102

CHAPTER VI
IMPACT OF RURAL NON-FARM EMPLOYMENT ON
POVERTY AND INCOME INEQUALITY
The various studies on the causal relationship of RFNS with poverty and
income inequality reveal that the development of RNFS has a positive impact on the
reduction of poverty and income inequality in the rural area. Accordingly, this chapter
has been divided into four sections. Section I deals with the theory and empirical
evidence available on the poverty and RNF sector in economic literature. Section II
examines empirical evidence on these aspects generated by the study. Similarly,
theoretical and empirical evidence on income inequality and RNF sector has been
reviewed in Section III. Section IV analyses empirical evidence on income inequality
and RNF sector in Punjab produced by the study.
I
6.1

Poverty and RNFS: evidence from literature

Worldwide, rural sector houses a vast majority of the poor. Ravallion (2002)

estimates that 68 per cent of the developing world's poor live in rural areas. Further, a
majority of the poor found in rural areas for many-many years to come (Ravallion et
al., 2007). Reducing rural poverty has, for this very reason, been a long standing
concern, motivating an array of initiatives by governments, non-governmental
organizations and international development agencies. The first Millennium
Development Goal is to halve world's extreme poverty between 1990 and 2015.
Achieving this goal within rural areas as opposed to through massive migration to
urban sector, at the risk of urbanization of poverty, requires that productive and
decent employment be created in the rural sector itself. The traditional approach to
rural poverty alleviation was based on redistributive land reforms, integrated rural
development and a heavy reliance on agricultural development.
It is generally recognized that agricultural production does not require the
same amount of continuous labour input over the whole year. Unemployment and
underemployment is, thus, a regular and significant feature of agricultural wage
labour market (ILO, 1996). Furthermore, it has been claimed that a strategy for raising
rural incomes which focuses only on raising agricultural productivity, even if

103
successful, may, prove inadequate (Chinn, 1979). This study demonstrated that for a
major rice producing region of Taiwan, income from non-farm sources, rather than
increased income from farming, was responsible for raising rural income levels.
These thoughts and findings heralded a new approach to poverty alleviation in rural
areas which recognized the promotion of rural non-farm employment as a key element
in rural development strategies (de Janvry and Sadoulet, 2001).
The landless, marginal and small land holding households form the largest
block of rural poor. Non-farm employment opportunities are likely to be of particular
importance to these households. The increases in rural labour incomes for these
lowest income groups will depend heavily on the growth in the demand for rural
labour outside agriculture (Anderson and Leiserson, 1980). The positive impact on
rural poverty of engagement in rural non-farm activities depends on whether or not
the earnings from rural non-farm occupations or the average incomes of non-farm
rural households are above those in agriculture (Chuta and Liedholm, 1979). They
present evidence to show that on an average, the wages and incomes generated by
rural non-farm activities generally exceed those generated by farming. Non-farm
earnings provide a significant portion of the total income of those rural households
with little or no land.
Discounting the role of non-farm sector in poverty reduction in rural areas,
Lee (1981) comments that development of non-crop activities in the poor and densely
populated agrarian economies has often been a symptom of distress and adaptation to
growing poverty and landlessness. These have served as a sector of last resort and are
dominated by petty occupations with pitifully low returns. Islam (1984) also takes a
similar position. White (1991), too, cites many empirical studies to bring home the
point - the extremely marginal nature of much rural non-farm activity in both
traditional and modern sectors and in both small and large scale enterprises and
comments that this supplementary employment does serve to hold people in rural
areas, but it is not serving as an 'engine of growth', dynamising the rural sector and
creating the higher income on which further diversification can be based. Another
alleged indication of the fragile and vulnerable base of the rural non-farm economy is
the relatively sluggish rate of rural manufacturing growth in comparison with the

104
preponderance of tertiary activities in the mix of rural non-agricultural employment
(White, 1991; Basant and Kumar, 1990; Basu and Kashyap, 1992).
Nevertheless, there is another view which claims that the activities in the subsector of trade, transport, construction and commerce are in fact growing rapidly in
many regions (Haggblade and Hazell, 1989) and given low capital and land
requirements it seems possible that these activities may be potentially more open to
the poor than agricultural activities. Lanjouw and Lanjouw (2001) take the view that
where individuals are involuntarily unemployed that is looking for agricultural
employment at the prevailing wage rate but not finding it, then the agricultural wage
is not the opportunity cost of labour in rural areas. He quotes Dasgupta (1993) and
Bardhan (1984) to show the existence of rural unemployment in India even in peak
agricultural seasons and the rigidity of agricultural wages. With the involuntary
unemployment of agricultural labourers engagement in the non-farm labour and
product markets even at low returns and even as a part of their household survival
strategy (Saith, 1991) may be very crucial in raising living standards of the poorest,
particularly those who do not have other resources, such as household land to fall on.
Similarly, in many developing countries, the ability of women to work outside the
home is limited. Thus, their opportunity cost of time bears little relations to the
agricultural wage, and for the poor, may be very low. Moreover, the peaks and
troughs in labour demand from agriculture leave many workers in rural areas
seasonally unemployed. As a result, much of non-farm employment is secondary. In
the slack season, where there may not be any agricultural employment, so even a low
productivity occupation can be useful in smoothing income over the year (Lanjouw
and Lanjouw, 2001).
The dismal portrayal of rural non-farm activities by Lee (1981), Islam (1989)
and White (1991) is contended by studies from agriculturally advanced states of
Punjab and Haryana in India. Chadha (1986) informs that the agricultural
advancements in Punjab have created a number of productive jobs in the non-farm
sector and engagement in which cannot be said to be a symptom of distress adaptation
to growing poverty or landlessness. Noting the heavy reliance of marginal and small
farmers on the off-farm activities, he comments that a situation of economic
catastrophe could be visualized if such sources of off-farm income were not available

