Atanu Dey On India's Development

A Brief Introduction to RISC

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I had been pondering India’s rural development for a while before I signed up as a Reuters Fellow at Stanford University in Sept 2001. As a Reuters fellow, I developed a model for catalyzing India’s rural development. I called it RISC — for “Rural Infrastructure & Services Commons”. Later, Vinod Khosla and I co-authored the concept paper. This is a short version introducing the why, what, how of RISC.

Why RISC

India’s economic growth and development is predicated to a large extent upon the development of its 700-million strong rural population. Currently, the majority of India’s population lives in about 600,000 small villages and are engaged primarily in agriculture and related activities. Since a very large labor force in agriculture necessarily implies very low per capita incomes, a substantial portion of India’s current agricultural labour force has to move to non-agriculture sectors for incomes in all sectors to go up. The challenge is to manage the transition of a large segment – perhaps even 80 percent – of the rural population from a village-centric agricultural-based economy to a city-centric non-agricultural economy, and do so in a reasonable period.

Urbanization and Development

Economic growth is both a cause and consequence of urbanization. By urbanization is meant the dense aggregation of people into economically interacting units (cities and towns) of anywhere between 100,000 people and several million people. Cities are engines of economic growth because they give rise to economies of scale, scope, and aggregation. This is so because infrastructure – buildings, roads, power, telecommunications, water, sanitation, security, maintenance – can be provided economically to larger aggregations of people. Availability of low cost infrastructure in turn makes the availability of a wide range of services possible in cities as opposed to very small villages. It is the aggregation of supply and demand for economic goods and services (and therefore indirectly for infrastructural goods) which account for cities.

Constraints

A set of basic facts define the constraints within which the economic growth and development of India’s rural population must be addressed. Fundamentally, they relate to resource constraints, the nature of infrastructure, and the future trajectory of the geographical distribution of the population.

First, people need access to a wide range of services which allow them to engage in economically productive activities. These services include, at a minimum, market access, educational, health, financial, entertainment, transportation, and communications. It is primarily these services which enhance life and livelihood, and with which any population is concerned with.

Second, the provision of services depend on the availability of infrastructure. Without the foundation of affordable infrastructure, affordable services cannot be provided.

Third, infrastructure investment is ‘lumpy’ – the average cost of provision of infrastructure is inversely related to the scale of the operation.

Fourth, if there were no limitations on the financial and other resources available for providing infrastructure, it would be possible to provide infrastructure at every village. Resource limitations preclude this option.

Fifth, even if the full set of infrastructure were provided at every village, they will not be commercially sustainable as the aggregate derived demand for the infrastructure will be insufficient to make them commercially viable. Clearly, subsidy of infrastructure for 600,000 villages is not an option considering resource constraints.

Finally, while the current geographical distribution of the rural population is into over half a million small villages, the future distribution is a much smaller number of much larger aggregations of people – if the desired future is one where the agriculture sector’s share of GDP is to be significantly smaller relative to manufacturing and services sectors, and if the majority of the labor has to be engaged in non-agricultural activities. In other words, the basic geographical structure of population distribution will eventually undergo a change, whether one likes it or not.

Not Village-centric

It is therefore argued that ‘village-centric’ development is not feasible because of resource limitations and because people naturally tend to migrate out of villages to cities. Furthermore, it not desirable since a vibrant economy depends on the aggregation of the population into units much larger than a small village. In short, investing scarce resources into villages is short-sighted and uneconomical.

Based on the above considerations, a model for rural development has been conceived called RISC – Rural Infrastructure and Services Commons.

The RISC Paradigm

The RISC idea is to bring to the rural population the full set of services that are normally available only in urban locations. It works within the constraints of limited resources by focusing attention to and concentrating investments at specific locations to obtain economies of scale, scope, and agglomeration.

RISC follows the logical trend of moving away from vertically integrated institutions to one of horizontal segmentation and specialization. Thus, conceptually and operationally, a RISC has two levels: the lower one is the infrastructure level (I-level) which provides a reliable, standardized, competitively-priced infrastructure platform consisting of power, broadband telecommunications, and the physical plant (building, water, air-conditioning, sanitation, security). The I-level is achieved by the coordinated and cooperative investment of firms that specialize in the component activities.

