Change of government is an opportunity to discard
outdated ideas and policies and bring in fresh ones. The
UPA government has that window of opportunity but only
for a few months. Sooner than one realises, the honeymoon
will be over; anti-bodies will develop and innovations
will become harder and harder to introduce.
new government is banking on better education, agricultural
growth and a new industrial policy to rectify matters.
Education is a tool and not a product. It can amplify
a person''s capability to work but cannot create work to
any significant extent. Its influence on income and other
disparities is ambiguous: At times, it increases disparities
and at times, it reduces them.
in the case of education, too much is expected of agriculture.
According to the 55th Round of the National Sample Survey,
in 1999-2000, there were around 45 million agricultural
labour households with an average annual consumption expenditure
of about Rs22,000, less than Rs5000 per capita, and barely
30 per cent of the national average. Five years hence
in 2009, per capita incomes would have gone up at least
60 per cent above the 1999 figure. Then, wages of agricultural
labour should increase at least five times to come on
par with the rest of the population.
is no way that agricultural incomes can rise that high.
It appears that agricultural labour is destined to wallow
at the bottom of the economic pyramid. However, there
is one way out: reduce the number of agricultural labourers
by five. Most other rural labour and small farmers too
are almost as poor as agricultural labour. They too should
quit agriculture. Then, over the next five years, we will
have to quadruple employment in industry and services,
at the least double such employment or work for a 20 per
cent growth rate of employment in industry and services.
manufacturing industry, as we move from hand tools to
power tools to machine tools to computer driven numerical
control machines to robotics, productivity, reliability,
quality and competitiveness increases. Employment per
unit of product decreases in the same proportion. Hence,
in a globally competitive economy, industry cannot contribute
significantly to the growth of employment.
contrast, in services, the larger the numbers employed,
the better will be the quality of services: taxis offer
better service than buses; restaurants with waiter service
are better than fast-food restaurants; smaller classrooms
are better than large ones. Thus, in direct contrast with
industry, the quality of services increases as the numbers
employed in providing a given service increase. Hence,
the real hope for new jobs is in services, not in industry.
the net capital formation is about Rs.300,000 crores a
year. As we are unable to create even one crore jobs a
year, the capital required on the average to create one
job is more than Rs300,000, nearer Rs400,000. We need
10 million new jobs a year to employ the increasing workforce;
we should transfer at least another 10 million from farms
to services to reduce rural-urban disparity.
appears we need more capital than we have to engineer
faster and better growth. Alternately, we may improve
the productivity of capital. Incremental Capital-to-Output
Ratio (ICOR) is the accepted measure of the productivity
of capital. Currently, ICOR is about four in India. We
should aim to reduce ICOR to no more than three.
The present cost of investment is artificially inflated
because most development is concentrated in expensive
cities but not in villages where the purchasing power
of money is greater. In villages, land can cost ten or
even a hundred times less. Cheaper construction techniques
can be adopted. Many services like water harvesting, waste
disposal cost less. It is possible to have worker residences
within walking distance of the workplace. Hence, all other
factors being the same, in villages, ICOR will be less,
as little as half that in cities. That is, other matters
being equal, with a given amount of capital, villages
can generate twice the number of jobs cities can.
practice, that does not happen; a city with a population
of a hundred thousand creates many more jobs, all in the
non-farm sector, than does the same population distributed
over a score of villages. Though, in theory, villages
are cheaper, entrepreneurs prefer to invest in costly
cities. They do so because they need for their survival
a variety of infrastructural support, which only cities
provide and villages do not. Cities offer connectivity,
mainly physical or transport connectivity that brings
together large numbers of customers to support large markets,
large both in size and in variety. Villages do not have
connectivity; they cannot support large markets.
connectivity require a minimum customer base to be viable
and profitable. The larger the customer base, the greater
the variety that the market will support, the larger the
employment it will create. For instance, in Mumbai, a
number of dabbawalas make a living carrying lunch
from workers'' homes to their place of work. Such jobs
are unthinkable in villages, not even in smaller cities.
although in theory, villages cost less, investment there
is unviable because demand is too little. If there is
one criticism that can be levied against Indian policymakers,
it is that they never had a cogent policy for demand generation.
In India, the value of a project is measured by how much
it costs, not by how much it produces, let alone how large
a market it supports.
the one hand, large cities offer large connectivity (both
in quantity and in variety) but costs are high. On the
other, costs are low in villages but their customer base
is too small to support any but the most elementary commerce.
Reducing costs in large cities is next to impossible.
Hence, the only alternative is to raise, somehow or other,
the customer base that rural markets provide.
