I strongly believe that the only way India can sustain its long-term economic growth is by unleashing and harnessing the creativity of its grassroots entrepreneurs, especially in rural areas. But here is the challenge: these grassroots inventions don’t scale up. Indeed, most rural innovation initiatives such as DesiCrew and grassroots inventions like Mitti Cool, however impressive they may be, are sadly limited in their impact to a local or regional market of a few hundred customers, and end up employing no more than a dozen workers in the local community. What is missing is a mechanism to cross-pollinate and scale up these bright ideas among India’s 250-million-strong agricultural community which lives scattered across more than 600,000 villages.
I find the paragraph interesting. His belief that “the only way India can sustain its long-term economic growth . . . by unleashing and harnessing the creativity of its grassroots entrepreneurs, especially in rural areas” is approximately right. The bit that raises questions is “especially in rural areas.” Surely, “the only way” cannot be “especially in rural areas.” Rural areas and “sustained long-term economic growth” are incompatible and inconsistent. This is puzzling since in the same paragraphs he explicitly recognizes the limitation that rural areas have — a matter of scale.
We need to go back to the fundamentals, as always.
Generally speaking, economic growth arises from an increase in productivity (the amount of goods and services that an hour of labor produces). Productivity increases depend on the degree of specialization, a fact that is well-known since Adam Smith’s 1776 book “The Wealth of Nations.” The degree of specialization is limited by the size of the market. The smaller the market for a specific good (that is, the volume of supply and demand), the smaller degree of specialization it can support, and therefore the smaller the gain in productivity through specialization.
Rural markets are small because of fragmentation. The rural market is fragmented even though the rural population is huge. Integrating the fragmented markets is a big task and there are several approaches to it depending on the good or the service under discussion. For instance, for goods markets to be integrated, the transportation system has to be efficient. For services, if it is a service that can be delivered over a wire, a good telecom infrastructure can integrate the market. But if the service is non-transportable — such as a hair cut or plumbing service — then the only way is through aggregating the scattered rural population.
The natural way that markets become integrated is when the scattered village population moves to aggregate themselves into towns and cities. Cross-pollination of ideas and economies of scale (what Navi mentions in that paragraph), and hence the integration of markets, occurs naturally in dense aggregations of people.
The bottom line is this: India is heterogeneous along all dimensions, including people and places. There are leading and lagging places. The broad policy thrust has to be the development of people, not places. That means, the policy should be the development of people in the lagging areas, not the development of the lagging areas. The complementary policy for the leading areas is the development of the place.
Summary: Develop the people of lagging areas (policy A) and develop the infrastructure of leading areas (policy B). The policies A and B have to be implemented simultaneously. Policy A creates human capital who can (by migrating to the leading areas) become more productive given the infrastructure produced by policy B.
Grass-roots entrepreneurs, the ones mentioned by Navi, regardless of how clever they are, are likely to find limited success as long as they are forced to operate in small markets (that is, having to live in villages.) Larger markets are only available either in places with dense aggregations of people, or where the transportation and telecommunications infrastructure is efficient enough to provide integrated market even with scattered populations.
The long-term sustainable economic growth that Navi talks about in the quoted portion above is not possible in the context of rural areas. As long as rural populations are involuntarily restricted to rural areas, they will be forced to low productivity levels. India’s long-term economic prospects are linked to how effective India’s policies are in transforming the currently rural population into an urban population.