Atanu Dey On India's Development

The Better, Faster Way to Help Rural India

India has been singularly unlucky in the sense that its movers and shakers don’t seem to get what it takes for the economy to prosper. Therefore it comes as a terribly pleasant surprise when one comes across a M&S who apparently gets it. Not only does the man get it, he gets it in spades and how.

Mukesh Ambani apparently gets it.

The 17th July edition of Newsweek International carries a must-read article on Mukesh “Mr Big” Ambani’s Makeover Plan for the Nation. The article says that Mukesh

has finalized plans to invest more than $11 billion over the next decade to build two new satellite cities outside creaking, overcrowded Mumbai and Delhi. He foresees these metropolises emerging within just four years, each with a population of 5 million people making $5,000 a year, on average (or seven times India’s norm), and hosting top multinational companies. And that is all pretty simple—a development on steroids—compared with the idea that really gets Ambani going.

Ambani’s favorite scheme aims to revolutionize in one swoop two of India’s largest but most backward sectors: farming and retail. . . . Ambani plans to invest $5 billion by 2011 to put both the farms and the stores on the road to modernity, connect them through a distribution system guided by the latest logistics technology, and create enough of a surplus to generate $20 billion in agricultural exports annually.

Further down in the article, it says

Ambani wants to build a chain of both small and supersize stores across India, creating 1 million jobs and reaching $25 billion in annual sales, all by 2011. If his plan succeeds, he says, consumers will get fresher food at lower prices, rural incomes will soar, farmers will become active consumers, and Reliance will become “a WalMart in India.”

And finally

To transform Indian farmers into quality suppliers for his new retail chain, Ambani plans to create 1,600 farm-supply hubs across India, providing technical know-how and credit, selling seeds, fertilizer and fuel, and buying produce. He also plans to build some 85 logistics centers to move food to retail outlets and to ports and airports for export.

See why I say that it appears as if the man gets it?

First, he talks about creating cities. Cities are the engines of growth since it is an urbanized population which has the productive capacity to create economic wealth and thus lead to development. India’s largely rural population has to be urbanized and since the existing cities are basically incapable of absorbing the population, new cities have to be developed.

Second, he talks about transforming agriculture by raising its productivity. Building a large number of farm-supply hubs will make the supply chain for agricultural inputs more efficient. Raising agricultural productivity will not only increase production but will also release farm labor which can then migrate to the cities and produce non-agricultural goods and services.

Third, the farm output will be more efficiently brought to the market. It is estimated that around 40 percent of farm produce never reaches the consumer. Introducing efficiencies in the supply chain of farm output and retailing it efficiently will translate into lower prices for consumers and higher realized prices for the farmers. This in turn will increase farm incomes so that the remaining rural population would be able to effectively demand more non-agricultural goods and services — the same stuff that is being produced by the labor released by the farms.

This is along the lines of Irma Adelman recommended long ago: Agricultural Demand Led Industrialization, or ADLI.

The important point to note is that the schemes that Mukeshbhai is concentrating on has, prima facie, nothing to do with development, leave alone development of rural India. But in effect that is precisely what will happen. The answer to India’s rural economic development lies in cities. It is the urbanization of the rural population which will help rural development, not the so-called “development of villages” as I have argued for a while.

To a large extent, the 1,600 farm-supply hubs are approximations of RISC. RISC are the seeds of a mini-city in the rural area. With about 5,000 of these, you can effectively aggregate the 600,000 villages into productive mini-cities.

The approach that Reliance is taking is commendable because it is private sector driven and does not involve the government directly. Indirectly, of course, the government has to acquiese to the plan. Not just that, it is possible that the government will give away quite a bit of the land needed for these new Reliance cities at below-market prices. Yes, Reliance has power and it will only grow. But the question we need to ask is this: is it better that the land gets utilized and wealth created, and even though some of that immense wealth will go to enhance the Ambani fortunes, than the alternative where the land sits around doing precisely nothing and millions of people don’t get to lead a better life? I think the answer is a no-brainer (unless of course the answer is from a no-brainer communist), “Yes, better that someone creates wealth and takes a chunk of it if it means that lots of people will also grow rich, than the alternative.”