105
to marginal farmers, where many might have been forced to dispose off their tiny land
holdings and join the ranks of urban proletariat with far reaching implications for the
urban poverty and already over stretched urban infrastructure. A study of noncultivating rural households in Punjab and Haryana (Sidhu, 1991) also found that a
one per cent increase in employment opportunities outside agriculture is likely to
reduce poverty by about 0.39 per cent. Bhalla (1981), too, asserts that the
occupational diversification is so effective in putting a 'floor' under landless
households incomes in Haryana even in relatively low average income areas that there
is less grave poverty among the landless than in regions with much higher average
farm labour and total income but less occupational diversification. The rural non-farm
activities have been credited for pushing the agricultural wages up in rural India
(Bhalla, 1993a). Another way to reconcile these contrasting views on the potential of
rural non-farm employment in mitigating or alleviating poverty among rural poor
would be looking at the channels through which positive impulses generated by nonfarm sector impact the income and expenditure levels of rural households.
There are three channels through which effects of rural non-farm sector are
transmitted to poverty reduction or alleviation. Firstly, direct participation of rural
poor in non-farm sector. The essential question here is whether the rural poor
participate directly in those sub-sectors of the non-farm economy which are
productive and attractive enough to serve as a source of upward mobility for them.
Secondly, rural non-farm sector also operates as a safety net for the poorer segments
of the population which are pushed out of their traditional occupations. When rural
households are pushed out of agriculture due to unemployment there or, because of
unviable and fragmented land holdings, droughts, or other natural calamities, they run
the risk of falling into a poverty trap. The availability of non-farm employment
opportunities, even those not associated with higher returns, can thus be very
important in preventing incomes from falling further. A third transmission is through
indirect channels. General equilibrium linkages between non-farm and the agriculture
sector can imply that growth in the non-farm sector translates into rising income of
the poor in the agriculture sector (Lanjouw, 2007).
As far as the direct impacts of engagement of rural poor in productive nonfarm employment are concerned, the evidence is mixed. Chuta and Liedholm (1979)

106
provide evidence to show that, on an average, the wages and incomes generated by
rural non-farm activities generally exceed those generated by farming. In some
instances, non-farm earnings can be sufficiently large to enable landless or nearby
landless rural households to generate a total household income greater than even that
of the large sized farms.
de Janvry et al., (2005) showed that without non-farm employment, rural
poverty would be much higher and deeper. Their study related to rural China
highlights that the non-farm incomes lead to a decline in the incidence of household
poverty, both in the depth of poverty, and in the severity of poverty. The strong
impact on depth of poverty suggests that participation in non-farm activities reduces
the income gap among the poor. And, impact on the severity of poverty, which
assigns higher weights to the poorest of poor, suggests that a participation in non-farm
activities improves the well being of the poorest disproportionately. They indicated
that 87 per cent of the decline of rural poverty between 1980 and 1995 could be
attributed to non-farm activities, and rest of decline attributed 13 per cent to on-farm
activities.
Hossain (2004) also finds a positive impact of rural non-farm employment in
raising rural incomes and reduction of poverty in rural Bangladesh. He finds that the
average rural household income was found to grow at a rate of 2.2 per cent per year
over 1987-2000. This growth was almost entirely on account of non-agricultural
activities. Diversification into non-agriculture contributes to a substantial reduction in
poverty. In particular, he observes that productivity in rural non-farm activities is 10
to 40 per cent higher than the agricultural wage rate even for those activities that need
very little physical and human capital, such as construction work, rickshaw pulling,
etc.
Lanjouw and Shariff (2004), by decomposing rural non-farm incomes into
casual non-farm wage income, regular non-farm wage income and self
employment/own enterprise income for rural India, found that while self employment
and home enterprise activities are fairly distributed lead to favourable income
distribution, non-farm casual labour incomes accrue mainly to those in the lowest
quintiles, while regular non-farm incomes accrue mainly to the rich. The relatively
more productive occupations in the rural non-farm sector as is available in India are

107
taken by the better-off households thus leaving low-productive, low-earnings
occupations for the rural poor having very little prospect for poverty removal. The
study found that for a limited number, off-farm income has lifted total household
income well above poverty levels, and this improvement has typically been associated
with higher education and associated skills of one or more household members. The
great majority have been able to secure only unskilled or low skilled jobs, income
from which could only raise total income to, or near to, the prevailing poverty line. In
that sense, even the availability of off-farm work, while making a vital contribution
towards the achievement of a reasonable level of sustenance for landless or
nearlandless households, has not provided a solution to the poverty problems of the
majority (Shand and Chew, 1986).
de Walle and Cratty (2003) suggest a far more nuanced and complex inter
linkage between rural diversification into non-agricultural activities and living
standards than is often assumed in policy discussions. Their data suggest that the cross
sectional association between the two variables is driven by common correlations
with other factors rather than a direct causal link. The ethnic minority groups in
Vietnam are more likely to be poor than the majority population and are less likely to
become involved in the expanding non-farm sector. Similarly, those with higher
education are more likely to be involved in off-farm income diversification and are
less likely to be poor. Location also appears to play an important role in determining
where non-farm activities proliferate and where poverty is concentrated. The authors
argue that the emerging rural non-farm sector in Vietnam is unlikely to serve as the
main route out of poverty for many of poor Vietnamese, who mainly belong to ethnic
minorities, are illiterate or near illiterate and live in remote areas. Similarly, de Janvry
and Sadoulet (2001) also find that in rural Mexico chances of participating in
remunerative non-farm activities depend heavily on education, age, ethnicity sex and
land holding of the individuals and households. Resource poor households belonging
to minority community and having illiterate or less educated household heads have
less chance of getting engaged into those sub-categories of rural non-farm
employment which hold a real prospect for pulling them out of poverty. Women in
particular lose out to men in the non-farm labour market.

108
A study by Kijima and Lanjouw (2005) of rural India suggests that in rural
India, the likelihood of employment in regular non-farm activities and in non-farm
self employment (relative to agricultural labour) is significantly higher for those with
more per capita land holdings. Furthermore, the probability of employment in any of
the three non-farm sub sectors (relative to agriculture wage labour) is consistently
lower for those who belong to scheduled castes or scheduled tribes and for those with
no education than for those in other groups. They also note that the predicted
probabilities of regular non-farm employment increase markedly with education
levels. For self employment, education was not found to be of significance. Almost
similar findings have been referred by Lanjouw and Stern (1998).
Social status exercises an important independent influence on access to high
productivity non-agricultural jobs (Unni, 1997). The workers belonging to the higher
castes were found to be more employed in high paid occupations than those belonging
to the lower castes or disadvantaged sections in rural Gujarat. Incidence of
concentration and entry barriers to rural non-farm jobs including evidence of 'super
profits' to non-farm activities and of very high wage relative to farm wage in several
areas was noted in a review of African studies (Reardon, 1997). Such barriers clearly
dampen the potential of the rural non-farm sector to alleviate poverty.
Gender is another important factor influencing the participation and returns
from rural non-farm employment. Lanjouw and Shariff (2004) document a
significantly lower probability of non-farm employment by women from regionallevel multinomial models used for rural India. Chadha and Sahu (2002), too, note the
disadvantages faced by rural female workers in non-farm labour markets in India.
When, largely under the spell of modernization and intensification of agriculture, the
rural non-farm economy evolves from low productivity labour intensive activities
often household based to higher investment, higher-productivity enterprises operating
mostly out of the house and increasingly in rural towns, it is the women workers who
bear the brunt of the adjustment process. Although rural transformation offers
improved opportunities for non-farm labourers and for the rural poor in general, yet
women's access to the larger, full-time, higher-investment and higher productivity
non-farm business is not assured (Haggblade and Liedholm, 1991). After going
through the evidence produced by a number of these studies, one can say that the

