Investigating the existence of entry barriers in rural non-farm sector (RNFS) employment in India: A theoretical modelling and an empirical analysis

Abstract

Abstract Amidst the laggardness of the farm sector, a major shift away from the farm sector to the rural non-farm sector (RNFS) has been observed in India, in the recent decades. However, the diversification into the RNFS, especially for the small and the marginal farmers, may be restricted due to the presence of various entry barriers like, lack of education in general and technical education in particular, credit constraint and a lower endowment of social capital. In this context, the study develops a simple theoretical model to incorporate the labour allocation decisions of the rural farm households, focussing on the potential entry barriers in the RNFS. The theoretically determined entry barriers along with other covariates are then used to empirically estimate the intensity of RNFS participation. We employ household level panel data on Indian states belonging to Semi-arid tropics (SAT) and Eastern regions, for the years 2010–14. A fractional response model is used to empirically analyse the determinants underlying RNFS diversification. The empirical results of the study confirm the presence of entry barriers in the form of lack of education and technical education, and access to credit and social capital. Other variables that are found to have a significant impact on diversification are land asset, family size, gender of the household head, age of the household head and farm income. Since, access to education, skill, credit and social capital are vital factors determining RNFS diversification, specific policies are required to be implemented for increasing access to these assets so as to increase RNFS employment in India.