Non-Farm Occupation in Rural India



A. K. Mukhopadhyay, 

D. Gangopadhyay & Saswati Nayak


Rural non-farm economy, in recent times, is considered as an effectual strategy for decentralization of economic activities to rural India. The Economic Census of India estimates that around 41.89 million rural people are employed in non-agricultural establishments which registered a growth rate of 4.56 % during 1998-2005. However, the sector has been contending with a number of factors like inadequate rural infrastructure, particularly roads, electricity and communication facilities, lack of sufficient skilled labour and adequate access to credit, information and training facilities etc. The present study investigates the strengths and weaknesses of the rural-non-farm-sector of India analyzing the structure and growth of rural-non-farm-sector and its’ trends towards employment and income generation to arrive at certain inferences like formulation of possible approaches with a view to promote rural-non-farm-sector self-sustaining in the changing competitive environment.



Farm activity means agricultural activity and non-farm activity is used synonymously with non-agricultural activity. There are two alternative approaches to define rural-non-farm activities (Saith, 1992). The first is the locative approach in which the primary criterion is that a RNF activity is performed in a location which falls within a designated rural area. The second is based on the linkage approach where an industrial enterprise generates significant development linkages with the rural areas. For purposes of this study we are using the first. Rural-Non-Farm-Sector (RNFS) includes all economic activities viz., household and non-household manufacturing, handicrafts, processing, repairs, construction, mining and quarrying, transport, trade, communication, community and personal services etc. in rural areas. Rural-Non-Farm-Activities (RNFAs), thus, play an important role to provide supplementary employment to small and marginal farm households, reduce income inequalities and rural-urban migration. Though, agricultural sector has played a very significant role for generation of rural employment in the Asia and Pacific region, its contribution to the overall economy has greatly reduced in the recent past (Asian Productivity Organization, 2004). Therefore, development of various non-farm-activities can effectively be exploited as a potent stimulator for further economic growth offering rural communities better employment prospects on a sustainable basis.


Importance of Rural Non-Farm Sector

The non-farm sector, particularly in rural areas is being accorded wide recognition in recent years for the following reasons: 


Structure and growth of Rural-Non-Farm-Sector

The RNFS in India is too diverse in respect of activities, unit size and geographic dispersal. Further, it does not consist of a homogenous set of activities in terms of income and productivity levels. The RNFS is classified into three major sub-sectors (Saxena, 2004). The first sub-sector consists of enterprises that are run on more or less stable basis with target on the surplus generation and growth, employing labour with certain degree of technical sophistication. The second sub-sector consists of products or activities, which are often seasonal, run solely with the help of unpaid family labour, using primitive technology and catering mostly to the local market. These two sub-sectors can be differentiated in terms of capital use rather than product categories. The third sub-sector consists of paid workers characterized by low earnings and a disintegrated market with respect to labour supply. As per the Economic Census 2005, the total non-agricultural establishments accounted for about 17.855 million in the country, whereas 19.83 million were situated in rural areas. Out of 19.83 million non-agricultural establishments located in the rural area, 13.26 million (66.89 %) were own-account establishments and remaining 6.56 million (33.11 %) were establishments with hired workers (Table 1). Non-agricultural and agricultural establishments registered a growth rate of 4.56 and 8.62 % respectively during 1998-2005 (Figure 1). The data suggests that with the major share of non-agricultural activities, the growing rural labour force can successfully be absorbed as RFNS workers generating supplementary income for better economic growth of the rural community. Retail trade (39.28 %) was the dominant activity followed by manufacturing (26.02 %) and other community, social and personal service (8.15 %) of the non-farm establishments. Sector-wise distribution of different rural non-farm sectors in rural India has been depicted in Figure 2.  


Table 1: Non-agricultural establishments and employment in rural India in 1998 and 2005

Temp Fig

Note: Figures are in absolute number. Figures in single and double brackets indicate average number of persons per establishment and percentage of female / hired worker to total employment respectively.

Source: Economic Census All-India Report (2005), Govt. of India, Ministry of Statistics and Programme Implementation.



Fig 1

Fig 1: Distribution of enterprises in rural India during 1998 and 2005

Source: Economic Census All-India Report (1998; 2005), Govt. of India, Ministry of Statistics and Programme Implementation.




Fig 2

Fig 2: Distribution of major Non-agricultural establishments in rural India during 2005

Source: Economic Census All-India Report (2005), Govt. of India, Ministry of Statistics and Programme Implementation.