109
involvement of women in the non-farm sector is generally low; and that, where
women are involved in this sector, they are generally concentrated in less
remunerative activities.
There is a strong association between non-farm employment and relatively
high educational levels. Similarly, non-farm participation is generally observed to be
higher in those locations that are situated or connected through important road
networks or are closer to small urban centres. Thus, the rural poor who are mainly
landless, marginal and small land holders (for whom land does not serve the purpose
of wealth and in accessing information and networks), uneducated, belonging to
socially down-trodden groups and inhabiting isolated localities and villages are less
likely to participate than others in the non-farm sector, particularly in those activities
that would be able to lift them out of poverty.
However, some evidence is there to show the direct participation of poor and
other vulnerable segments of rural society in non-farm occupations. Lanjouw and
Lanjouw (2001) summarize and review a number of studies providing evidence of the
rural poor, near-landless and women households in rural areas and rural towns being
directly benefited and earning major income shares and of their members being
engaged in low productivity activities like weaving, pottery, food preparation and
processing and domestic and personal services in parts of India, Korea, Taiwan,
Vietnam, Ecuador and El Salvador. Similarly, Ellis (2000) asserts that under the
precarious circumstances that characterize rural survival in most of the low income
countries, diversification into rural non-farm activities has positive attributes for
livelihood security that out-weigh the negative connotations it may possess. Diverse
rural livelihoods, he asserts, are less vulnerable than undiversified ones. Perhaps,
these observations are more relevant to the safety net function of rural non-farm
employment. A recent study has found that casual non-farm employment, which is
disproportionately taken by the poor, yields 45 per cent more than agricultural wage
labour. Thus, direct participation of poor in even casual non-farm jobs has positive
impact on poverty (World Bank, 2011).
The non-farm sector serves an important safety net in rural areas by providing
employment, even if poorly remunerative, that helps to prevent vulnerable sections of
society from sliding further into poverty. Many rural employment guarantee

110
programmes, like the MGNREGA in India, have been initiated in many developing
countries to provide non-agricultural employment in the villages for those who fail to
get productive employment generated directly by the process of economic growth all
fall in the category of safety net.
At any moment in time, (rural) households might be exposed to idiosyncratic
shocks and crises and they may find themselves unable to fall back on insurance,
credit, or other means of off-setting income shortfalls. Their ability to earn some extra
earnings, although limited through the non-farm employment opportunities, can be of
great assistance in preventing such households from sliding into the poverty, or, from
falling into deeper poverty, if they are already poor (Lanjouw, 2007).
The primary determinant of poverty is the level of the unskilled wage rate,
which is typically approximated by the agricultural wage. As such, the question of
whether the non-farm sector raises the well being of the poor is primarily a question
of whether the unskilled wage is affected by the presence of the non-farm sector, not
whether the poor are differentially likely to work in the non-farm sector (Foster and
Rosenzweig, 2008).
Kijima and Lanjouw (2005) found that, all else equal, rural poverty falls
significantly with increases in agricultural daily wage rates and rises with growth in
agricultural wage employment shares. They also found that the expansion of casual
non-farm employment is strongly correlated with growth in agricultural wage rates.
This is consistent with a process of labour market tightening. As agricultural and nonagricultural product and factor markets in rural areas of developing countries are
interlinked, rise in wage in one sector has a profound impact in the other (Haggblade
and Liedholm, 1991). Increased absorption of rural labour in non-farm occupation
impacts agricultural wages through labour supply channels. While the poor may not
always find it easy to gain access to even casual non-farm employment, the siphoning
off of the non-poor out of agricultural labour and into casual non-farm employment
puts pressure on agricultural wages. This rise in agricultural wage rates then helps to
reduce overall poverty levels (Chandrasekhar and Ghosh, 2001). That engagement in
rural non-farm employment has helped to raise the agricultural wages has been noted
by Bhalla (1993) and Sharma (2001). Lanjouw and Shariff (2004) found that

111
increased employment in construction activities in rural areas had a significant
positive impact on male agricultural wages in India.
The available evidence suggests that while the low productivity rural non-farm
activities serve as an important safety net to the rural poor that prevent more rural
households from falling below the poverty line, it is not possible to judge from the
literature available whether the rural non-farm sector as a whole helps reducing
poverty in a direct way. However, the pro-poor impact of the rural non-agricultural
activities is observed in most studies, and a recent shift in the attitude towards the
rural non-farm sector from viewing it as a 'symptom of backwardness' towards an
engine of growth of the rural economy and lifting of the poor out of the poverty trap is
also noted (Lanjouw, 1999). Expansion of non-farm employment, particularly, the
unskilled casual employment opportunities that appear to present the poor with fewer
barriers to entry, may play an important role in putting pressure on the agricultural
labour market and in raising agricultural wage rates. Thus, the indirect effect of rural
non-farm employment on rural wage rates may prove quite important to the extent
that they might even dwarf direct effects (Lanjouw, 2007).
II
6.2

