The policy for rural development has been premised on the assumption that enhancing agricultural productivity is sufficient to achieve the macro economic goals like growth of rural economy and poverty alleviation. This misplaced assumption is mainly responsible for the institutional neglect of the rural non-farm economy (RNFE).

The fact of the matter is that agricultural growth alone even if substantial is not sufficient to reduce poverty in the rural areas as majority of the rural poor are neither tenant farmers nor farm owners. Moreover, agriculture incomes accrue to those who have access to key factors of production like land and water. In view of highly skewed system of land ownership, the efficacy of agriculture policy for poverty alleviation in rural areas is further reduced.

According to Pakistan Social and Living Standards Measurement Survey (PSLM) 2004-05 non-farm income is a major source of revenue even for farmers with land. According to the survey crop, livestock and agricultural wage labour incomes account for only 25, 8 and 4 per cent respectively of the total rural incomes. The results of the survey further indicate that about 29 per cent of rural households operate a non-farm enterprise.

Rural non-farm economy includes all rural economic activity which is outside the domain of agriculture sector. It includes self-employment, wage employment, full time, part time, formal, informal and seasonal non-farm production. Agro processing i.e. the transformation of raw agricultural products by milling, packaging and bulking etc is a key component of non-farm economy.

Agro processing enterprises like flour mills, rice husking mills, bakeries and sweet shops are the basic manufacturing enterprises in small towns and rural villages.

Repair shops for cycles and motorcycles, vehicles and small electronics, hotels and restaurants, tailors and hair dressers and barbers are the typical services sector businesses in rural areas.

Besides it, nearly half of all self-employed people are engaged in wholesale and retail trade. The construction and social / personal services sectors are major sources of non-agriculture wage employment.

The significance of RNFE is manifold. Besides providing services to agriculture, it helps in stabilising the incomes of the rural people. It plays a vital role in providing local consumer goods and services to the rural populace. It is an important pathway for poverty alleviation in the rural areas. It is linked to food security both directly and indirectly. The growth of rural non-farm economy spurs growth of agriculture sector and increased production in agriculture contributes to the availability of food, thus taking care of food security concerns. RNFE supplements and stabilises the income of the rural people and increases their access to food.

It is a fact that RNFE is important both for the land owning people as well as the rural poor. Its significance is however more pronounced for rural landless and near-landless households who heavily depend on non-farm income sources. The poor rural people face tremendous pressure to explore avenues for their survival in the rural non-farm economy but paucity of resources, both financial and physical, frustrate their efforts and they are caught up in a vicious cycle of poverty. Thus it is required that agriculture and RNFE should grow in tandem with each other as both are closely linked due to a number of key linkages.

Rural non-farm economy faces severe constraints and requires serious attention of the policy makers. The most important element in this regard is the rural investment climate. The access to finance is the most serious obstacle to business operations in rural areas.

The cumbersome loan procedures coupled with high interest rates are the biggest hurdle in setting up small businesses. Almost all lending institutions require collateral and are short-term in nature. The most common forms of collateral are property / buildings and agriculture land.

The rural people who are assets-less find it very difficult to meet these stringent collateral requirements and are unable to start their own businesses due to financial constraints. Moreover, there is an inherent bias in the policies of lending institutions due to high transaction costs and perceived risks associated with lending to small businesses. It is thus required that outreach of micro-finance institutions is extended to the rural areas by easing rules and regulations for establishing these institutions. Furthermore the softening of collateral requirements and cumbersome procedures is good policy prescription.

Another constraint faced by rural enterprises is poor infrastructure. Non-existence or low quality of roads, lack of transport facilities and uninterrupted access to electricity are major infrastructural issues. It is a proven fact that farm to market roads play an important role in creating business and employment activities in the rural areas. In this regard measures like better road maintenance, extension of basic motorable access and launching of schemes aimed at financing of rural transport systems may be a good policy option.

Unreliable electricity supply is also a big obstacle to the growth and development of non-farm enterprises particularly in the manufacturing sector. Most of the rural non-farm enterprises are not able to afford generators and unreliable electricity supply diminishes the chances of growth of small manufacturing units in rural areas. It is imperative that measures are taken for increasing investment in power generation, distribution and transmission, which in turn requires focus on energy sector.

Public investment for developing rural markets is also critical for the growth of RNFE. The role of the government is very important in creation of an enabling environment for growth and development of rural non-sector economy through provision of public goods. Besides developing rural infrastructure, investments in rural education, health and skills development provide essential building blocs for high productivity of non-farm rural economy.

In order to make RNFE a vehicle of poverty alleviation, it is imperative that targeted interventions are made to equip people with technical know-how about businesses. In case of inaction, RNFE may become concentrated in the hands of richer households further widening the existing inequalities in the society. Thus the immediate policy challenge is to equip poor households with necessary wherewithal for setting up small businesses in the rural area and create a regulatory environment where few business houses or big landlords do not control the rural non-form economy. Such regulatory environment is also justified on equity grounds as RNFE plays a key role in the livelihood strategies of the rural poor.

Therefore any changes that impinge on the small RNFE firms negatively warrant special attention of the policy makers. This aspect has gained heightened importance in view of new forces of competition unleashed by globalisation and trade liberalisation. Instances have been noticed in the developing countries where rising super markets have negatively impacted the small retailers and the wholesalers. It however, does not mean that we should close the doors of modernisation and liberalisation. The point being emphasized here is that the small firms and businesses operating in the rural area should be assisted either to compete in the market or to redesign themselves for alternative RNFE activity.

Another issue facing the RNFE area is the institutional gaps which need to be filled in to turn it into an effective pathway for poverty alleviation. As the RNFE covers multifarious business activities, so these activities do not fall in the domain of a single ministry or government institution giving rise to institutional gaps and state neglect. An integrated response to take care of these gaps is the need of the hour.