Bridging the 'viability' gap

The newly-elected Central government has interpreted its victory as a call for a return to the basic issues of rural regeneration and revival of the farm sector. The distribution of agricultural land in rural areas is highly skewed and has been more or less static for many years.

However, rural-urban linkages are very strong. And the rural areas have served as catchment areas for labour in urban towns and cities for the last several generations. In large cities, small informal activities, typically in slums, is the only kind of industrial activities in which this migrant labour finds employment.

This type of employment does not generate incomes to support the rest of the family, who continue to stay with their rural kin.

It is cheaper to live in rural areas than in urban areas, since the economy is not fully monetised. Very few services need cash and labour transactions are typically on reciprocal exchange.

So, a family can survive on a few acres of land. Water is free. Bio-fuels need only human effort. Draft animals double up for transport, and communication with kinfolk is face-to-face.

However, this situation is changing slowly, over time, in the direction of more "modern" arrangements and infrastructure. But the jury is still out on the relationship between infrastructure development and economic growth, because this relationship is determined by a variety of socio-cultural factors.

While there are examples of successful adoption and maintenance of modern infrastructure in villages, there is no foolproof rational economic method of prioritising a village for providing a particular infrastructure, based purely on cost-benefit analysis.

It is easy to estimate the cost of not having a particular type of infrastructure. Drought results in the most painful drinking water shortages in rural areas.

The costs of collecting water, from, say, an agricultural well and bringing it to the village/household using a tanker can be estimated. But these shortages are temporary. It is more difficult to calculate the economic benefits of having drinking water piped to a village.

For example, in a comparative study of the villages in Gujarat, between the two types of villages -- one group where the Self Employed Women's Association exists, and the other without such an association -- providing piped water supply saved efforts for the women involved in both the villages.

This saved time and effort, which translated into producing and marketing more finished products. There was a direct impact of up to a 30 per cent increase in family income, as indicated by a study conducted by an independent scholar.

As against this, in the non-SEWA villages, no such measurable economic impacts of providing piped water supply were observed.

Similarly, a World Bank study has estimated the cost of irregular and interrupted power supply in rural areas of Haryana. It showed that the irregular power supply and unstable voltage in rural agricultural power supply in Haryana lead to the installation of higher powered and more expensive pump-sets.

These pump-sets are left on due to unpredictable power supply, resulting in over-drawing of water and thus water-logging and saline fields. The benefits of improvements in power quality would have been realised if farmers had responded by investing in more efficient pumps.

However, they typically continued to operate the old pumps, only replacing them when they stopped working. This diluted the impact of the investments made to improve the quality of power.

At the level of domestic demand for electricity, it was demonstrated successfully by Sahakari Vahar Dharak Samiti, a chit fund in Maharashtra, that the demand is limited to small amounts of power and, that too, for two or three hours of "light" after sunset.

The organisation was able to successfully market solar lanterns under a deposit mobilisation scheme that took care of the initial risk of new investment. The lanterns helped small businessmen extend their business by a few extra hours using a solar lantern and thus recover the cost of the lantern and more.

In Uttar Pradesh, a private distribution company tried to ensure regular water supply for irrigation by supplying individual electricity meters with dedicated transformers for each farmer.

This approach involved the additional cost of investing in individual transformers by the power company. It has demonstrated that the cost of these investments takes five to 10 years to recover and the benefits accrue to individual farmers who pay for electricity.

The company took the risk and made the initial investment, and was able to recover the cost of transformers. These case studies on introduction of  "modern infrastructure" in water and power in rural areas indicate -- both from success and failure -- that additional investment by individuals are needed to ensure future benefits, with, of course, associated risks.

Therefore, any strategy for rural infrastructure development will depend for its success on the ability and willingness of people to make these investments and take the risks. Broadly speaking, it will have to take into account geo-climatic and socio-cultural diversity across regions.

It will have to consider the non-monetised nature of the rural economy. It will have to give the rural residents autonomy in dealing with creation and maintenance of infrastructure. Most importantly, it will have to empower the individual villages to prioritise their specific infrastructure needs.

Centralised financial assistance for creating the infrastructure has to be combined with decentralised prioritisation of investment.

If there is a consensus on the priority for creation of a particular infrastructure, it should be reflected in the willingness to contribute by the community. Such willingness can be taken as an indication of their priorities.

Central assistance for capital investment in infrastructure should be treated as a common pool to be disbursed on the principle of "those who want it the least will get it first".

For example, each village in a block can be called upon to submit a proposal that would list the priority of their infrastructure from among the sectors of water, power, transport and telecom.

Then, for each sector, they would be required to submit the amount needed for its creation, their contribution and the amount of money they will need from the pool.

Thus, villages could be ranked based on amount required from outside for the creation and maintenance of the infrastructure. Those who need the least amount for a particular sector will be given the money first and so on, till the pool is exhausted.

The government's announcement that it is willing to try this combination of top-down financing with bottom-up investment planning is, therefore, welcome.

The "viability gap" approach has succeeded among non-governmental organisations like CARE in Mumbai, in providing individual loans for improving housing. There are also instances of successful implementation in other countries.

If the focus on rural regeneration is to pay off, this is the strategic approach to put one's money on.