Incidence of poverty: field study findings

A study by Bhalla and Chadha (1983) for data pertaining to 1974-75 found

that 31.43 per cent of the marginal cultivators and 23.00 per cent of small peasants
were found to be poor. Using the same data set for wage labour and non-cultivating
households, it was found that 48.10 per cent of wage labour (agricultural and nonagricultural) and 34.85 per cent of non-cultivating households in rural Punjab were
below the poverty line (Sidhu, 1991). These studies also found that poverty ratios
were considerably higher in agriculturally less developed regions than in agricultural
advanced regions.
Planning Commission of India estimated poverty ratios since 1993-94
following Lakdawala Committee (1993). As per this methodology, 12.00 per cent
rural persons in Punjab were below the poverty line in 1993-94. The ratio, however,
decreased to 9.1 per cent in 2004-05 (Government of India, 2011). According to
'Tendulkar' committee methodology (Government of India, 2009), poverty line for

112
rural Punjab in 2004-05 was Rs. 543.51 per person per month. Poverty head-count as
per this measure was 22.10 per cent in 2004-05 for rural Punjab.
Poverty is measured from consumption data. But, this study has data only of
income variables. Due to this, study used the income data as proxy of consumption to
study how engagement in RNF activities affects rural poverty. The income data
pertains to the period 2009-10. The two poverty lines were updated for the year 200910 using the following formula:
Yc
Where,
Yc
P1c
P1b
Yb

(P1c / P1b) x Yb

=
=
=
=

Poverty line in current year

General Consumer Price Index for Agricultural Labour for the current year
General Consumer Price Index for Agricultural Labour for the base year.
Poverty line in base year.

Hence, poverty line for the year 2009-10 by using Tendulkar Committee's
methodology becomes
Yc

(586/355) x 543.51

= Rs. 897.17

However, the poverty line for the year 2009-10 using the Planning
Commission criteria is Rs. 622.42. Indices of general consumer price index for
agricultural labour for these two years were taken from the data provided by Labour
Bureau, Ministry of Labour and Employment, Government of India.
The study measured poverty ratios of agricultural households and rural nonfarm households separately following the two poverty lines. Since the methodology
adopted by Tendulkar Committee seems to capture the poverty profiles more
realistically and also has been accepted by the Government of India for future poverty
measurements (Government of India, 2011), so the study relied upon this
methodology.
6.2.1 Poverty ratio as per Planning Commission methodology
The study has data on household income for each of 300 RNF households and
100 pure agricultural households. It is known from the data that average household
size of RNF households is 5.94 persons, whereas for pure agricultural households, it is
5.13 persons. Using the average household size, per capita income per month for each
of the household was calculated and compared it with Rs. 622.42 and Rs. 897.11 to
see how many households were having per capita monthly income below these
poverty lines.

113
From the analysis of data of 400 households, it was found that 40 households
were below the poverty line. Thus, in 2009-10, one-tenth of sampled households
(10.00 per cent) were the poor as per Planning Commission (Lakdawala)
Methodology. Further, out of 300 RNF households, 25 households to be below the
poverty line. Thus, as per Planning Commission methodology, 8.33 per cent of those
rural households which have one or more members working in non-farm occupations
are below the poverty line. Of the pure agricultural households 15 households (15.00
per cent) are found to be below the poverty line. Table 6.1 and 6.2 show in detail the
poverty households across the different categories of households.
Table 6.1: Poverty incidence in RNF households (Poverty line= Rs. 622.42 per person,
per month)
Household
Number of sampled
No. of households below
%age
type
households
poverty line
Landless
191
21
10.9
Marginal

42

9.52

Small

19

0.00

Semi-Medium

21

0.00

Medium

22

0.00

Large

0.00

Total

300

25

8.33

Source: Computed from the data obtained from field survey.

Table 6.2: Poverty Incidence in pure agricultural households (Poverty line= Rs. 622.42
per person, per month)
Household
Number of sampled
No. of households below
%age
type
households
poverty line
Landless
41
11
26.83
Marginal

13

15.38

Small

10

10.00

Semi-Medium

19

5.26

Medium

14

0.00

Large

0.00

Total

100

15

15.00

Source: Field Survey.

It is significant to note that the poverty incidence is higher in purely

agricultural households as compared to non-farm households. Further, even some of
the small and semi-medium farming households among agricultural households are

114
below the poverty line. In the absence of non-farm employment, the poverty incidence
among the landless households who are only confined to agricultural activities is
much higher than those engaged in non-farm activities (Tables 6.1 and 6.2).
6.2.2 Poverty ratio as per Tendulkar Committee methodology
As per the Tendulkar methodology, the poverty line for rural areas for the year
2009-10 came to Rs. 897.17 per person per month. The data in Tables 6.3 and 6.4
show that out of 400 sampled households, 67 households were found to be below the
poverty line. Thus, 16.75 per cent of the sampled households were the poor. As
mentioned earlier, the Tendulkar Committee methodology estimated that 22.10 per
cent of rural households were poor in the state in 2004-05. It seems that, in 5 years
since then, rural poverty in Punjab has decreased. The data also reveal that of the 300
RNF households, 42 households (14.00 per cent) were below the poverty line (Table
6.3). Of 100 pure agricultural households, 25 households (25.00 per cent) were found
to below the poverty line (Table 6.4).
Thus, the data reflect that of RNF landless households, only 17.80 per cent
were below the poverty line, whereas of those landless households which purely
relied upon farming as a livelihood means, 39.02 per cent were below the poverty
line. Thus, if the rural landless households move away from farming to non-farming,
the chances of their being poor would be reduced by more than one-half. Similarly,
for the landed RNF household, only 7.34 per cent were found to be below the poverty
line, whereas in the case of those landed households which relied solely on
agriculture, poverty ratio was slightly more than double, i.e., 15.25 per cent (Tables
6.3 and 6.4).
From the above analysis, it is abundantly clear that a far lesser percentage of
rural households who chose to engage in non-farming occupations are in poverty as
compared with those who remain embedded in agriculture as a source of livelihood
and this is true for both landless as well as land holding households.
By taking into account how rural poverty is distributed over various land
holding size classes, the data show many interesting results. For instance, amongst the
rural landless households who have one or more of their members in RNF
employment, 17.80 per cent of these were the poor. Except for marginal land holding
households, amongst whom 19.05 per cent were below the poverty line, no other land

115
holding household is the poor. But this is not so with regard to pure agricultural rural
households. As Table 6.4 shows, of these households, 39.00 per cent of landless
households, nearly one-third of marginal (30.77 per cent) and small farmers (30.00
per cent) and even 10.53 per cent of semi-medium land holders are below the poverty
line.
Table 6.3: Land holding and poverty incidence in RNF households
(Poverty line = Rs. 897.17 per person per month)
Household
Total number of
No. of households below
type
households
poverty line
Landless
191
34

%age
17.80

Marginal

42

19.05

Small

19

Semi-Medium

21

Medium

22

Large

Total

300

42

14.0

Source: Field Survey.

