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Rural India Needs Corporate Investment
December 29 2006

By Abraham M. George

In recent years, there has been considerable talk about poverty and how to deal with it. The idea being promoted by supporters of the UN Millennium Project is that underdeveloped nations can be saved through more outside assistance and by expanding existing programs that are run mostly by governments. The emphasis is still on more funding for programs that have been in existence for many years. But there is very little evidence that foreign assistance has made much difference in overcoming poverty in any country.

Poverty levels in India

Before we can think of devising new approaches to poverty alleviation, the true extent of the problem must be understood. The World Bank has introduced two measures for poverty levels: $1 and $2 per day per individual. Instead of adhering to world standards, The Indian government chose to define caloric intake and its corresponding cost as the measures by which poverty is to be defined. The government assumes that only Rs. 327 ($7.25) per month is needed for an individual living in the rural area to buy enough food to meet the required calories. This works out to less than Rs.11 ($0.25) per day per person. By this measure, the official estimate of poverty is 26 percent of the country’s population.

The real story is much worse. According to respected economists and statisticians in India, in the year 2000, the monthly income needed for a rural individual to consume the required calories in a day as per government standards is not Rs. 327 ($7.25) but Rs. 567 ($12.60). At this income level, which amounts to $0.42 per day, probably over 50 percent of the rural population is poor.

The George Foundation’s own survey of 17 villages in Hosur Taluk in Tamil Nadu shows that over 80 percent of the population has family incomes of less than $1 per person, and over 90 percent of less than $2 per person. If this is any indication of actual poverty in rural India, there are far more poor people in the country than what is presented in government statistics.

The dismal state of rural education and healthcare

There is no doubt about a close linkage between illiteracy and poverty. As Amartya Sen, the Nobel laureate in economics, points out, the capacity to read and write deeply influences one's quality of life.

Official data on literacy is collected from household surveys during national population census. These estimates are based on information that are frequently inaccurate, with the result of significant over-count of the truly literate.

To validate published official records, The George Foundation recently completed a house-to-house survey of several thousand people in 17 villages in Hosur Taluk, Tamil Nadu. Those surveyed were asked to read and respond to a simple question written in their local language: How old are you? Less than 15 percent of the people among the “lower” social classes or “dalits” were able to read the question, while barely 40 percent of the “upper” classes responded correctly; the overall count of literate people was below 25 percent. If this survey is representative of most villages, it is hard to believe the government's claim of 65 percent adult literacy in all of India (when over 700 million people live in the rural sector).

Besides the absence of proper education, poor people in India lack access to anything resembling quality healthcare. Inadequate infrastructure, too few physicians, absence of drugs, and lack of accountability have turned government-run primary health centers into ineffective institutions. More than half the children in India under the age of four suffer from malnutrition, 30 percent of the newborns are significantly underweight, and 60 percent of women are anemic.

Why rural income is low

Billions of dollars have been expended over the past half a century by governments, international agencies, and donors to address the problem of unemployment. For example, in rural India, government programs focus on subsidies (for electricity, fertilizer, and other), food rations, price support, land allocation/distribution, job training, and financial assistance for initiatives in agriculture and small businesses. But the direct beneficiaries of these programs are the corrupt officials who manage/distribute the funds, and the landlords and powerbrokers in the villages who have the ability to extract the benefits.

Over 90 percent of the agricultural land is owned and cultivated by less than 10 percent of the rural population. The poor are unable to use their land (if they have any) for agriculture for lack of water resources, poor soil conditions, and unavailability of credit. Hence, they do not stand to gain directly from any of the government programs.

A small number of people, mostly village officials/leaders and their family members operate the few small businesses in the villages. The great majority of the poor — some 60-70 percent of the rural population — are uneducated and serve as labor for landowners and the few nearby businesses, when their services are needed. Hopefully, if and when these landlords and small businesses prosper, the rural poor may also benefit from its trickle down effects. 

Most poverty eradication programs run by NGOs and supported by the government and/or donor funds do not directly target the bulk of the rural population who are seasonal laborers. For example, contrary to the widely held belief, the beneficiaries of micro-credit (loans of $100 or so) are not the poorest among the population. The socially deprived labor class — over 60 percent of the village population – is not even targeted by these projects for obvious reasons: they simply do not have the ability to run a business or payback the loan. Yet, many make the claim that more than 95 percent of the people who receive micro-credit are really poor, and that practically all of them succeed in new entrepreneurial activities which enable them to meet interest obligations at 26 percent or higher and repay the principal.

