Where is India today? How did it get here? Where should India be going? And how should it get there? These are the big questions that I try to grapple with. And that is how I began my presentation.

ISB at night [source]

Recently I was on a panel discussion titled “Business Strategies for Inclusive Economic Growth” held during the semi-final round of the Global Social Venture Competition at the Indian School of Business in Hyderabad on the 9th and 10th of March. The panel–moderated by my friend Dr Reuben Abraham–included Mr Varun Sahni of Acumen Fund, Mr K Krishan of Malavalli Power Plant Pvt Ltd, and Arjun Uppal of the IFMR Trust.

You and I—and those who were gathered at the GSVC event—are exceptional. We live in cities, engage in non-agricultural work, and earn far more than what the average Indian earns. The vast majority of Indians live in villages, and eek out a meager existence from agricultural related labor. We tend to forget the fact that our economic prosperity and our lives in urban India are correlated. Therefore if the goal is India’s economic prosperity, somehow the 700 million living in some 600,000 villages of India have to have the same option of living and working in urban India on jobs in non-agricultural sectors.

Do we want the reality of today’s India to persist into the future, a generation or two hence? Or do we want a future where the majority of Indians are urbanized and are engaged in highly productive non-agricultural sectors? We can choose, and having chosen, we can actually make that future happen.

I think it is fair to assume a broad consensus on that development is a good thing. Of course, development and economic growth are not the same thing. You can have one without the other. For a very materially rich society, development does not require economic growth. It is possible to appropriately channel resources towards development, an exercise in greater allocative efficiency if the resources are available in plenty. But in a materially poor society, merely changing the allocation of resources is not likely to be sufficient. There you have to have increased production, in addition to the problem of efficient allocation of what is produced. The US, for instance, has a per capita annual income of around $28,000. Extreme variance in incomes and wealth can be reduced with appropriate redistributive mechanisms. Contrast that with India. Yes, there are a lot of very poor people in India. Even perfectly distributing the national income leaves everyone pretty poor. The conclusion is hard to avoid: India needs economic growth for development.

Economic growth is both a cause and consequence of urbanization. The reason is simple. Cities are the engines of growth. The high population and population densities of cities reduce “transaction costs.” Services are cheaper (as compared to the same in rural areas) because infrastructure is less costly because of scale economies. That is, infrastructure have high fixed costs and investment in infrastructure is lumpy. The high aggregate demand and supply of infrastructure in urban areas makes lower prices possible.

So the logic so far: economic development of India requires economic growth. Cities are engines of growth because there is a bi-directional link between urbanization and growth. Therefore the rural people have to be urbanized for India’s development and growth. Every economy has followed that path which begins with agriculture being the main source of income for the majority of the population and ends with agricultural employment being a very small fraction of the total labor force.

In my considered opinion, the problem with India’s rural development has been that the focus has been on the development of rural areas, not rural people. The policy makers have been focusing on the wrong goal, that of village development. It is silly to attempt to develop 600,000 villages because it cannot be done. The future is deserted villages because people vote with their feet when they get the chance to move to a city. Only in very rich economies do people have the resources to live comfortably in villages. India cannot afford to live in villages; it is not that rich.

[Continued at "India--the Land of Endless Opportunities".]