Table 6.4: Land holding and poverty incidence in pure agricultural households
(Poverty line = Rs. 897.17 per person per month)
Household
Total number of
No. of households below
%age
type
households
poverty line
Landless
41
16
39.02
Marginal

13

30.77

Small

10

30.00

Semi-Medium

19

10.53

Medium

14

Large

Total

100

25

25.0

Source: Field Survey.

It also shows that for the small and marginal farmers, depending purely on
agriculture and allied activities, situation has not changed since mid-1970s. As
referred to earlier study, Bhalla and Chadha (1983), for the data set of mid-1970s, had
found that 31.43 per cent of marginal and 23.62 of small peasants were below the
poverty line then. But the situation is far better for those similarly placed rural
households who chose to send one or more of their workers to non-farm labour
market. The data, thus, conclusively hold that rural non-farm employment, even

116
casual employment taken by uneducated and landless poor households, has a positive
impact on rural poverty.
It would be intuitive to see whether or not there are any zonal patterns in
poverty ratios. Table 6.5 shows that poverty amongst rural non-farm households is the
least in zone I. First, it is found that poverty ratio across households is lower in more
developed zones as it is only 8.73 per cent in comparison to 19.32 per cent in zone II
and 16.28 per cent in zone III. Secondly, only 12.36 per cent of landless households
are below the poverty line in zone I in comparison to 23.08 per cent in zone II and 22
per cent in zone III. Thirdly, no landed household of marginal category is below the
poverty line in zone I, whereas 25 per cent and 20 per cent of marginal farmers are
below the poverty line in zone II and III. One may recall that zone I consists of
villages drawn from the developed blocks; zone II from moderately developed and
zone III of villages belonging to the least developed blocks. Though no one to one
relationship seems to be there between the level of socio-economic development and
poverty levels, but poverty ratios are almost half in zone I than in zone II and zones
III. In brief, one can say that rural non-farm activities are more income-generating in
developed region than in other regions.
Table 6.5: Land holding and poverty incidence in RNF households zone-wise
(Poverty line = Rs. 897.17 per person per month)
Household type
Percentage of rural households below the poverty line
Zone I
Zone II
Zone III
All zones
Landless
12.36
23.08
22.00
17.80
Marginal

25.00

20.00

19.05

Small

Semi-Medium

Medium

Large

Total

8.73

19.32

16.28

14.0

Source: Field Survey.

Looking at the zonal level distribution of poverty of purely agricultural rural

households, the data show that poverty level is slightly lower in zone I as compared to
zone II and III. This is clear from the data given in Table 6.6. Across the zones and
various categories of households, the poverty incidence among the landless
households and marginal farmers is lower in the least developed zone (zone III) than

117
that in the developed zone (zone-I). It may be because of the relatively availability of
more work in agriculture in the least developed zone. Compared to it, the poverty
incidence among the semi-medium farmers is low in the most developed zone than
that in the least developed zone.
Table 6.6: Land holding and poverty in pure agricultural households zone-wise
Household
Percentage of rural households below the poverty line
type
Zone I
Zone II
Zone III
All zones
Landless
40.00
45.45
35.00
39.02
Marginal

50.00

0.00

33.33

30.77

Small

20.00

100.00

25.00

33.33

Semi-Medium

14.29

0.00

12.5

10.53

Medium

0.00

0.00

0.00

Large

0.00

0.00

0.00

Total

23.53

28.57

24.44

25.00

Source: Field Survey.

6.2.3 Poverty gap of BPL families

Poverty is defined as inability of an individual to meet certain minimum
desirable level of living. All the people who live below this minimum desirable level
of living are said to be living below the poverty line. The percentage method is based
on a general head counting procedure; it does not take into consideration the short
falls in income by which the household falls below the poverty line. Following
Amartya Sen, The study has segregated the poor people into four ranges of income to
gauge the intensity and depth of poverty. These ranges vary from below Rs 6163, Rs.
6164-7521, Rs 7522-9271 and Rs. 9272-10766 (Table 6.7). The threshold of Rs.
10766 is the poverty line in 2009-10 based on Tendulkar Committee methodology.
It is observed that there are considerable variations in the proportion of
households below the poverty line in different ranges of income. In the first range of
income, number of poor households is 3.67 per cent in RNF and 10.00 per cent in
agriculture sector whose average annual income is Rs 4718 and Rs 4038 per capita,
respectively. The share of BPL households and RNFS and agriculture in the next
higher slabs is 3.67 per cent and 3.00 per cent, respectively. In the remaining two
slabs, the share of RNFS has been lower than that in the agriculture sector. The
shortfall of income in the households of these four income ranges is Rs 6048, Rs

118
3811, Rs 2231 and Rs 684 in RNF households and Rs 6728, Rs 3835, Rs 2246 and Rs
582 per capita per annum in agriculture households, respectively.
Table 6.7: Poverty gap of BPL families in RNF and agriculture sector in Punjab
(Per capita, per annum)
Income range
BPL
%
Annual average Poverty
%
Share in BPL
(Rs)
households
BPL
income (Rs)
gap
gap
households
BPL households in RNF households
26.19
0-6163
11
3.67
4718
6048
56.18
26.19
6164-7521
11
3.67
6955
3811
35.40
23.81
7522-9271
10
3.33
8535
2231
20.72
23.81
9272-10766
10
3.33
10082
684
6.35
100.00
14.00
42
7490
3276
30.43
BPL households in agriculture
40.00
0-6163
10
10.00
4038
6728
62.49
12.00
6164-7521
3
3.00
6931
3835
35.62
20.00
7522-9271
5
5.00
8520
2246
20.86
28.00
9272-10766
7
7.00
10184
582
5.41
100.00
25.00
25
7002
3764
34.96
Notes: 1. Computed from tables 6.3 and 6.4
2. BPL Line, as per Tendulkar committee comes out to be Rs. 10766 per annum per person.

