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TECH TALK: India’s Challenges: Atanu Dey

March 29th, 2007 · No Comments

The future of India and Indian policy is important because we are living in India. A few years ago, I had remarked in one of my Tech Talks that one could sense a visible change of attitude around people were optimistic that tomorrow will be better than today. While at least some of that optimism remains, it is being tempered with the harsh reality that the politics and economics of what needs to be happening in India are just not right. The solution does not lie in replacing one party in government with another. Give people power and its shocking what they are capable of doing with it. Armed with a little knowledge, a large percentage of Indian politicians can be quite dangerous for the future of India. I do not have a solution on hand, but the problem is important enough that we all need to think hard about it. After all, we all intend to be around in tomorrow’s India.

One starting point is by reading and thinking over what people like Atanu Dey (my colleague) have to say. I will reproduce two of Atanu’s recent blog posts. The first one lays out the challenge ahead of policy makers:

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 Indias 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 todays 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 Indias 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 Indias 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.

Tomorrow: Atanu Dey (continued)

TECH TALK India’s Challenges+T

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