Thursday, December 22, 2011


Rural India should have been our growth driver

Indian villages, since independence, have been suffering from myriad problems which have always been an impediment towards sustainable development. And this dichotomy in growth is very evident when one sees the stark difference between urban and rural India in almost all sectors. However, one of the key deterrents to growth has been perpetual neglect and lack of investments. What more, even the government has largely failed to create an enabling environment of investment infrastructure.

When it comes to measuring productivity of a region, statistically, there can’t be a better tool than Incremental Capital-Output Ratio (IOCR). It allows one to gauge ratio of investment to growth. In simple words, the higher the ratio is, the lesser is the productivity of the capital and lower the ratio, the more is the productivity. The IOCR at all India level is around 4.3 as calculated at the end of the tenth five-year plan. However, conventionally it is understood that IOCR is high in villages, as there is lack of physical infrastructure. But then, there exists no merit in this conventional wisdom as it has been proven by micro-finance companies, that even after lending money at a high rate of 28 to 30 per cent, the rural households are able to repay their debts. In fact, at regions where organised microcredit does not have a foothold, private money lenders lend money at an upward rates of 36 per cent and still the debts get repaid. So any debate on growth viz-a-viz investments is ruled out simply because if the capital employed would not have generated those kinds of returns, it would have been impossible for rural households to repay.

For the last six decades, various governments proposed several schemes, but most of them have been put on hold even before they could be implemented. From projects under National Bank for Agriculture and Rural Development (NABARD) to Rajeev Gandhi Grameen Vidyutikaran Yojana (RGGVY), most of these initiatives have miserably failed. So much so that the budgetary allocation for rural development on an average is merely 1.5 per cent of our total GDP as compared to 33 per cent of China. This is despite the fact that villages provide shelter to around 60 per cent of the total population.

Indian villages are those untapped markets which have a relatively low IOCR and a high income multiplier. Since, our villages are plagued with high unemployment and huge supply-demand gap for basic commodities, a small investment would not only reap huge productivity (as the overheads would be low) but would also generate employment opportunities — especially as it would built positive externalities and fuel growth in manufacturing and processing at a very small as well as small and medium level.

Developing investment infrastructure would eventually make these villages self-sustaining and there is no reason not to develop it. Today, villages of Europe and China are acting as potential investment destinations and they have scooped out as satellite towns. They have broken out of being archaic villages to become modern ones. And they are the ones who are triggering all round growth for their respective nations. Very unfortunately, we keep suffering from the legacy of conventional wisdom which is forcing these villages to remain conventionally poor. Poor India!


1 comment:

  1. I disagree with the fact that China is an example of investments going to villages. On the contrary, they have identified buckets of potential investment in existing cities. Most of the populace(even from the cites) was heading towards the east coast. Such large scale human migration was leaving behind ghost towns. To alleviate this, cities have been identified with specific industry investment potential. So you have a city with pharmaceutical industry subsidy, and thus a potential destination for most pharma companies. This has led to shorter distance migration from villages to nearby cities and not to the east coast.