Overall, 14 per cent RNF households are living below the poverty line whose
average income is Rs 7470 per capita per annum. The gap between poverty line and
average income of these households is Rs 3276 per capita per annum. On the other
hand, 25.00 per cent agricultural households are living below the poverty line whose
average income is Rs 7002 per capita per annum. The poor RNF households have
30.43 per cent shortfall of income to cross the poverty line. On the other hand, the
poor agriculture households have 34.96 per cent short fall of income to reach above
the poverty line. This scenario shows that it is comparatively easy for the state to
alleviate poverty among RNF households than that of pure agricultural households as
RNF households need comparatively less increase in income (30.43 per cent against
34.96 per cent) to cross over the poverty line. In other words development of RNFS
can be an affective strategy to address the poverty incidence.

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III
6.3

Income inequality and RNFS: evidence from literature

Explaining income inequality has consumed a considerable effort and time of

the economists. According to Thorner et al. (1986), the agrarian inequality is largely
demographic and family cycle produces a significant portion of it. The explanation for
income inequality between households then relates to the differences attributable to
where households are in their life cycle. Recent theoretical explanations of income
inequality are based on differences in ownership of assets or means of production. In
rural societies of developing countries, the main form of asset is land. So, differences
in farm size are often said to result in differences in income. Simmon Kuznets (1955)
hypothesized that in most communities prior to development, income is relatively
equally distributed. During the early stages of development, income becomes more
unequally distributed, but at some point, this growing inequality levels out. In later
stages of development, income tends to become more equally distributed over time.
Thus, the distribution of income in a particular community is affected by where that
community is in the development progression. However, there are many problems
with Kuznets explanation. It fails to explain the recent increases in income inequality
in developed world. Nor does it explain the fairly stable distribution of rural incomes
during the economic development of East Asian countries like Japan, Taiwan, and
Korea.
It has strongly been argued that income benefits from intensification and
modernization of agriculture have been very unequally distributed favouring large
farms over small farms and areas with assured irrigation over those without it
(Frankel, 1971; Cleaver, 1972; Griffin, 1974). The impact of green revolution
technologies on rural household incomes has not, thus, been positive. The growing
interest in rural non-farm activities stems from and reflects the increased international
concern for equity and employment objectives, and the corresponding reduction of
emphasis on the earlier strategies that had focused primarily on growth and output
objectives (Chuta and Liedholm, 1979). It is hypothesized that as most of the rural
non-farm activities need very little capital and further as there exist an inverse
relationship between the farm size and the engagement of rural households in nonfarm activity, this engagement would have a positive impact on rural income

120
distribution. Anderson and Leiserson (1980) emphasized that the increase in non-farm
employment is likely to be most beneficial for the poorest households. The empirical
evidence on the issue is however mixed.
The growth experience of East Asian countries like Japan, Taiwan, and Korea
indicates that rural non-farm incomes have a positive impact on income distribution
among rural households. In all these countries, the incidence of non-farm employment
in total rural employment is significantly higher for the smaller size classes of
holdings. In fact, a large number of studies show an inverse relationship between nonfarm employment and farm size in most of the developing countries, except for
certain regions in Africa where land constraint is missing. Opportunities for non-farm
employment, thus, permit farm households with smaller farms to raise their income by
using labour to compensate for their lack of land [Misawa (1969) and Kada (1986) for
Japan; Ho (1986) for Taiwan; Park (1986) for Korea; Oshima (1986) for Japan and
Korea]. The inverse relationship seems to hold for South Asian countries
(Bangladesh, Sri Lanka, India and Pakistan) as well (Islam, 1986) as South East Asia
[Onchan and Chalamwong (1986) for Thailand; Shand and Chew (1986) for
Malaysia]. Similar pattern is said to hold good in Sierra Leone and Northern Nigeria
(Chuta and Liedholm, 1979) and Latin American countries like Mexico (de Janvry
and Sadulet, 2001). The counter-cyclical nature of the timing of the non-farm
activities further indicates that such incomes could be performing an additional
positive role from the point of view of the rural poor (Saith, 1991).
Chinn (1979) demonstrated that in a major rice producing region of Taiwan,
non-farm sources of income allowed households with smaller holdings to close the
income gap between themselves and larger farms by allocating more of their labour to
non-farm activities. Thus, the expansion of non-farm opportunities had the effect of
reducing relative inequality in the rural areas. Ho (1979) argued that the growing
availability of off-farm incomes in the 1960s and the 1970s narrowed the gap
between urban and rural household incomes in Taiwan and also improved
distributional equity within the rural sector. Kuznets (1980, quoted by Ho, 1986)
suggests that a major factor in the relative stability of income disparities among rural
households of Taiwan was the capacity of these households to increasingly involve in
off-farm and non-agricultural activities.

121
Whereas non-farm activities provided a sufficiently promising means of
injecting egalitarianism into the growth processes in rural areas of the East Asian
countries, in contrast to it, growth of non-farm activities in the countries of South and
South East Asian countries is taking a quite different path (Islam, 1986). Returns to
labour in non-farm wage employment activities are so low that they do not hold out a
real prospect for improving the distribution of farm household income through an
increase in the share of labour income. The asset-base needed for access to non-farm
self employment also seems to depend partly on the access to land, and the rate of
return to capital in rural non-farm enterprises appears to be strongly correlated with
the amount invested in capital equipment. Hence, the distribution of income from
non-farm assets is also unlikely to be more equal than the distribution of income from
agriculture. Thus, the mere fact that rural non-farm enterprises are usually small in
size and require very small capital investment should not lead one to be too optimistic
regarding their capacity to improve the income distribution.
In a significant study of inequality and its sources in rural Pakistan, Adams
and He (1995) found that of the five sources of income to rural households
agricultural, non-farm, transfers, livestock and rental non-farm and livestock
incomes tended to decrease overall income inequality whereas agricultural, transfer
and rental incomes increased overall income inequality. Agricultural income makes
the largest contribution to overall income inequality and livestock income the
smallest. The reason for this difference is ownership of land which is distributed so
unevenly in rural Pakistan that the main benefits of land ownership such as crop
income and land rent tend to go to the rich. Livestock and non-farm income are,
however, negatively correlated with land ownership. Though non-farm income as a
whole was found to be reducing income inequality, not all of its components have
favourable impact on income distribution. Similar results have been reported by
Alderman and Garcia (1993) in their study of rural Pakistan. In another study of nonfarm income, inequality and poverty in rural Egypt and Jordan, Adams (1995) using
decomposition analysis informed that while non-farm income reduced poverty and
improved income distribution in Egypt, in Jordan, non-farm income goes mainly to
the rich and thus tends to increase rural inequality. The reasons for this difference
have to do with the land. In Egypt, land is highly productive, but the poor lack land

