The Hindu Business Line : Rural development, a new framework

Proposing a seven-part plan that involves no subsidies, but only a re-allocation of existing budget, P. V. Indiresan outlines how rural blocks can become competitive and efficient to attract private business and investment. Local administrati ons can build permanent infrastructure that will create new jobs, directly and indirectly. Then, no family need be destitute.

IT TAKES the income from a tonne of grain to buy a commonplace TV. That is a lot of grain. Hence, though agriculture is the foundation of the economy, it cannot make farmers rich enough to lead prosperous lives, unless they have very large farms. In agriculture, mass employment and prosperity are a contradiction in terms.

With prosperity, consumption of expensive goods such as vehicles and television sets or of services such as Internet rises. Villages cannot afford such expenditure on agricultural income alone; they will need high-productivity industries as an additional source of income. Because their labour productivity is high, such industries too cannot generate much employment. That is why rich nations, such as the US, create most jobs not in agriculture, not in industries, but in services — in flipping hamburgers, in travel bureaus, and the like.

That rural-urban disparity is worsening, not improving, is a fact. Logically, there must be some flaws in present policy. The Table lists some facts and fallacies of prevailing ideas on rural development. We discussed five of them in some detail in the previous article. There are other errors, such as the view that micro-credit will do for villagers while cities must have capital-intensive investments; that it is not easy to find a bare thousand rupees to fund blackboards for village schools but cities must get tens of crores of rupees for flyovers. I have advocated several times in these columns that connectivity will transform villages. To be precise, good connectivity is necessary for rural prosperity but it is not a guarantor of success. To be certain of success, we should know what the sufficient condition is. Unfortunately, the sufficient condition for either rural prosperity or for full employment is like the pot of gold at the end of the rainbow: it recedes ever and ever as we move towards it. The best we can do is to fulfil as many necessary conditions as possible. That will increase the probability of success even if it does not guarantee it. Reverting to necessary conditions, improved connectivity is the starting point. Rural-urban disparity will improve if rural investments rise to the national average of Rs 5,000 per capita per year.

Next, nationally, half the net capital investment is in the household sector. Then, minimising unwarranted transaction costs in house construction, in buying and in renting will be a valuable boon. As explained above, rural prosperity needs modern industries too not so much to generate employment as to provide villages with as much purchasing power as cities have. Therefore, industries too should be deliberately diverted to villages. (That will have the grace that no accident will become disastrous the way it did in Bhopal.)

These are necessary conditions for maximising rural incomes. To maximise employment, we will need in addition to the above, "domestic infrastructure" — land for housing, piped water supply, electricity, sanitation, schools, hospitals, Internet, and transport services to a large market. The presence or absence of domestic infrastructure is the reason why cities generate more jobs than villages do. It is also the basis for domestic prosperity. Once villages are endowed with domestic infrastructure, they may even overtake cities as desirable places to live. Domestic infrastructure multiplies jobs initially created in agriculture and industry.

For quite some time now, development economists have stopped using the GNP as the prime indicator of development. Yet, our policy-makers are obsessed with the growth rate of GNP. An economy growth rate of 8 per cent is being touted as the cure for the ills of our country. Such rapid growth can be a boon; it can also be a bane. It can sell more TV sets and expensive flats. But will new gadgets and high-rise buildings make our cities better? Will mere increase in income help our slum dwellers buy better homes or will it force more people into slums? Will it improve family welfare or will it cause disruption with increasing rural-urban migration? At best, GNP and growth rates are dubious guides for development. I propose instead the following seven-part scheme: (a) Per capita, rural investment on a par with urban ones. (b) High quality connectivity — most economically obtained through a ring road linking a loop of villages. (c) Delegated power from Central and state governments for local administrations (with the rural development block as the unit) to licence the establishment of businesses and industries on condition they guarantee all residents the seven basic elements of domestic infrastructure — land, water, power, sanitation, schools, hospitals, public transport and Internet, and not otherwise. (d) Simplified rules for buying, selling and renting land or dwellings to minimise transaction costs. (e) Low-cost credit up to Rs 200,000 per job (that is the national average of net investment per job created) created in the rural areas. Further, as a push-factor, (f) a rule that organised businesses will provide their employees space to build houses (plus an extra fifth to house casual labourers). (g) High enough tax on congestion to induce businesses to move away from crowded cities.

This plan has no subsidies. It is bottom-up planning. It requires only a re-allocation of existing budget. It is competitive; it forces rural blocks to compete among themselves to attract private business and investment. Because of that competition, rural administrations will have no option but become efficient. In this plan, local administrations build permanent assets, not distribute perishable goods. Hence, there is little scope for evasion and corruption. Further, with so much domestic infrastructure, many new jobs will be created both directly and indirectly. Then, no family need be destitute.

For three reasons, this scheme is socially progressive too: (a) Local governments concentrate on domestic and public infrastructure, which helps the poor even more than the rich. (b) As businesses set apart living space for poor, casual labourers who are attracted by peripheral job opportunities will have space to live. (c) The Congestion Tax induces businesses to move out of crowded cities into uncrowded rural areas. Both ways, slums will clear in cities. The environment will improve in cities because the population pressure decreases. Villages also improve because of better domestic infrastructure; they will grow if, and only if, they provide a full range of domestic infrastructure.

This scheme is based on two hypotheses: (a) Per capita investment in rural areas should be no less than in cities. (b) Just as in cities, services and not agriculture will contribute most to future employment. Once some commonsense precautions are taken, with these two hypotheses, both capital and labour productivity will be better in the rural areas than in cities; for a given investment more jobs will be created.

Unfortunately, good economics is not necessarily good politics. That is why governments in India prefer to spend on subsidies rather than on development.

(The author is former Director, IIT Madras.)

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