When combined with the evidence on the falling elasticity of employment growth with respect to output growth in the agricultural sector referred to earlier, these urban trends increase the significance of rural non-farm activity. However, even here there are clear signs of deceleration. The average annual rate of growth of the number of rural enterprises only fell marginally from 2.7 per cent during 1980-90 to 2.3 per cent during 1990-98. However, the rate of growth of workers engaged in non-farm activity in the rural areas fell from 3.3 per cent to 2.3 per cent during these two periods. This suggests that the expansion of non-farm activity has occurred through the growth of a number of smaller enterprises, suggesting that at least some of this expansion could be the result of a distress-driven shift to non-agricultural activity.
 
In fact, as Chart 5 makes clear, the growth of non-farm activity has not been accompanied by the growth of small capitalist enterprises based on hired labour, which would also be indicative of dynamic diversification of economic activity. Rather, the share of own-account enterprises (OAEs) or enterprises that do not use hired labour has remained constant at around 77 per cent of all non-farm enterprises in rural areas right through the 1980s and 1990s. Interestingly, even in the urban areas the share of OAEs has declined by just 4 percentage points between 1980 and 1998 and still remains at the relatively high of 62 per cent of all urban non-farm enterprises even in 1998.
Chart 5 >>
 
Another indicator of the nature of evolution of the structure of economic activity, is the industry-wise distribution of non-farm activity. As Chart 6 shows, three kinds of ‘industries’ dominated rural non-farm activities during the period under study: manufacturing, the wholesale and retail trade, and community, social and personal services, which together accounted for around 90 per cent of non-farm enterprises. However, there have been significant changes in the shares of these three sectors over the 18 years that the three censuses under discussion spanned. The share of manufacturing enterprises in all non-agricultural enterprises fell from 39 per cent in 1980 to 25 per cent in 1998, while that of trading enterprises increased from 31 to 38 per cent and of enterprises engaged in community, social or personal services from 21 to 26 per cent. Thus, it was not areas like storage, transportation, and repair services, where growth would be triggered by agricultural dynamism, that non-farm activities expanded, but in areas like trade and social and personal services.
Chart 6 >>
 
It could be argued that it is not the expansion in the number of enterprises but in employment that matters, but as chart 7 relating to 1998 shows, the domination of the three sectors mentioned above was even greater in employment than in the number of enterprises and manufacturing’s share in employment was not way out of line from its share in non-farm enterprises.
Chart 7 >>
 
The domination of trade and service activities in rural non-farm employment is accompanied by a domination of small enterprises in non-farm activity. Own account enterprises that do not employ hired workers accounted for 47 per cent of all non-agricultural activity in 1998 and non-directory establishments or those employing less than six workers (hired and non-hired) for another 21 per cent (Chart 8). Medium sized capitalist enterprises with more than six workers accounted for just 32 per cent of total employment. What is more, even in urban areas, OAEs and NDEs accounted for 50 per cent of non-agricultural employment in 1998 (Chart 9).
Chart 8 >> Chart 9 >>
 
Finally, if we examine the distribution of non-agricultural workers by enterprises classified according to size class of employment, we find that even in 1998 small enterprises overwhelmingly dominated the total number of enterprises and substantially dominated in terms of share in workers.  Enterprises employing less than 6 workers accounted for 84 and 79 per cent respectively of rural and urban non-agricultural enterprises and 41 and 33 per cent of rural and urban non-agricultural workers (Chart 10 and 11).
Chart 10 >>  Chart 11 >>
 
How is all this information to be interpreted? First, the evidence seems to suggest that the kind of diversification conventionally associated with capitalist development has not occurred in India even after five decades of post-Independence development. That process of diversification in the developed countries was captured by Kuznets as involving “the shift away from agricultural to non-agricultural pursuits” and only recently “away from industry to services”, besides “a change in scale of productive units, and a related shift from personal enterprise to impersonal organisation of economic firms, with a corresponding change in the occupational status of labour.” Here, the shift to services has occurred well before manufacturing matured, and the shift to larger scale and impersonal forms of organisation has been extremely gradual.
 
Second, there are signs that even this gradual process of diversification of economic activity has lost momentum during the 1990s.
 
Third, the structure of non-agricultural activity in the rural areas and its evolution suggests that the pace and pattern of growth of agriculture has not adequately contributed to a “dynamic” diversification of rural non-agricultural activity.
 
Finally, semi-capitalist forms of organisation and smaller scale units still dominate the non-agricultural sector in both urban and rural areas to an extent where they appear indicative of structural stagnation in India’s development.