122
access and are thus pushed to work in non-farm sector. However, in Jordan land is not
very productive and so the rich are pulled by more attractive rates of return into nonfarm sector. In Egypt, the poor-those in the lowest quintile group-receive 60 per cent
of their total per capita income from non-farm income; in Jordan the poor receive less
than 20 per cent of total per capita income from this source. Further, while in Egypt,
the share of non-farm income in total income generally falls as income rises, and in
Jordan, the share of non-farm income in total income typically increases.
Chadha (1986), in a study of Indian Punjab, found that the reliance of farming
community on rural off-farm employment varies inversely with farm size. For
marginal farmers, off-farm incomes comprised as much as 60 per cent to 70 per cent
of total household income. For the small farmers, the contribution varied between 32
per cent and 42 per cent, and for large farm sizes, the contribution is still smaller. The
author remarks that besides improving the income levels of lower strata of peasantry,
non-farm earning reduces the severe inequity of income distribution from crop
husbandry alone. In another study of Punjab, it was found the Ginni coefficients for
crop income to be 0.394; for dairying and poultry income to be 0.256; for total offfarm income, it is 0.125; while for the total household income, it was 0.336 (Bhalla
and Chadha, 1983).
Poleman and Sharma (1993) in a study of another green revolution region of
western Uttar Pradesh in India show the equity enhancing effects of non-farm
employment. However, in an agriculturally backward state of Orissa in Indian Union,
it was found that the landless population receives little of their total income from nonfarm sources (Bhatty and Vashishtha, 1987). Chadha (1986) also supports this
contention that in the poorly developed region of the Punjab state, the earnings from
off-farm accruing to marginal farmers are also relatively less. The study contends that
in agriculturally more developed regions, possibilities for higher off-farm incomes
become available to weaker sections of the peasantry. In the absence of radical land
reform measures, the promotion of off-farm activities with proper institutional and
financial support is a very desirable economic measure.
Evans and Ngau (1991), however, found that non-farm income in fact
increases inequality among rural households. The authors note that as one moves from
poor farm households to richer households, non-farm incomes increase along with

123
total farm household incomes. Non-farm income rises in parallel with farm income.
Thus, households which are wealthier have proportionately more income from rural
non-farm activities as compared with poor households.
A study by Reardon et al. (1992) of farm households in Burkina Faso found
household income and share of non-farm income as strongly positively correlated and
in two of three zones non-farm income did not improve inter- household income
distribution. Similarly, Reardon (1997), in a review of several studies of rural
household income diversification in Africa reveals that non-farm income is unequally
distributed over rural households. Compared to poorer households, upper income
strata households have much higher shares of non-farm income in total income, and
higher in absolute non-farm earnings. This pattern is the opposite of that found in
South Asia. Perhaps findings like this prompted Haggblade (1987) to conclude that
blanket equity arguments supporting promotion of rural non-farm activities cannot be
imported from Asia to Africa.
But even in Asia, rural non-farm employment is not equity enhancing
everywhere. Shand and Chew (1986) in a study of Kembu project area in rural
Malaysia found that the distribution of total off-farm income showed a high degree of
inequality largely because on the one hand, households in the three lowest deciles had
no off-farm income, while on the other hand, a large proportion of total off-farm
income was concentrated in the top income decile. Thus, in this study area, they found
that the contribution of off-farm income slightly worsened the existing inequality in
farm income distribution. They reasoned that the factor which could give rise to a
high degree of inequality in off-farm income distribution is differential access to
education opportunities which may limit the ability to find work off-farm, create wide
differences in skill levels amongst the working population, and in turn produce major
variations in wage levels. Kijima and Lanjouw (2005) also suggest that better-off
households are disproportionately represented in the non-farm sector in the sense that
the share of income from non-farm sources is typically higher among better of
households than it is among poor households.
An interesting point is noted in a study of Palanpur village in India (Lanjouw
and Stern, 1998) where distributional impact of non-agricultural employment was
found to have shifted from equalizing to disequalizing over time. Hazell and

124
Haggblade (1990) observed from Indian data that in the mid 1970s, the wealthiest and
poorest households had the highest shares of income from rural non-farm employment
sources; business income in the case of rich and wages for the poor. Lanjouw and
Shariff (2004) in a study of rural non-farm employment in India found that the
importance of non-farm income is fairly evenly spread across per capita quintiles. But
it was found that for the poorest quintile, casual non-farm wage income accounted for
about 16 per cent of the total income. This drops to 15 per cent for the second quintile
and continues to fall monotonically across quintiles, to only 2 per cent for the top
quintile. In contrast, regular non-farm wage income shares rise sharply with the
income quintiles from 4 per cent for the lowest to as much as 21 per cent for the top
most/richest quintile. Own enterprise income shares were found to be the highest for
the second and third quintile and lowest for the top quintile. These results show that
the relatively poorer households were more than proportionately involved in residual
type categories. Surely, such a pattern as this has adverse implications for rural
income distribution.
Hossain (2004) observes that the rural non-farm income is more unequally
distributed than the income from agriculture. Lanjouw's (1998) study of Ecuador
found that within the rural income distribution, non-agricultural incomes would
appear to go primarily to the better-off, so that raising non-agricultural incomes
(rather than expanding access to non-agricultural incomes) would lead to widening of
the distance between rich and the poor, and therefore, increase in inequality. Similar
findings are reported from El Salvador (Lanjouw 2001) and Brazil (Ferreira and
Lanjouw, 2001).
It is not that all the non-farm sources of income are inequality increasing or
reducing. Whereas some sources may increase the inequality, other may reduce it.
Adams and He (1995) had found that of the three main sources of non-farm income unskilled labour, self employment and government employment only unskilled
labour tends to decrease income inequality. Government employment an inequality
increasing source of non-farm income, accounts for a large proportion of non-farm
income inequality. Remittance incomes also have differential impact depending upon
their sources. Ho (1986), while interpreting South Korean data, notes that remittances
and dividend incomes are very much more unequally distributed over farm sizes than