[This blog has a lot of posts on cities and urbanization. You can see the whole category on "Cities and Urbanization", or you can see the following selected posts:

1. Ancient Cities, Modern Slums. This is the first of a series of 10 posts I did on the subject.

2. India Needs Cities.]

  • http://www.musafiri.rediffblog.com Laukik Desai

    Awsome!
    Reminds me of something similar from history.
    When British came to India, they came as traders/businessmen and as East India Company. It is noteworthy that this company created infrastructure and governance alongwith military to rule India till The Queen herself took control.
    Gradually I think we will come to a stage where companies will run countries and non value creating activities (like defence) will be outsourced to government.
    Can anyone remind me of the book/author who has spoken of this future? I remember someone speaking of corporations as countries.
    Thanks

  • http://krcfart.blogspot.com Karthik Rao Cavale

    hi,

    You can dismiss me as a communist, but I can’t help seeing this project with great suspicion.

    I don’t know whether this new Ambani project will revolutionize agriculture or not. Neither do I know whether the kind of money it generates will be so much that a few millions going to the Ambanis is fine or not.

    All I know is this, what is going to earn Ambani money is not the agriculture and the retailing, but the real estate.

    It has become a pattern that even undergrad students like me are beginning to notice.

    Ambani purchases land at dirt-cheap rates from the govt. Now he ‘develops’ the land, which basically means he lets out the land for people to do whatever they want; and earns huge profits. That is what the SEZ in Haryana is about; That is what the BMIC project is about; and that is what even the Bangalore Airport project is about. Building industries, roads and airports is the least of their concern.

    And I am afraid that Ambani’s new plan is just a repetition of an old trick.

    The crux of the problem is this: the government is able to procure lands and low rates; and it is only people like Ambani who can convince the government to hand over the land to them for non-agricultural purposes. For all others, the answer is going to be that the political cost is too high.

    My solution: give farmers the right to property. The government shouldn’t have the right to take over private lands; and farmers should have the right to sell land to anyone who desires to buy it; whatever his purpose maybe; so long as he declares his purpose and sticks to it.

    The result: the moment Ambani starts buying lands somewhere prices will shoot up and he will no longer find ‘revolutionising agriculture and retail’ a profitable venture.

    I wrote something very similar in my post

    The problem of land-grabbing

    Again, I have no problems whatsoever with Ambani making money. As long as he buys land directly from the farmers at full market price. And if he is really interested in revolutionising agriculture; all the better.

  • http://krcfart.blogspot.com Karthik Rao Cavale

    Sorry,

    The link is

    The Problem of land grabbing

  • VS

    I find it funny that the Indian media should pick up this significant newsweek story and report it when this has been out there for the taking for years now…no one really talks about the amazing ambani family except keep on talking abt RIL shares…MDA and ADA are going to revolutionize India..and the mofo politicians should just stay out of their path…we also need to herald the greatness of our other amazing people such as Sunil Mittal who is another MDA in the making…hats of to these amazing people for making India what it is today…

  • shiva

    Kartik Rao Cavale seems to be the exact sort of moonbat whose ideas have spelt doom and misery for our fellow citizens for decades. Our government even as governments go is among the most inefficient entities in history. MDA and ADA OTOH have time and again put their and our money where their mouth is and come out winners. We have tried the same thing over and again with nothing to show for it. Quit carping and let this investment happen.

  • Amitabh

    Kartik,
    While there is a small amount of truth in your view, let me point out the following:

    1. If it was only about land, why would anyone build an SEZ on it when you could sell/lease it at many times higher rates for commercial or residential use; which is what all builders do. Building infrastructure inside your land area actually leaves only about half or 50% of saleable land, apart from costing around twice the cost of land per unit area. That’s you have to pay 30% income tax on your ENTIRE EARNINGS to the Govt just so that it can build and maintain whatever shabby infrastructure we have in India. Even with the efficiency of privte sector competitive forces, the cost of infrastructure is HUGE. That’s why toll roads seem so expensive if you pass a couple of times(at least during the initial 5-10 years).

    2. If you go out to buy very large area of land from a huge number of owners – you’ll usually find that after you’ve sunk a good amount of money some owners will ask for astronomical sums tens of times that which other have sold because they know you can’t afford to be land locked or have a lone guy’s plot in the middle of your area. Therefore you’ll never have a new road or a railway track. only the ones which existed before people started living around them.