The user services level (S-level) is above the I-level. Co-located at the S-level are firms that provide user services such as market making, financial intermediation, education, health, social services, governmental services, entertainment, logistics, etc. The presence of the I-level reduces the cost of the services and therefore the prices that the users face. Economies of scope and agglomeration are obtained by the presence of the variety of different service providers.

Given that rural populations are very poor, it is reasonable to expect that the aggregate demand of a single village for any single service will be very low. However, the aggregate demand for, say, a 100 villages for a single service could be significant. Aggregating the demand for many different kinds of services of the same 100 villages would translate into lot of services. These services would require infrastructural inputs which can be commercially and sustainably supplied. Thus, a RISC would supply to the needs of about 100 surrounding villages.

The total rural population of India can be covered by about 6,000 RISCs each servicing the needs of approximately 100,000 people. Further external economies of scale can be obtained by implementing a few thousand RISC locations across the rural landscape. Access to a RISC for any rural person would be only a ‘bicycle commute’ away.

Operationalizing RISC

The distinction between the I-level and the S-level becomes apparent at the operational level. The I-level is provided by a small number of firms which specialize in the provision of infrastructure. The essential requirement is that the investments from these various firms are coordinated. This resolves the ‘coordination failure’ generally associated with investments that are large, lumpy, which have large lead times in implementation, and have long pay-back periods. These can be private sector or public sector firms.

There is an element of planning in the creation of the I-level. But it is not a top-down, bureaucratic, government imposed centralized planning. It is coordinated investment in various components of the infrastructure so that they all make each other mutually viable. The role of the government is highest at this level.

The government has to facilitate the process of the creation of the I-level first through light-handed regulation. Second, it has to give required tax incentives to the firms. Third, the government may be required to facilitate investment though loan guarantees. Finally, it has to help with the acquisition of land required for the projects. The model does not require the government to directly fund any of the infrastructure.

The firms providing the infrastructure will be basing their investment decisions on adequate return on investment, of course. The infrastructure will be used by, and paid for, the firms which are at the S-level and which provide the services that the users demand.

The composition of firms at the S-level will be almost entirely market-driven. There will be two basic categories of services. First, services which the users are willing and able to pay for. This means that the benefits to the users of the services will be greater than the costs. These are the ‘income-enhancing services’ such as greater market access. Second, services which are not fully priced such as government services and those provided by NGO and charitable entities.

What RISC Does

RISC provides a signal to coordinate the activities of a host of entities: commercial, governmental, NGO’s. It synchronizes investment decisions so as to reduce risk. It essentially acts as a catalyst that starts off a virtuous cycle of introducing efficient modern technology to improve productivity that increases incomes and thus the ability of users to pay for the services, and so on. It creates a mechanism that reduces transaction costs and therefore improves the functions of markets.

Thus, RISC

* serves as a focal point for the bi-directional flow of information and materials within the rural areas
* clusters economic activities in specific rural locations by facilitating firms’ businesses
* seeds urbanization and urbanize the rural population without socially costly rural to urban migration
* integrates the rural economy with the national and international economy and remove inefficiencies

By providing a full complement of services, RISC creates a ‘mini-city’ which seeds the formation of a city by drawing to it the population from the surrounding villages. Initially, those who need the services will commute to the RISC location but as time goes by, the area around a RISC will naturally evolve into a small city. RISC is the grain of sand around which the pearl of a city can develop.

Development of People, Not Villages

The economic development of the rural population, rather than the development of villages, is the goal. This requires that the population have access to services, which in turn requires the availability of infrastructure. Infrastructure investment is lumpy and cannot be economically provided at the scale appropriate to small villages which are the norm in rural India. Furthermore, looking to the future, the economy of present day rural India cannot continue to be dispersed into 600,000 villages. The population will have to migrate to a much smaller number of larger aggregations. These formation of these aggregations can be catalyzed by the coordinated investment of infrastructure, either in greenfield ventures or in existing locations where there is road or rail connectivity.

RISC is not an attempt at social engineering through centralized planning. It aims to solve a problem by appealing to the profit motives of all participants, be they private sector, NGOs, or the public sector. The good that will surely come out of it can only be attributed to Adam Smith’s invisible hand.

Reference: Dey, Atanu and Vinod Khosla (2002), ‘RISC – Rural Infrastructure and Services Commons’. Full document available at Deeshaa.com and at Khoslaventures.com.

Post Script: Andrew Leonard wrote about RISC at “Vinod Khosla’s Marshall Plan for Rural India” at salon.com.