The distributional impact of structural transformation in rural India: case-study evidence and model-based simulation

Abstract

Abstract The North Indian village of Palanpur has been the subject of close study over a period of six decades from 1957/8 to 2015. Himanshu et al. (2018) document the evolution of the village economy over this period and point to two distinct drivers of growth and distribution of income. An early period of agricultural intensification associated with the green revolution saw an expansion of irrigation and the introduction of new agricultural technologies, leading to rising incomes accompanied by falling poverty and fairly stable, or even declining, income inequality. From about the mid-1970s onwards, a cumulative process of non-farm diversification took hold, and was associated with further growth and poverty decline but also a significant rise in income inequality. Such a process of structural transformation has been observed more widely in rural India. We construct a simple model of a village economy that captures several of the salient features of the Palanpur economy and society, and that is able to reproduce the distributional outcomes observed in the village. Our analysis suggests that while non-farm diversification occurred alongside rising inequality, the counterfactual of no diversification would in fact be associated with an even greater increase. We suggest therefore that non-farm diversification has in fact helped to contain growth in inequality, and has played a particularly pronounced role in reducing poverty. To the extent that other villages in India share features similar to Palanpur, our findings may also hold elsewhere.