India’s big stimulus: Welfare boosts rural spending

This is how you work an economic stimulus: Give money to people that will spend it.

Say what you want about tax breaks, bailouts and land concessions for big business. But as my grandfather (a seed corn salesman) used to say, nothing happens until somebody sells something. And nothing drives sales better than putting money in the hands of people who don't have any. 

Take some recent figures from India as a case in point. 

For the first time in 25 years (and possibly a lot longer), rural spending is growing faster than urban consumption, according to a new study by Crisil, the Indian arm of Standard & Poors.

Between 2009-10 and 2011-12, additional spending by rural India was Rs. 3,750 billion ($68 billion), significantly higher than Rs. 2,994 billion ($54 billion) by urbanites, the Hindustan Times said.

"Underpinning this growth in rural consumption is a strong increase in rural incomes due to rising non-farm employment opportunities and the government’s rural focus through employment generation schemes," the paper cited a Crisil research report as saying.

At this stage, it's unclear what portion of the increased consumption stems from migrant laborers sending money back home, and what portion stems from India's rural employment guarantee scheme. According to the HT, National Sample Survey Organisation (NSSO) data shows that during 2004-05 to 2009-10 rural construction jobs rose by 88 percent, while the number of people employed in agriculture fell from 249 million to 229 million. Meanwhile, money sent home by migrants from villages to urban areas no doubt also boosted consumption.

But the suggestion that a welfare scheme for India's poorest is actually fueling growth should prompt some rethinking about a program that has recently grown controversial.

India is already running a fiscal deficit of more than 5 percent of gross domestic product, and in recent months conservatives have blasted the government for doling out money to the underclass, claiming that these "sops" (which includes luxuries like subsidized rice and wheat) will break the bank. But unlike the corporations who receive tax breaks as an incentive to invest in expanding their businesses and generating unemployment, the new data shows, poor people never fail to plow the cash they receive back into the economy.

How much of that cash is responsible for making rural India a market that is attractive for companies like Unilever? And, in turn, for driving the growth of non-farm jobs that Crisil is so excited about?