Kalam has been advocating the scheme PURA Providing
Urban amenities in Rural Areas as a solution to
this problem. PURA starts with the construction of a ring
road linking a loop of villages and the establishment
of frequent bus services. With both in places, every point
on the ring road gets a large customer base equal to the
total population of all villages on the loop.
other words, merely building a ring road and running bus
services, converts this rural space into a virtual large
town or small city capable of supporting a wide variety
of services the way large towns do. The habitation may
not extend beyond two to five hundred metres on either
side of the ring road and yet it can ultimately house
a couple of hundred thousand people with well-spaced houses.
ring road configuration cuts by half the length of all
types of infrastructure roads, water pipes, sewage
drains, electricity lines, telecom cables, street lights
and so on. It makes it possible to locate worker residences
close to their place of business ideally, eliminate
daily commuting to work with all its financial, time,
social and psychological costs. Water harvesting is simple,
and so is waste disposal. Overall, the cost could be less
than half of housing the same number by expanding a large
the ring road and bus services tackle only one side of
the problem of rural development: they reduce the cost
of supply but do not ensure that customers are rich enough
to demand goods and services as well as urban dwellers
do. In this respect, agriculture-based villages suffer
from an inherent defect that forces them to remain poor.
The reason lies in the nature of prosperity.
prosperity increases, the pattern of demand changes; customers
look for a larger variety of goods most of which cannot
be made locally and will have to be imported. Matching
exports are needed to pay for those imports. Thus, the
higher the prosperity, the larger will be the demand for
goods (and services) produced outside the community and
the larger the requirement for exports of goods (and services).
agriculture is a low price good, agriculture-based villages
cannot export much; they can neither import much. They
are condemned to remain poor.
to match what cities do, PURA needs a two-pronged approach:
ring road plus bus services to make the supply side more
efficient, and a prosperous export sector to pay for the
goods and services that prosperity demands. Only modern
industry can provide that export business. Therefore,
before a PURA is initiated, there should be a tie-up with
industrial entrepreneurs who contract to invest in PURA,
and create new and high-paying jobs in exports.
well-paid employees, provided they stay in PURA, will
generate new customer demand directly. They will also
multiply jobs by demanding housing, electricity, water
supply, sanitation, new schools, health centres, entertainment,
domestic help and a variety of such services. Once both
the direct employment and indirect ones take root, demand
will rise to support larger and larger markets.
such a virtuous development will take place only when
the employees of the new industries live in PURA and do
not commute from large cities the way it happens
in industrial satellite towns like Hosur and Faridabad.
If well-paid employees do not reside in PURA, the demand
they generate will be transferred to wherever they stay
and will not go to PURA.
government has two options: It can take the conventional
route, expand large cities and allow them to monopolise
large businesses to the exclusion of rural areas. That
will keep ICOR high because large cities are intrinsically
expensive. It will also increase rural-urban disparity
still further because villages will be left only with
agriculture, which cannot grow as rapidly as industries
and services do.
the other hand, the government can tread a new path, and
transfer as much of new industry, new industrial housing
and related services to rural areas. Costs can then be
halved, and for a given amount of financial investment,
output and growth can be doubled with a corresponding
increase in jobs created. As a bonus, rural-urban disparity
shift of emphasis from agriculture to industry and services
will require more vocational training. In place of vocational
training, current fashion emphasises liberal education
that makes most graduates unemployable. There is an urgent
need to restrict college admissions to the numbers that
can find jobs, and no more. Then, half the college courses
may have to close. So be it.
crafts-persons and not bookish teachers are best equipped
to offer vocational training. The workplace too is better
equipped to do so than classrooms, or school workshops.
Then, a sandwich programme, with students alternating
every week between classroom teaching and vocational practice
under master crafts-persons, will offer a workable compromise
between education and employability. Such a system will
place the onus on employers to provide vocational training.
Ultimately, it is in their own interest to do so. Even
then, because such training is a social good, employers
deserve some reward for offering vocational training.
Low-cost credit is the simplest and the most effective
reward for employers. It will cost the government practically
nothing but will help employers, particularly small businesses,
a great deal.
growth is not a good economic remedy by itself unless
it is evenly distributed. Shifting modern industry, services
and housing for employees from expensive cities to rural
areas is a good way of distributing the fruits of growth.
We will then get an added benefit: ICOR will come down
and the growth rate will increase.
decades, we have tried agricultural subsidies, artificial
support to dying industries, legal protection to unwanted
labour, huge investments to make large cities liveable,
and many other populist schemes without success. The government
has a small window of opportunity
to experiment with something new. What innovations the
Prime Minister introduces in the next few months will
determine his place in history.