Trends of non-farm employment and income

Rural non-farm economy in recent times is being considered an effectual strategy for decentralization of economic activities to rural India and giving a halt to the migration of people to urban centres. Around 41.89 million persons worked in rural non-agricultural establishments of rural areas which constitute 46.55 % of the total employment in non-agricultural sectors including both rural and urban areas. Of these, 17.30 million persons (41.30 %) were employed in own account establishments and the remaining 24.59 million (58.70 %) in establishments with hired workers. Female workers (nearly 10 million) constituted 21.96 % of total employment in rural non-farm sectors and proportion of female employment was found comparatively higher (24.32 %) in establishments which hire workers than own-account establishments (18.59 %). There were 1.03 million child workers, which constituted 2.45 % of total employment in non-agricultural establishments in rural areas and the proportion was more in establishments with hired workers (2.85 %) than in own account establishments (1.89 %) (Table 1). Retail trade, manufacturing and other community, social and personal service activities were the three most important activity groups which attracted the largest number of own account establishments. However, the percentage of other categories including social and personal service activities was much less compared to that of retail trade and manufacturing. Employment in retail trade (7.5 million) constituted 43.12 % of the total employment in the own account establishments in the rural area followed by manufacturing engaging 5.4 million workers (31.01 %) and other community including social and personal service activities 1.3 million workers (7.67 %). Percentage of share of employment was found negative in the sectors like mining and quarrying, electricity, gas and water supply, financial intermediation and other activities. The trend of percentage share follows the same pattern as that of establishments with hired workers. The non-agriculture-sectors where employment growth during the 90’s was positive and higher were manufacturing, construction, trade, transport, and business services whereas negative in mining and quarrying, utilities and community services.

Various studies have estimated that the earnings of regular workers in the RNFS were 2.4 times higher than that of agricultural workers. Casual labourers earn higher wages in non-agricultural activities than in agriculture. For male labourers wages are 40 % higher. For female the difference is just over 20 %. According to National Sample Survey, only 10 % of male rural workers and 5 % of female workers were regularly employed. A trend of a shift from self-employed in agriculture to higher paid casual work in non-agricultural activities has also been pointed out by some independent studies.

Non-farm employment can broadly be classified into three categories:  regular employment, self-employment and casual employment. A trend in employment status of rural labour in India is presented in Figure 3. 27 million people were employed in organized sector in 2003. The Employment in this sector has been decreasing since 1998 when it was 28.1 million. Estimates suggest that 92% of Indian labourers are engaged in the unorganised sector while organised segment constitutes the remaining 8%. Further, it can be noted that 95% of female workers and 89 % of male labourers are engaged in the unorganised segment in India. The informal nature of farm and non-farm activities in rural areas drives this trend of overwhelming presence of unorganised sector in India. Though, the informal nature of farm activities in rural areas has been documented to some extent, non-agricultural activities appear to be extremely unorganised in India. Distribution of workers in organized and unorganized sectors has been depicted in Figure 4.


Fig 3

Fig 3: Trends in employment status in rural labour force (male + female) by sector

Source: NSS Report No. 522 (62/10/01) Employment and unemployment situation in India, July, 2005 - June, 2006




Fig 4

Fig 4: Distribution of rural workforce by type of employment and sector

Source: Estimates by NCEUS



Labour force growth and employment requirements

To provide employment for additional labour force which is estimated to grow at the rate of 2.51 % per annum during the Tenth Plan period (2002-2007), besides reducing the backlog of unemployment accumulated from the past, is a daunting challenge for India. Despite an expected reduction in the growth rate of population to 1.63 % per annum by 2002 - 2007, the labour force growth reached 2.51 % per annum. This is attributed to change in the age structure of the population and an increase in the population in the most active working age group of 15-59 (Table 2 and 3). Growth or decline in the labour force participation rates (LFPRs) depends on certain factors. With the increasing thrust on education, LFPRs in the age group 15-19 years will decline. On the other hand, with improved health and longevity, LFPRs in the older age groups, particularly 50+ years, will increase by 7.9 – 8.9 % during the Eleventh Plan period (Table 2). The labour force projected to increase by 40.02 million in special group and 55.82 million in working age group (15+) during the period of 2007-12 implies the need for an increase in the pace of creation of additional work opportunities commensurate with the growth of labour force (Table 4).


Table 2: Age structure of population

Age group




















All age groups










Note: age distribution in per cent, population in million

Source: Planning Commission, Govt. of India, Tenth five year plan 2002-07



Table 3: Growth in population and labour force projection by age group    

Population / labour force




Population (all age groups)




Population (15 - 59 years)




Labour force (15 – 59)




Population (15+)




Labour force (15+)




Note:  1) Data for respective years are per cent per annum   2) Labour force projections here are on the basis of labour force participation rate for each quinquennial age group remaining unchanged, i.e. the changes in labour force growth in relation to population are due to changes in the age composition of the population.

Source: Planning Commission, Govt. of India, Tenth five year plan 2002-07



Table 4: Increase in labour force and working age population

Basis of scenario



Increase in labour force  (Specific group)



Increase in working age population (15+)



Note: Data for respective five-year blocks in million

Source: Report of Planning Commission Special Group on creation of 10 million employment opportunities, per year since 2002.


