Financial Daily from THE HINDU group of publications
Monday, May 17, 2004
Columns - Vision 2020
PURA: HUDCO opens the door
P. V. Indiresan
THE SCHEME PURA (Providing Urban-amenities in Rural Areas) has crossed an important hurdle: Dr P. S. Rana, CMD of HUDCO, has offered to finance, on an experimental basis, the start-up costs of establishing PURA in a few viable locations. HUDCO's offer provides a chance to try out PURA as a for-profit, self-financing commercial project.
The capital for this PURA scheme will be in three parts: (a) usual grants of the Central Government for rural development, (b) venture capital from HUDCO and (c) normal business investment to meet expected increases in market demand. Hopefully, government grants for rural development will be available to HUDCO as seed capital. The venture capital contributed by HUDCO will be several times larger, large enough to install urban quality infrastructure rather than the much lower quality that villages are allowed to have at present. At a second level of hope, private ventures would be attracted by this superior infrastructure.
Thus, this model of PURA amplifies the funds that the Centre provides for rural investment in two stages. One, HUDCO raises three-four times what the Central government provides. Two, private investors multiply 3-4 times what the Centre and HUDCO jointly invests. Taken together, the final investment increases by a factor of ten or more. That enables an entirely new paradigm of rural development to be put into operation.
Traditionally, across the political spectrum, most policy-makers in India have treated poverty alleviation as the primary objective of rural development. Invariably, towards that end, they give outright grants to village-level functionaries. Due to budget constraints, such grants are usually sub-optimal, and, to make matters worse, middlemen siphon off the most part. Hence, the exercise is often infructuous: roads do not last even one monsoon; hospitals have no medicines; teachers abscond. PURA corrects that wastage by raising investment from private sources above the minimum threshold for sustainability.
In addition, due to political pressures, government grants cannot be terminated however inefficient or vitiated by corruption they may be. Private investments have no choice but stay efficient: The moment they cease to be productive, the flow of money will dry up. Hence, unlike government grants, private investments self-terminate the moment they become ineffective.
In place of doles, PURA tackles rural poverty by generating wage employment. It even hopes to reverse rural-urban migration by attracting high-end jobs that are currently the monopoly of large cities. For that reason, PURA will be located near fast expanding cities. That is not as idealistic as going to the most backward of the backward districts but it stands a better chance of success. As villages near cities are more populous, it will still address a large proportion of the rural population.
HUDCO has offered to provide venture capital to: (a) construct a ring road to link a loop of villages, as also a link road to connect that ring road to a highway emanating from the city; (b) run bus services on the ring road; and (c) develop a modern habitat on either side of the ring road to a width of 200-500 metres. The quality of transport will be as good as, or even better than, in cities. With these inputs, a population of nearly 50,000 will be connected immediately with scope for substantial expansion.
With so many people connected together, the market becomes large enough to support a variety of services that no village can sustain by itself. That provides a double benefit: One, new ventures will emerge, from restaurants and vehicle repair shops to English medium schools and cinema theatres, creating new jobs, including many for educated youth. Two, those jobs will check rural-urban migration improving Quality of Life in both villages and in cities.
However, there is a catch: As rural development specialists point out, in theory, rural roads can attract new jobs but, in practice, they rarely do. That happens because quality transport helps on the supply side only by making it cheaper to set up new production units. However, on the demand side, it cannot create by itself additional purchasing power. As transport connectivity removes only the supply side bottleneck and not the bottleneck on the demand side, it is a necessary but not a sufficient condition for rural development.
That explains why officials of the Urban Development Ministry have been optimistic about PURA but not those from the Rural Development Ministry. The former sees in PURA a cheaper way of creating urban amenities. The latter have seen many promising rural development schemes fail; they are cautious if not sceptical.
To appreciate how the demand side bottleneck develops, let us consider what happens when incomes rise. By Engel's Law, when incomes rise, the demand increases sharply for such non-basic goods as radios and cycles, and even for luxury items like TV sets and cars. As a rule, all these goods will have to be imported from outside the rural development area, and to match that increase in imports, the rural area should increase its exports. Conversely, in the absence of exports, no matter what schemes one may devise, villagers cannot import the goods bought by the rich; they cannot get rich. It is an Iron Law that the higher the per capita export income, the higher the capacity to import, and greater the purchasing power. The operative parameter here is "per capita" export income.
Hence, exports should be of products with high labour productivity. Interestingly enough, that productivity condition need not apply for goods of local consumption: A restaurant may have many waiters; schools may have small class sizes. Such locally produced goods and services increase employment but do not hurt purchasing power. Only in the case of production for export is it important to have high value-addition, high labour productivity.
Unfortunately, this fact is not common knowledge. Therefore, rural development schemes concentrate on capital-saving, labour-intensive production oly; they do not allow for capital-intensive production, which is essential for high value exports. Handlooms, handicrafts, microfinance and such other low-cost additions to the rural economy can make marginal improvements only. They cannot make villagers rich however good the connectivity may be.
If villages can become rich only through capital-intensive production, then they should attract large producers also. Such producers pay high wages. In sympathy, wages in local services too will increase. Thus, real purchasing power will increase all round, up to a level exports match the rise in the demand for imported goods.
In other words, quality infrastructure is an enabler not a guarantor of rural prosperity; villages can celebrate only when they attract large export businesses. A seed of at least 500 high-value jobs in the export sector will be needed before a PURA can take off.
Thus, with HUDCO's offer of venture capital for physical infrastructure, PURA crosses one hurdle only. It faces yet another hurdle attracting export businesses.
These days, it is fashionable to talk of Corporate Social Responsibility (CSR). It is commonly understood that CSR is the same as corporate charity. If that were so, CSR will only throw a few crumbs around; it will never take-off. For CSR to truly succeed, it should become an integral part of the corporation's profit-seeking process. That will happen if CSR is designed to increase the prosperity of the citizens at large. That CSR will be twice blessed: it blesseth the citizen with increased purchasing power; it blesseth the corporation with a larger market.
Because the purchasing power of money is higher in villages than in expensive cities, it will be in the self-interest of large producers to shift their production to the rural areas. In the absence of reliable transport, that is not feasible at present. PURA corrects that defect. PURA offers a profitable opportunity for businesses to implement CSR merely by shifting to rural areas; it helps large businesses to satisfy both mammon and God simultaneously.
Actually, PURA is a four-step process with four hurdles to cross: One, the State government should be supportive: it should agree to acquire land for the ring road; it should enforce zoning regulations to make the space on either side an attractive habitat. It should also agree to hand over the implementation of PURA to a commercial corporation. Fortunately, in CIDCO, which has been developing Navi Mumbai with great success, there is an attractive precedent.
Two, with the assured patronage of the State government, a venture capitalist like HUDCO should come forward to supplement the meagre finances the Centre can provide.
Three, after both the government and the venture capitalist commit to implement PURA, villagers should agree to part with their land on reasonable terms.
Finally, at the fourth stage, modern export businesses should agree to join. HUDCO's offer means that of these four hurdles, only one has been crossed and three more still remain.
For the sceptic, that means the door is three-fourths closed; for the optimist, it is one-fourth open. For the visionary that is enough: even the longest journey starts with but one step.
(The author is former Director, IIT Madras. Response may be sent to: firstname.lastname@example.org)
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