125
are other non-farm incomes. Similarly, Leons and Feldman (1998), in a study of a
remote and resource poor area of Philippine, found remittances being responsible for
almost one-half of the income inequality measured by Gini coefficient. While trading
and skilled labour income also contribute modestly to income inequality other offfarm income sources tend to reduce income inequality on the margin. de Janvry and
Sadoulet (2001) and Hossain (2001) and Ahmed (2006) also noted the differential
impacts of rural non-farm income sources on inter-household income inequality. Even
different components of a particular source of non-farm income tend to have
differential impact on rural inequality. The external remittances represent an
inequality-enhancing source of income (Adams and He, 1995). These results indicate
that different types of non-farm activities have qualitatively different effects on
income distribution.
The above review of literature suggests that, a priori, it is difficult to predict
how the distribution of rural non-farm income is likely to affect the distribution of
total household income. This is because, the study needs to know not only the levels
of inequality in both net farm and non-farm income distribution, but also the relative
importance of each source of income in total household income.
IV
6.4 Income inequality and RNFS: evidence from field study
Income inequality can be best studied through Gini ratio. Gini ratio, also
called Gini coefficient, is a measure of the distribution of income in an economy. The
value of Gini coefficient can range from 0 to 1. A low Gini coefficient indicates a
more equal distribution, with zero value corresponding to complete equality, while
higher Gini coefficients indicate more unequal distribution, with 1 corresponding to
complete inequality. To be validly computed, no negative goods can be distributed.
Thus, if the Gini coefficient is being used to describe household income inequality,
then no household can have a negative income. When used as a measure of income
inequality, the most unequal society will be one in which a single person receives 100
per cent of the total income and the remaining people receive none (Gini
coefficient=1); and the most equal society will be one in which every person receives
the same income (Gini coefficient=0). The results of our study have been presented in
table 6.8.

126
It is observed that bottom 10 per cent persons got 1.08 per cent in case of
agricultural households and 1.51 per cent per capita income in case of RNF
households. The per capita income of lower 50 per cent of the population is 13.32 per
cent in case of agriculture and 17.14 per cent in case of RNF families. On the other
hand the upper 50 per cent of population obtained 86.68 per cent per capita income in
agriculture and 82.86 per cent per capita income in RNF sector. It was further
observed that upper 10 per cent of population obtained 46.04 per cent per capita
income in agriculture and 37.61 per cent per capita income in RNF sector (Table 6.8).
Table 6.8: Concentration of per capita income among RNF and agricultural households
in Punjab
Decile group
Cumulative %age of
Cumulative %age of
PCI of RNF households
PCI of agri households
1.51
1.08
10
4.09
3.29
20
7.56
6.16
30
11.80
9.46
40
17.14
13.32
50
24.17
18.68
60
33.14
26.01
70
45.22
36.72
80
62.39
53.96
90
100.00
100.00
100
Gini Ratio
0.486
0.563

The magnitude of Gini ratio also confirms the results observed according to
decile group. The RNF sector is found to have a comparatively lower Gini ratio of
0.486 against 0.563 for agriculture sector which indicates relatively better per capita
income distribution in RNF than agriculture sector.
RNF activities reduce income inequality as Lorentz Curve in case of RNF
families is closer to the line of equal distribution as compared to that in case of
agricultural families (Figures 6.1).

127
Lorenz curve depicting concentration of per capita income among RNF
and Agri household in Punjab

Cumulative percentage of persons

Graph 6.1

Cumulative percentage of per capita income

Table 6.9: Concentration of per capita income among different categories of rural
households in Punjab
Decile Group
10
20
30
40
50
60
70
80
90
100
Gini Ratio

Pure RNF
1.77
4.79
8.81
14.12
19.14
25.88
34.95
46.80
64.36
100.00
0.459

Landed RNF
1.50
4.35
8.16
13.03
19.06
26.35
35.71
47.45
63.67
100.00
0.461

Agri Labour
1.93
4.81
9.25
15.16
21.85
29.22
38.41
49.94
64.76
100.00
0.429

Pure Agri
1.29
3.34
5.78
8.63
13.24
19.46
28.03
39.61
55.38
100.00
0.550

The concentration of per capita income of different categories of rural

households is given in Table 6.9. It is observed that the bottom 10 per cent households
of pure RNF got 1.77 per cent, landed RNF households got 1.50 per cent, agricultural
labour households got 1.93 per cent and pure agricultural households got 1.29 per cent
per capita income. The lower 50 per cent population of pure RNF households and
landed RNF households obtained 19.14 per cent and 19.06 per cent per capita income,
respectively, whereas agricultural labour and pure agricultural families obtained 21.85
per cent and 13.24 per cent per capita income, respectively. In contrast to this, the

128
upper 50 per cent population obtained in case of pure RNF households 80.86 per cent
and landed RNF households 80.94 per cent per capita income whereas agricultural
labour obtained 78.15 per cent and pure agricultural families obtained 86.76 per cent
per capita income. It is interesting to note that the upper ten per cent persons of pure
agricultural households enjoy the largest share of income held by landed RNF, pure
RNF and agricultural labourers.
Lorenz curve depicting concentration of per capita income among
different categories of rural population

Cumulative percentage of persons

Graph 6.2

Cumulative percentage of per capita income

The Gini coefficients (Gragh 6.2) clearly depict that pure agricultural families
have worst distribution of per capita income as compared to other rural households.
The Gini ratio is the highest (0.550) for pure agricultural households followed by
landed RNF households with 0.461, pure RNF households with 0.459 and agricultural
labour households with 0.429. This scenario shows that RNF employment reduces
income inequality as Gini ratio for pure RNF households is 0.459. Even the RNF
households who have landed property are better than the pure agricultural households
in as far as income distribution is concerned. The graph also shows that RNF
activities reduce income inequality as Lorentz Curve in case of pure agricultural
household is the farthest from the line of equal distribution.

129
It follows from the above discussion that the RNF employment has improved
the income level of the rural households which reduced the magnitude of rural
poverty. As agricultural labour is almost a homogenous group of society due to their
minimum income level, there is less income inequality among agricultural labourers.
In asset owning households, RNF incomes tend to dampen the inter-household
income inequalities. Thus, the analysis clearly shows that RNF employment not only
provides sufficient income for the participant households to have a living above the
official poverty line, but these incomes also inject an element of egalitarianism in
otherwise unequal agricultural incomes. In the absence of RNF incomes, poverty
ratios would have been higher and rural income distribution worse.