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TECH TALK: As India Develops: Distribution Hubs (Part 6)

April 16th, 2004 · No Comments

The next excerpt from the RISC paper by Atanu Dey and Vinod Khosla looks at the economics:

The objective of a RISC is to provide as complete set of services as possible sustainably. Sustainability essentially imposes the condition that user fees (demand) have to cover the cost of the services delivered. Given the low average income in rural India, per capita demand for many of the services can be expected to be low. However, rural populations are heterogeneous in their demographic characteristics. A small but significant section of the rural population would be able and willing to make use of the services. Besides, there is a significant dynamic income effect.

The flow of incomes is straightforward in the model. Users pay for the services they need. The services are assumed to provide a net benefit to the users. The service providers in turn use infrastructural services and pay for them. The provision of services that are relevant to rural economic development, and do so efficiently, is the basic objective of a RISC.

The per capita demand for any single specific service in rural India has to be very low in keeping with the low per capita incomes. The RISC model derives its sustainability by aggregating the demand for a variety of services over a sufficiently large population. Thus the total amount of services required is a function of the aggregate income of the population rather than the per capita income.

If we assume an average daily per capita income of $1, then the annual income of the 100,000 target population of a single RISC is about $36 million. Assuming that the presence of the RISC actually increases productivity and economic efficiency so that the economic output of the population goes up by 10%, the increase in economic output will be roughly $3.6 million. Assigning half of this increased output as increased income to the population leaves nearly $2 million per year to pay for the services available at the RISC. The annual gross revenues per RISC will be around $2 million and the aggregate revenues for about 6,000 RISCs is approximately $12 billion per year.

The figures above only take into account the direct effect of RISC on the economy. This is only a partial analysis as there will obviously be a multiplier effect on the economy. Taking a conservative multiplier of about 2.5, the total effect of 6,000 RISCs will be about $30 billion in the initial years alone. However, realistically it may be that initially only a few states in the Indian union will be the early adopters. Assume that only about 2,000 RISCs are implemented in the first phase. Therefore the direct effect on the economy will be about $4 billion and the total effect on the GDP will be $10 billion.

Given annual gross revenues of $2 million per RISC, and assuming that profits account for 15% of gross, then given an interest rate below 15%, the investment per RISC can be up to $2 million. Given that land is relatively cheap in rural areas, that does amount to a lot of basic infrastructure in terms of investment in power, telecommunications, the physical plant and so on.
The most critical question regarding the implementation of RISC is about the source of the investment required for the infrastructure layer. The costs are significant. Assuming the capital costs of each RISC to be $1 million, then 5000 centers, enough to entirely saturate rural India, would cost $5 billion. While it is a large number in absolute terms, it is only about a percent of the annual GDP of India. Much of this investment is already being made, and we contend, somewhat inefficiently.

The central concept of RISC is that it is a market-based approach that requires the participation of the government (at national, state, and local levels), the private sector, NGOs and multinational lending institutions. Each of these have different (albeit overlapping) interests in broad based rural economic growth and therefore have an incentive to participate in the implementation.

The government has an incentive to expand social and economic opportunities in rural India. To that end, it already invests significant amounts in rural development. At the central level, the government already spends nearly 3% of GDP for various subsidies. The solution we present operationalizes the efficient deployment of the resources that are already being spent. In fact only a partial redirection of the current spending would in our view have a significant impact. Further it would attract additional investment from non-governmental sources if criticality is achieved.

By focusing the investment of various actors around these RISC centers, it is possible to gain the economies of scale, scope, and agglomeration. This agglomeration will also serve to mitigate risk in the investment.

Next Week: As India Develops (continued)


TECH TALK As India Develops+T

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