Unemployment is estimated at 21.15 million, 5.11 % of the total population (Table 5). To achieve full employment by 2011-12, it is estimated that employment should grow at 2.7 % per annum based on the proposed policy and programmes in the Tenth Plan. This would require GDP to grow at 8 % per annum. It is observed that the proportion of person-days of the usually employed, utilized for work, is lower for females as compared to the males throughout the period 1987-88 to 1999-2000. During 1999-2000, this proportion was estimated at about 68 per cent for females as against 90 per cent for males in rural India. The distribution obtained from the 1999-2000 survey is presented in Table 6. Distribution of male and female work force in non-farm activity in rural areas during 1983 – 2005 has been depicted in Fig. 5.  


Table 5:  Labour force, employment and unemployment






% per annum

Labour force


















Unemployed rate (%)






Note: 1) Data for respective years in million   2) Special group estimates on CDS basis

Source: Planning commission, Govt. of India, Tenth five year plan 2002-07



Table 6:  Distribution of male/female per 1000 person-days usually employed in rural India

Current daily
























Not in labour force














Source: NSSO, India



Fig 5

Fig 5: Distribution of rural workforce in non-farm-activities

Source: NSS Report No. 522 (62/10/01) Employment and Unempolyment situation in India, July, 2005 - June, 2006



Quality of employment

Nearly 51.3 % of the workforce is either illiterate or educated below the primary level (Table 7). Even in industries where skill up-gradation for raising productivity requires a reasonable level of educational standard, 39.6 and 74. 0 % of the workforce consisting of male and female respectively was illiterate. The pattern of development of the Indian economy requires skill and education levels not immediately available thereby leading to a mismatch between the demand and supply of labour services – an increasing level of unemployment in one segment of the labour market coupled with a labour shortage in the other.



Table 7:  Distribution of workers in the rural area by the level of education (%), 1999-2000

Rural area

Level of general education

Share in workforce


Up to Primary

Secondary and above




















Source: This section draws upon the Report of the Task Force on Employment Opportunities, Planning Commission, Govt. of India (2001)


The quality of employment also relates to wages and security of the worker. Wages paid/received depend on the productivity and education of the worker. The more skilled and educated the higher the wage. A full-time worker, illiterate and unskilled, may not earn adequate income. There is high incidence of this kind of underemployment.

Surveys reveal a substantial increase of illiterates among the unemployed persons (Table 8). Over the period of 1993-2005, the proportion of those with educational level up to primary among the unemployed increased from 1.9 - 3.0 % and 2.6 - 3.1 % in case of male and female respectively while unemployed decreased from 8.3 to 6.5 % among the secondary school or higher educational level and increased from 9.8 to 18.2 % in case of female. It shows not only a lack of sufficient efforts and resources to educate the workforce, but also a mismatch between the kind of job opportunities that are needed and those that are available in the job market. The situation also indicates the need for more jobs requiring skilled labour rather than the simple low productive manual labour.


Table 8:   Education profile of the unemployed in India (%)





Up to Primary

Secondary and above

Rural male
















Rural Female
















Source: NSSO report NO. 515 (61/10/1)



Strength and weaknesses of non-farm sector

Non-farm activities either keep the poor falling into deeper poverty or are advantageous in lifting the poor above the poverty line. Keeping this in view, it becomes imperative to identify the strengths and weaknesses of the non-farm sector in India to focus on, in order to alleviate poverty. The strengths and weaknesses of rural non-farm sector in India as highlighted by Mukherjee and Zhang (2005) have been discussed below.



Institutional basis for rural non-farm sector:  In India, the institutions underlying the development of the rural non-farm sector are very strong. These include secure property rights; a well-developed financial system with preferential access to credit for the sector; supporting institutions such as the KVIC, State Khadi Board, NHHDC, Small Industries Development Bank of India (SIDBI), State industrial corporations; policies and programs promoting linkages with agriculture, especially agro-industries; domestic marketing channels for rural nonfarm production; as well as government support in export promotion. The institutional mechanisms for a rapid growth of the rural nonfarm sector are already in place.

Decentralization process: Over the last two decades the State governments in India have been able to exercise far more independence in decision-making than in the pre-1980 period. Regional parties are an integral part in coalition governments at the Center. In turn, they have negotiated economic autonomy in the formation of state specific policies for development. Moreover, with the opening up of the economy in 1991, foreign direct investment (FDI) has come to play an important role in the overall policy environment. State governments are in competition with one another to attract higher FDI levels both in manufacturing and infrastructure. In some ways, it mirrors the path followed by China, although the volume of FDI coming to India is less than 10 percent of what is flowing into China. On the positive side, however, this creates an opportunity for higher levels of investment in the future.



