India Defies Slump, Powered by Growth in Poor Rural States

By Ayaan Khan

This country's path out of the global economic turmoil may start here, among a community of outcastes who dine on rats.

In Bihar, India's poorest and least literate major state, the Mushahar are the poorest and least literate. Most are farm laborers. About one in 10 can read. So impoverished is this group that they hunt field rats to supplement a deprived diet. Mushahar is Hindi for "rat eater."

But the outlook for the state's two million Mushahar has brightened in the past year. Thanks to government aid programs, more Mushahar children are attending school. Increased state investment in roads and local factories has put their parents to work. Demand for laborers has pushed up wages for field work.

In a sign of the times, a government proposal to promote rat farming was ridiculed by the Mushahar, the very group of untouchables, or Dalits, it was supposed to benefit. They worried it would pull their children out of school and extend a social stigma to the next generation. Some protested on the streets of Bihar's capital, Patna, shouting: "We want to learn to use a computer mouse, not catch mice."

The Mushahar in Bihar are part of a political and economic shift that is building across the Indian countryside. The transformation, largely driven by development spending by national and state policy makers, will be put to a test starting next week. The world's largest democracy kicks off a month of polling April 16 in which many of the leaders behind these experiments are seeking re-election.

Growth has slowed in the new India of technology outsourcing, property development and securities trade. But old India -- the rural sector that is home to 700 million of the country's billion-plus people -- shows signs it can pick up the slack. The rural awakening helps explain why India continues to grow even as the U.S. recession drags on the world economy.

The change is largely political. In years past, many state leaders rode to power with vows to give voice to lower-caste voters. But after failing for the most part to lift living standards, these officials have been replaced in many cases by leaders who have. In poor and largely rural states from Orissa in the east to Rajasthan in the west, many new leaders have invested in health, education and infrastructure. That has set the stage for the creation of industry and consumer markets and enabled upward mobility.

It's unclear whether development spending in rural India will spark longer-term expansion. "Up till now, a lot of our growth has been bubble growth," says Nandan Nilekani, co-chairman of Infosys Technologies Ltd., a software and outsourcing company. "That makes the internal reforms even more important now, so we create momentum for future growth."

The rural economic rise is recent, with few figures yet available for 2008. In the five-year period ending in 2007, rural Indians' consumer spending grew faster than that of city dwellers, according to Indian brokerage IIFL. Rural India has surpassed urban centers in the number of households earning $2,000 a year, above which families begin to have disposable income.

Companies from Coca-Cola Co. to telecom provider Reliance Communications India Ltd. say rising sales in once-spurned rural areas are driving their India growth. The Indian unit of LG Electronics, which sells low-voltage appliances for power-deprived areas, expects rural areas to account for 45% of its Indian sales this year, up from 35% last year. Mahindra & Mahindra Ltd., a car and tractor maker, says it couldn't keep up with orders for its new Xylo, a cross between a minivan and SUV, in part because of surprising rural demand.

"If any one part of the economy is decoupled from the global crisis, it is India's rural sector," says Anand Mahindra, vice chairman of auto maker's parent company, Mahindra Group.

Tariff Barriers
The countryside's strength comes in part from a trade policy that free-market economists say may hurt India in the long run. Tariffs on agricultural imports are among the world's highest and may have deterred investment in rural India. But these tariffs have also sheltered swaths of the country. An estimated 88% of India's rural incomes are tied to activities inside those markets, according to IIFL.

Even slight improvements here are significant, economists say, because they build on a base of practically zero. "For so long, these states were a drag on our economy," says Surjit Bhalla, head of Oxus Research & Investments, an advisory firm in New Delhi. "Now larger rural populations can become a fillip to growth."

India's economy has held up better than most, in spite of slowing tech sales and falling real-estate and stock markets. The International Monetary Fund projects India will grow 5.1% in 2009, faster than Brazil (1.8%) and Russia (-0.7%). India is also closing the gap on China, whose 6.7% projected growth for 2009 marks a sharp decline from recent double-digit gains.

Bihar, which borders Nepal, was once a breadbasket of eastern India. But it largely missed out on the economic miracle of the last decade. In the 1990s, as India's economy expanded about 5% a year, Bihar barely grew.

Infrastructure was poor. Farm goods often rotted before reaching the market. Amid corruption and rampant crime, the state was branded India's "kidnap capital." The young left to seek education and jobs.

More than half Bihar's 83 million residents live below the international poverty line of about $1 dollar a day. Fewer than half are literate. The state attracted $167 million in foreign direct investment between 1994 and 2004, a period when India as a whole attracted $29 billion.

Government Open House
In recent years, political candidates won elections with promises to empower to lower-caste voters. But education, health and infrastructure projects were often neglected, presenting opportunity for opponents. In late 2005, a former railways minister from a low-caste background, Nitish Kumar, became chief minister, the leader of Bihar state.

