RURAL NON-AGRICULTURAL EMPLOYMENT IN INDIA – The Residual Sector Hypothesis Revisited

C. S. Murty
JEL codes: 
Working Paper No. 67 December, 2005

The literature on Rural Non-Agricultural Employment (RNAE) in India is replete with
references as to its nature – whether or not it is residual. Vaidyanathan (1986)
advanced the view that for the sector to be termed residual in nature two conditions
should be satisfied: (1) the unemployment rate should be positively related to the
RNAE and (2) the unemployment rate again should be negatively related to the wage
ratio between the non-agricultural and agricultural sectors. These two propositions
have become the corner stones of what has come to be termed as the Residual
Sector Hypothesis (RSH). While the hypothesis as such seems to be theoretically
sound, empirical evidence is rarely, if ever, consistent with the theoretical postulates.
The present paper examines whether the propositions find validity in the NSS data at
five different points of time with different statistical tools. The conclusion emerging
from the statistical exercises is that the second of the two propositions is not always
valid. It is argued that the absence of validity of the second proposition may have to
do with the fact that the labour market does not function perfectly and therefore, even
if the proposition is not valid one cannot dismiss the possibility that the sector is
residual in nature.
By way of conclusion it is noted that RNAS does perform the safety-net function
admirably by absorbing those who could not find employment in agriculture in the
service sector and, to a lesser extent, in the manufacturing sector. Insofar as this is
true, the sector needs to be promoted. While rural non-agricultural activities of highproductive
nature demand attention because they are a root out of poverty, the lowproductive
ones count, for they make critical contribution to the livelihoods of the
poor and prevent further destitution.