Infrastructure: The most significant bottleneck in generating higher levels of rural nonfarm activity in India is the quantity, quality and reliability of infrastructure. For example, the World Bank Investment Climate Survey for India indicates that power outages were one of the most serious obstacles to the development of the nonfarm sector ( Economist, 2005; World Bank, 2005). Although corrective steps are now being taken, increased infrastructure remains the most important priority for the future. To achieve a sustained growth rate of 8 - 9 percent, the investment rate has to be stepped up from the current level of 24 percent to nearly 35 percent over the next decade, with investment directed at the rural sector (Planning Commission, 2000).

Regulatory restrictions on small-scale sector: Regulation of the small-scale sector constitutes an important aspect of nonfarm development policy in India. In the initial stages, capital investment restrictions were imposed to protect the small-scale sector, especially in rural areas, from predation by large industry. Reservation of products for the sector was initiated to create a domestic market and quantitative restrictions imposed to protect them from competition from imports. At the end of the 1990s, however, these very policies have become detrimental to the dynamism of the small-scale sector, especially in the rural areas. Capital investment limits have discouraged economies of scale, and concessions offered to small industry have created adverse incentives against re-investment. Several official reports have recommended a substantial increase in the capital investment limit (from the present level of around $200,000) to make better use of technology and improve productivity (Planning Commission, 2000). However, no such policy announcement has been made as yet.

Reservation of products for the small-scale sector has gradually reduced in significance, although this has created rents within the system. The decision of the government to put all the reserved items in the open general license category from April 2005 would mean free import of such items at the prevailing tariff rate. With the latter slated to come down over time to around 20 percent as per the WTO norms, this will effectively signal the end of protection for the small-scale industry.

Quality of manpower: High levels of illiteracy in rural India have hampered the growth of the rural nonfarm sector. Education has both intrinsic and instrumental value. Apart from having a positive correlation with wages, a minimum basic standard of education is necessary to apply for credit, to be aware of one’s rights and responsibilities and to deal with instances of corruption and malpractice. Often, a lack of education is intrinsic to poverty, which seems to have been the case in India until recently.

In the rural areas, lack of education leads to labor being stagnant in agriculture, or moving to casual work occupations in the nonfarm sector, and not to salaried employment with higher wages and benefits. Together with lack of technical skills, there is little incentive for rural firms to invest in technology, leading to low levels of labor productivity in the rural manufacturing sector compared to urban manufacturing (Chadha, 2003). The same is true of the service sector as well, which has the potential for expansion given the already strong base in the urban economy. Higher investment to improve both the quality and the access to education (primary, secondary and above) needs to be a priority for policymakers.

Forward and backward linkages: Absence of appropriate forward and backward integration greatly affects performance of non farm activities in rural areas. Forward linkages of the RNF sector serve as inputs to other sectors. Also, in backward linkages the RNF sector demands the outputs of other sectors. Empirical studies indicate that forward linkages from RNF activities to agriculture (rurally produced agricultural inputs) are particularly important where traditional agricultural technologies are utilized, while in case of backward linkages between RNF activities and agriculture, especially the linkages between rural agricultural processing and the agriculture sector and between rural transport and rural marketing activities are quite significant for rural economic development. However, gaps in the integration of the production linkages brought about by poor infrastructure, low accessibility of market, support service weaknesses and intervention of middle men have constrained the development of non-farm enterprises in India.  



The RNF sector is increasingly playing an important role in the development of rural areas in Asia and the Pacific region. Specifically, as agriculture in the region declines in importance in terms of its contribution to the economy, the RNFS will need to become more and more a major provider of employment and income to many rural folks. It should be noted, however, that RNFE are not a substitute for employment in agriculture but rather as a supplementary measure. Agricultural development is still important and should be pursued as a necessary precondition. The promotion of RNFE also should be undertaken within the broader context of rural development.

Efforts are needed to identify appropriate and effective institutional vehicles for development of non-farm sector policy and interventions for creating employment opportunities. Many strategies and programs to promote RNFE have been formulated in various countries. China’s labour-intensive township and village enterprises (TVEs), for example, often described as the “engine of growth” behind that country’s remarkable growth during the past decades represents the vanguard in China's new capitalism. The TVEs are hybrid institutions generally unusual alliances between TVE entrepreneurs and local government officials (acting in the capacity of "owners" of TVE enterprises). In this regard, the role of government is crucial, especially in the provision of necessary infrastructure and other support services in the country. It is also vital to improve the marketing links between the village entrepreneurs and the larger business firms located in the towns/cities. Such strategic alliances or partnerships can contribute to the sustainability of small village and tiny enterprises in the rural areas. Other important considerations that need to be focused on may include human resource development, financial/credit facilities, research and development and women’s participation with a view to making the activities self-sustaining in the changing competitive environment.











Back to "Theme Overview"

Go back to Home Page of 'India, Science & Technology:2008'