did in 1965–66, constituting 49.55% in 2014–15 vis-à-vis 50.74% in 1965–66, despite evidencing some staggering decline between 11% and 18% in the interim years. Second priority was infrastructure development, including irrigation, communication, construction of paved roads and drains, betterment of villages, and assistance to panchayats. The expenditure share on this head evidenced an increase from 6.83% in 1965–66 to 25.36% in 2014–15. On the other hand, human resources development, including areas like education, health and rural sanitation, has received the least attention, despite its significance for attaining the inclusive and sustainable development of the economy. The government expenditure on this front has declined consistently from 14.42% in 1965–66 to 5.36% in 2014–15. Expenditures on health and rural sanitation saw sporadic increases in 2000–01 and 2010–11, otherwise its share remained low, hovering between 5.7% in 1965–66 and 2.37% in 2014–15. Expenditure data on education depicts an even worse picture. Public expenditure share fell to as low as 0.78% and 0.29% in 1980–81 and 1990–91 respectively, but revived to a mere 2.98% in 2014–15. Expenditure on employment programmes declined from 35.80% in 1980–81 to 19.72% in 2014–15. Although these shares are higher than those on many other development heads, it is not reasonable. In short, these findings show that the administration took precedence over some of the most crucial development indicators, such as health, education or employment, which have been almost continually neglected by the state government.

Interstate Comparison of Public Expenditure on Rural Sector

The findings in this section show that there has been considerable diversity across the Indian states in the pattern of their public expenditure on the rural economy between 1990 and 2016. Table 8 shows that the average share of overall public expenditure on the rural economy in major Indian states had declined from 19.65% in 1990–91 to 14.51% in 2000–01 to 7.28% in 2015–16. During 1990–91 the states that accorded high priority to the rural economy included Madhya Pradesh (26.99% of total expenditure), Uttar Pradesh (22.68%), Andhra Pradesh (22.48%), Maharashtra (22.13%), and Haryana (20.28%). The worst performers in this respect during 1990–91 were Punjab (12.71%) and Kerala (14.41%). In 2000–01, Madhya Pradesh (18.02%), Uttar Pradesh (15.65%) and Haryana (15.07%) continued according similar priority to the rural sector. While Bihar (15.33%) had joined the list of doers, West Bengal (9.88%) emerged among the poor performers. For 2015–16, Bihar (14.68%) and Andhra Pradesh (13.35%) recorded expenditure shares that were well above the average share of 7.28%, while for most of the other states these shares were way below the average.

It is worth noting that during this period most of the states evidenced consistent decline in the share of public expenditure allocated on the rural economy. Punjab emerged in a poor light in this respect all through this phase. First, its share of expenditure accorded to the rural economy had been persistently lower than the national average. Second, these low shares declined consistently from 12.71% in 1990–91 to 6.07% in 2015–16. Surprisingly, a state like Bihar was even found to accord more than priority to the rural economy in comparison to a dominantly agrarian state like Punjab.

Agriculture and allied activities: Table 9 shows that all major states were according less priority and hence low expenditures on the agriculture & allied activities from 1990–91 onwards. During this year Madhya Pradesh (11.55%) and Maharashtra (11.55%) emerged as the better performers among the various states, while Andhra Pradesh and Punjab were among the worst performers. In 2000–01, however, Punjab (3.63%) and Bihar (3.63%) accorded the highest share to these activities as compared to the other states, but these figures in the 1990s and 2000s were much better. Haryana and West Bengal—both with a share of 1.03%—accorded the lowest share of budgetary expenditure on the agriculture and allied sector in 2015–16. This data reveals the declining significance of agriculture and allied activities in the budget expenditures of major states of India in the contemporary period.

Rural development: For the betterment of the rural settlements, various schemes have been introduced and realised by the planning boards and local bodies at the central as well as the state levels. Expenditures on rural development envisaged to connect the rural areas with the urban centres of production and services. After independence, it was a challenge to the juvenile rural sector of the economy to embrace the modern development process. During recent times, however, the expenditure share on rural development, too, has consistently declined in major Indian states. For instance, Uttar Pradesh, which in comparison to the other states, had accorded the highest share of expenditure on rural development during the 1990s, had spent as low as 2.05% on this head in 2015–16. In 2015–16, Madhya Pradesh, which accorded the highest priority to rural development, had spent only 3.07% of the budget expenditure in this area.

Irrigation and flood control: Irrigation is an integral part of modern agricultural practices in India. Since the inception of development planning in the country, agriculture development planners recognised the importance of irrigation facilities in increasing agriculture production and for reducing the dependence of Indian agriculture on the monsoons. Simultaneously, Indian agriculture is also prone to floods. Various programmes were introduced and implemented by the state and central governments to reduce damage of crops due to floods and other natural disasters. Table 9 shows that the percentage share of budgetary expenditure on irrigation and flood control in major states have declined over the past quarter of a century. Andhra Pradesh, which had allocated almost 11% of the budgetary expenditure on irrigation and flood control in the 1990s, had spent only 1.02% in 2015–16.


The contemporary situation of Punjab’s rural economy has been a subject of serious concern. And a plausible reason for such disappointing outcomes is the proliferation of the expenditure heads for public outlays by the successive governments at different levels. While examining the public expenditure on rural economy, we have first examined the expenditure on major heads/activities, such as administration, production, infrastructure development, human resources development, from 1965–66 to 2015–16. During this period, local administration emerged to be the most important and human resources development most neglected aspect of public outlays.

On the other hand, while the average share of the public expenditure on rural economy over the Five Year Plan periods between 1969 and 2017 remained almost stagnated at about 12%, agriculture and allied activities emerged to be an area of utmost neglect by state government agriculture, despite the potential of this sector to increase GSDP and employment through its backward and forward linkages with other sectors. The study further reveals that the public outlays on the rural economy has not only been decreasing under the successive state governments, but has also remained below the average expenditure incurred by major states in the country, and even fell below the expenditure share of states like Bihar and Andhra Pradesh.

This article argues that the developmental state implemented the agenda of neo-liberal reforms and decided its priorities by notwithstanding the rural economy as a whole. Fundamentally, findings of this study disprove the claims of substantive interventions by the state to rejuvenate the rural economy of Punjab. The state should look beyond its agenda of neo-liberal reforms and divert public investments in key areas of rural development, such as public health, education, agriculture and allied activities, and village industries, to overcome the rural socio-economic crisis.


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Updated On : 5th Jul, 2019


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