    3. The cost of land only goes up by any significant margin when new opportunities start being created and hence more people can be supported by the same area of land. New opportunities require infrastructure. So the price of your plot will go up if there’s a new good road coming up nearby not if it’s in the middle of nowhere. how much would you pay for a plot where the nearest phone is 5 km, water at 2 hours walk and power till your eveready batteries last. would you pay more next year if these things remain the same ?

    4. I fully agree that land acquisition leaves a lot to be desired and needs to be refined much much more, but you need to suggest a commercially viable alternative. You can’t do it on the money from someone’s taxes or someone’s dividend. however, even at present people are given alternative land – which is small since we are only compensating land-for-land for that area which the person was using for living, the land used for livlihood (farming) is compensated by a payment – which again is slightly on the lower side but not as low as you think. most of the time the difference is not much and acquisition through government means you don;t even know how much you’ll end up paying. That’s why most builders prefer buying clean (title/ownership) land where they know what it’s costing them before they take a decision. If you want an idea of the real land rate of that area just check the prices at which people from the same village were buying land from each other a year or two before the project ! It’s be half to one third or what the acquisition is offering.

    The reason government wants private sector to do things like SEZs and other mega projects is because it is unable to build the required quantity of infrastructure for our population. To attract private players government need to sweeten the deal at least in the begining. Once the model is successful and some private players are generating good returns government actually charges a premium. When the JNPT (Port) in Mumbai floated tenders for the first time there were 3-4 bidders and a few weeks back for it’s fourth terminal there are 41 companies including the global top 10 shipping lines and global top 10 ports and the entire whose who.

    Finally, lets look at the disadvantaged people in an acquisition – ie those in a certain area whose land was acquired – and then compare them with the benefited people – those living in a 2-3 km band all around that plot who’s lives improve, land prices improve and their income levels or opportunities improve – which are usually around 5-10 times even at the higher sizes of acquisitions

    There are countless more things at work here, but to really understand this you need to buy some land in a village and try and make money off it.

    just my 2p.
    My response seems to be bigger than the actual post. just spent a bad day stuck with land acquisition problems today.

    Regards,
    Amitabh

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  • boundless

    Lets wait and see and not be hasty. Reliance has built an empire based on good management as well as effective use of the license raj. Agriculture is often a different cup of tea, and many- including several large corporates have burnt their fingers along the way. Give Mukesh his due and dont look at him as a devil, at the same time there is no need to make him a saviour of the farm sector yet, and as for retail, small retail is a useful contributor to non farm employment and it remains to be seen how much of it can be replaced by large retail chains.

  • http://thoughts2shair.blogspot.com Sabarish Sasidharan

    Totally off track… The blog title appeared familiar… 2 days later i realize why… It sounds like the famous “Better, faster, lighter Java” book.

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  • sharad

    Dear Atanu,

    This comment is not about the present article though I did comment on your present Mukesh Ambani piece in an earlier comment elsewhere. This comment is about RISC. I found your last entry in the RISC category dating back to 2004. It lead me to think that you have either abondoned that category or the topic itself is dead. I therefore chose the present article to post this comment since this article is recent and related to rual economy to which RISC is funadamentally related.

    I continue to read your articles and equally illuminating discussions that follow them. This is my fourth post as comments. Till now I had not read RISC in detail. Today I read the white paper you wrote with Vinod Khosla back in 2003. I then looked at ‘pilot’ and was shocked to see that it was empty!!

    Khosla’s backing and your return to India lets one think that there was a concrete plan for getting the RISC model going in India. Either the Deesha site is not updated on real progress made in this regard (in which case it would be a good news worth reading about) or you lost steam on RISC front. (I do see you cotninuing to push RISC at forums (such as the PURA meeting).

    The RISC model does look appealing and correct economically. It is appealing because it may address rampant urbanization (which has limits and deprivations) and meets the urban-rural divide midway. Unlike OLPC (which I thought a private sector entrepuenre like Premji can affordably sponsor), RISC should be attractive as a profitable (possiblly long term) investment. RISC could be micro-SEZs.

    In short, I am eager to know what has happened to RISC.

    One aspect of RISC that I had doubts about: a 100 village cluster could be a large geographic area requiring motorized transport for most. What about a cluster with 6 or 8 km as the largest distance from any village. I think this may encircle less than 100 villages.

    If my memory serves me right, Vinod Khosla is into micro-finance in India. Is there any connection between RISC and micro-finance?

    Sharad

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