The Hindu Business Line : Bharat Nirman: Foundation in Rural India

The ambitious Bharat Nirman project can succeed only if large industries are induced to distribute themselves in villages. For rural location imposes no serious financial liability on large industries but small ones cannot prosper in villages as well as they do in cities. Businesses also would be discharging best their social responsibility thus. A win-win for all, says P. V. Indiresan.

Bharat Nirman will succeed best if the government encourages the organised sector to locate in villages.

ON TOP of the National Urban Renewal Mission he launched recently, the Prime Minister inaugurated last week a CII meet on Bharat Nirman Mission for the development of remote villages. The two missions complement each other. Together, they are meant to rectify the ills of large cities and remote villages. A gap remains: The Government is yet to announce any plan for large villages and smaller cities.

Looking at Bharat Nirman critically (not to disparage but to search for further improvements), we can detect three major limitations:

It is essentially a subsidy scheme with no plausible plan for revenue generation and sustenance. Like most government projects, Bharat Nirman too may create assets that crumble for want of maintenance. Although the scheme was presented at a business conclave, Bharat Nirman has no tangible plan for Public-Private Partnership. Bharat Nirman may provide business opportunities for the construction industry and for a few others. However, that is a contractor-client relationship, not a partnership for development.

The standards adopted for the amenities are low. That is a cultural flaw in our country: Plans are made for today, not for tomorrow, certainly not for the day after. Hence, when tomorrow comes, our systems get overloaded with little scope to expand further except at high avoidable cost.

For instance, our roads are not designed for further widening, nor are our airports designed to expand and meet international standards at a future date. Ours is distinctly a static vision. As a Korean scientist once explained, we are a big country that thinks small. As a result, Bharat Nirman faces three risks: Non-sustainability; private business acting as vultures and not as milch cows; getting stuck in a low-development trap.

There is one solution that can remedy all three ills: Rural development becomes profitable business, particularly for big business!

Even though social fervour retarded our economic growth for over four decades, people have an aversion to businesses making profits. In this connection, it is worth recounting a folk tale of Karnataka according to which a thief was caught searching for something on the floor. Asked what he was searching for, the thief replied that he had accidentally dropped his finger nail. He could not find it in the dark, and was worried about it because "elders say that a house in which a finger nail is dropped will be ruined." He added, "How can I come to steal in this house again if it is ruined?"

How can the government collect more taxes to support Bharat Nirman or any other development, if business does not make profits? How can villages gain if they attract only big contractors and not big businesses? How can any system other than business create sustainable jobs?

At the CII conference, many business leaders expressed eagerness to contribute to Bharat Nirman but did not know how. Many spoke of Corporate Social Responsibility. Organised as charity (the way CSR functions even in the case of the Bill Gates Foundation), CSR can contribute relatively little. India's horrendous rural poverty cannot be tackled by charity but profitable businesses can do so when they locate in impoverished villages.

Basically, villages are poor because they do not attract employers and, hence, have few jobs on offer. Cities are poor because they have too many employers chasing the same patch of real-estate resulting in prices rising faster than wages. If employers were to shift to rural areas, both urban and rural poverty would be cured simultaneously. Then, in cities, the pressure for land will ease, rents will come down, and workers will be able to reside closer to workplaces and commute less. In several ways, purchasing power will increase. Simultaneously, rural jobs will increase, rural wages will rise.

Thus, CSR is discharged best when businesses shift their operations (at any rate their future expansion) to the rural areas. When they do so, their entire value-addition will enrich the rural areas and not merely the tiny fraction that can be spared for charity. Hence, benefits from business will be much more than what CSR as charity can contribute.

Obviously, businesses cannot afford to locate their future expansion, let alone relocate existing activities in the rural areas, unless they become more profitable than cities are. In spite of their higher prices for almost everything (particularly real-estate which could be a hundred times more), businesses prefer cities because, overall, costs are less in cities than in villages. Basically, there are six types of costs in running a business: (a) materials, (b) wages; (c) finance; (d) power and water, (e) telecommunications, and (f) rents.

Of these, material costs need be no higher in villages than in cities provided there are roads and the roads are truck-worthy. In the case of telecommunications and finance, technology has destroyed distances. Electronic outsourcing has progressed to such an extent that many transactions are performed instantaneously half way round the globe. Similarly, delivery of electrical power costs no more in villages than in cities — provided it is large enough. Thanks to government support, finance may actually be cheaper in the rural areas. However, all these advantages are illusory if desired services are not available. That is the problem in villages: Services are just not available at any price because, to be commercially viable, the market size should be large. Unfortunately, the rural markets are tiny.

The cost of accessing services and that of attracting skilled staff are the hidden transaction costs. Transaction costs in India are high everywhere but in villages they are virtually infinite; needed services and skills cannot be procured at any price. However, this is a handicap for small businesses only. For large businesses, their individual demand is so high that the services they require will have to be installed specifically for their use; they cannot depend on what is available for the general public.

It is cheaper to install new services, on the scale a large business requires, in the rural areas than in cities. Likewise, skilled staff too will be happy to move wherever large businesses go. Hence, for large businesses, transaction costs pose no problem even in mountains, in forests, let alone in villages. Small businesses cannot stand alone but large businesses can.

That is why large industries such as sugar, paper, mines and the like have no trouble operating profitably in remote areas. In other words, rural location imposes no serious financial liability on large industries but small ones cannot prosper in villages as well as they do in cities. Unfortunately, an erroneous view has taken root in the minds of administrators and policy-makers (even businessmen) that only tiny industries are suited for the rural areas. The truth is exactly the opposite. That misconception is the root cause of rural poverty. In brief, operational costs are low in villages but transactions are high. In cities, the converse is true. Only in the case of large business the difference does not matter but not for small business.

Then, the question arises, at what size can a business attract on its own all the services it needs? For what size of business does the sum of transaction plus operational costs become neutral between cities and villages? Above what size does it become actually advantageous for a business to locate in a rural area by avoiding the higher rents and pollution costs of cities? Here is a worthy field of enquiry for organisations such as the CII and for institutes of management. The Government too should consider whether Bharat Nirman can stand alone in rural areas as well as large businesses can.

Let us compare what Bharat Nirman plans to do and what large businesses will do. Taking roads as an example, Bharat Nirman will build single-lane "black-top" roads, which true to their name are often mud, coated black; generate more black money than traffic.

Large businesses have no option but build strong truck-worthy roads.Bharat Nirman roads will connect remote villages. "Connect what?" is the question. Strictly speaking roads are needed not to connect places but connect people — people as users with people as suppliers; connect jobseekers with markets. In the case of remote villages, people are so poor that they cannot afford to commute more than a few kilometres a day. Hence, roads in poor villages should connect to jobs within walking or cycling distance, within five, at the most, ten kilometres.

Hence, my Vision of Bharat Nirman is "job centres no farther away than five to ten kilometres from any village (at least from almost every village)". That is not as difficult as it may appear. Properly distributed, no more than five to ten thousand job centres (like a PURA) can serve the entire country.

At the CII Conference, the question was asked what business can do to promote Bharat Nirman. The least (and the best) it can do is to induce large industries to distribute themselves in villages. Bharat Nirman will succeed best if the government encourages the organised sector to locate in villages. I suggest that the first five thousand jobs created in a village cluster be given infrastructure status.

(This is 165th in the Vision 2020 series. The previous article was published on December 12.)

(The author is a former Director of IIT Madras. Response may be sent to: indiresan@gmail.com)

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