Breaking from the torpid bureaucracy of his predecessors, the 58-year-old Mr. Kumar has tried to prod the government machinery into action. He hosts Monday open houses at his residence, where ministers and department secretaries are required to field public complaints. Bureaucrats must also accompany him to town-hall meetings in far corners of the state, where they pitch tents in fields. His critics say the exercises simply aim to drum up votes; Mr. Kumar says an open government serves the people and the economy.

"My message is that democracy should provide solutions to the problems," he said in an interview at his residence, where he wore traditional white linen trousers and shirt.

With an alliance led by his ruling Janata Dal (United) party, Mr. Kumar has built thousands of miles of roads. He has hired 200,000 schoolteachers and is recruiting 100,000 more. He has lured private-clinic doctors back to public hospitals.

Development projects and strong harvests have helped Bihar's economy close the gap with the national average. The state is growing at an annual rate of about 5.5%, and that is expected to accelerate, according to the Asian Development Research Institute. The number of people migrating out dropped 27% in the 2006-08 period compared with 2001-03, according to the Bihar Institute of Economic Studies, a local think tank.

Homes in a Gully
One of Mr. Kumar's toughest challenges is improving the lot of the Mushahar in places like Dev Kuli village.

Home to about 10,000 people, Dev Kuli is surrounded by farming hamlets and abuts a two-lane highway where long-haul trucks blast their air horns as they rumble toward New Delhi. The lives of all residents, from low caste to high, have long revolved around the rice and wheat harvests.

Several hundred village families are outcaste Mushahar, who live among goats, pigs and swarms of flies in a dried-out gully. The government began to build brick houses but left them without windows or doors.

As a caste the government has identified as "extremely backward," the Mushahar will be eligible for a $57 million government program that will provide families with a water supply, toilets, radios and educational support, according to Vijoy Prakash, the principal secretary for two government departments dedicated to low-caste assistance.

On Mr. Prakash's desk sits a stuffed rat, a reminder of who such programs aim to help. Yet he says past efforts have failed in part because only 9% of the Mushahar can read. "This is the group that has remained excluded from India's growth," he says.

As the sun came up on a recent day, a group of Mushahar gathered round a water pump to wash clothes. Later in the morning a long line of Mushahar children made their way up a mud embankment and, in a profound departure from community tradition, headed to primary school.

Parents complain that their children face discrimination even at Dev Kuli's one-room school for Mushahar children, the name of which translates as "Slum People's Primary School." Children from other castes attend a school nearby.

The government has repaired the school's roof in recent months, hired a new teacher and added an extra bathroom to provide privacy for girls. Even so, the school doesn't have chairs or desks, so students sit on empty grain bags and write on a cement floor covered with dirt.

Each day, a group of government-hired Mushahar, known as "motivators," roust children from their homes and escort them to class. Motivator Phulwanti Devi, a recent and rare Mushahar college graduate, says she battles parents almost every morning to release their children from farm work.

"We tell them, 'It will improve their future,'" says Ms. Devi, 25 years old.

"They reply, 'We don't see that you have such a good job.' I tell them: 'I have a diploma, and so I can get a better job. What about you?'"

Still, Ms. Devi and other motivators say attendance at the school has grown. Teachers say about 150 children are enrolled. On a recent day, the motivators rounded up about half that many.

There are other challenges. Some motivators say they haven't been paid their salaries of 2,000 rupees a month, about $40. Local officials occasionally tell teachers to skip class to conduct government work, such as counting votes at election time.

Mr. Prakash, the secretary for lower castes, says the motivators will soon be paid from funds his department has set aside. Bihar's education secretary, Anjani Kumar Singh, says a Bihar court has ruled that teachers can't skip class for government work, but admitted the order could be hard to enforce at election time.

Spicy Masala
Generating genuine business activity among a largely illiterate community hasn't been easy, either, judging by Mr. Prakash's rat-farming initiative. He estimated that three million people in the state would welcome a stable supply of the protein-rich meat.

Many Mushahar say they enjoy the meat, typically barbecued or cooked with a spicy masala, and believe it keeps their hair dark. But many resented being pushed into farming them. "If we get involved in rat farming, our children will also get involved," says Ms. Devi.

After some Mushahar protested in Patna late last summer, Mr. Kumar, the chief minister, shelved the proposal.

Yet Dev Kuli's economy has improved. The infrastructure push has created jobs building and repairing roads. That has helped bring factories to the area, say locals, including a steel mill and a cola-bottling plant. Those jobs have boosted farm wages to the point where the Mushahar won't work in the fields for less than about $2 a day, says Raj Ballabh Raji, a local farmer from a different caste.

Mr. Raji, who now works his six acres with a new tractor, notes one more sign of prosperity. "You can now find a petrol pump within a mile of here," he says in a tone of pleasant surprise. "The economy is changing."