Corruption, political influence on credit, land allocations and other related decisions, diffused focus and priority, poor execution, shortage of rural infrastructure, social inequality and a host of other factors remain as impediments to poverty reduction. These are ultimately the result of failed governance. It is unrealistic to assume that governments can be made to run projects efficiently and honestly.

The limited role of NGOs

NGOs have gained considerable attention in recent years as they focus on micro-issues and provide grass-roots assistance. Many have taken up projects to improve the quality of education and healthcare, while focusing on specific critical areas such as HIV/AIDS, illiteracy, and women’s empowerment. Several are involved in income generation activities, offering assistance in areas such as water resource management and use of indigenous technology. These efforts usually complement those of governments in the implementation process.

Despite their positive contributions, NGOs have not been involved in major developmental undertakings intended to create large employment and wide income generation through sustainable businesses. This is attributable to their lacking good managerial skills and organizational structure to take up business ventures. Consequently, the role that NGOs are best suited to play is in support of projects funded by governments and international agencies, or those limited initiatives approved by private donors.

The crucial role of the corporate sector

Government’s role ought to be that of a catalyst for private economic activity. There should be no room for bribes. When private individuals and institutions find it worthwhile to take risks and invest in economically depressed areas, there will be sustainable development and poverty reduction. As incomes rise, there will be less need for government involvement in the delivery of many services currently provided.

In most developing countries there is no serious effort to involve private companies, though most rural areas are, in fact, ideally suited for industries in herbal products, food processing, alternate fuels, cement and tile, lumber and pulp, meat, dairy and poultry. Investments in these can create large numbers of sustainable jobs. By offering employment opportunities in villages, they would mitigate labor migration to cities.

Financial incentives like low-interest loans and tax breaks, and physical infrastructure improvements will motivate private companies to build factories in rural areas. Elimination of controls on the sale of agricultural products, and assistance in finding new markets will attract many businesses. These measures will in turn improve the demand for produce and boost commodity prices to levels that can financially sustain rural families.

Even in the delivery of basic services, such as education and healthcare, lack of affordability on the part of the rural population should not prohibit private sector participation. Private institutions can deliver services at reduced prices, but at a profit, within a competitive and independently monitored system where costs are subsidized or even fully paid for by the government. Such partnerships can work in a cost-effective fashion only with arrangements for independent audit and arbitration by credible third parties.

A new approach to poverty reduction

International agencies and donors must consider equity participation in companies instead of simply channeling funds through governments or offering grants. They should provide loans at low interest rates directly to businesses that are prepared to invest in rural areas. Instead of trying to create entrepreneurs out of poor illiterate adults, the emphasis ought to be in generating sustaining jobs in large numbers.

As long as significant poverty exists around the world, and disparity between the rich and the poor widens, private companies in developing countries need to make a contribution to solving the problem. A dialogue must begin between and among business leaders on devising rules for business conduct in deprived communities. The model must consider how poor people can be brought into the mainstream of consumers with sufficient purchasing power within a reasonable time period.

Those who work must earn enough to be able to come out of poverty. Minimum wages and benefits must be adequate to meet at least basic human needs, and farmers must be able to sell their crops at prices that assure a fair net gain. Economic success and social justice must go hand in hand.

There is serious concern in many circles, and rightly so, about whether the private sector can be trusted to operate fairly in communities that are poor. The fear is that free markets mean exploitation, citing what they call the “Wal-Mart Syndrome” of forcing suppliers, especially those from poor countries, to offer products at prices that leave little gain for workers.

Troubling issues like this one will always exist. But they can be addressed through effective enforcement of laws and regulations concerning minimum wages, worker safety and benefits, non-competitive practices, and environmental protection.

Companies must recognize that it is in their long term interest to win the support of communities where they operate. Repressive local norms in compensation and treatment of labor must be replaced with fair practices that assist the poor in adequately caring for their families. Market forces of supply and demand and competition for gaining a dedicated labor force and loyal consumers are powerful factors in motivating good behavior on the part of corporations.

India ’s rural population is increasing by over 13 million annually. Urban prosperity will not trickle down fast enough to reduce rural poverty. Government-run projects are not capable of adding 600 million sustainable jobs. NGOs can at best lower the misery faced by the poor, but not much more. Only the private sector can produce the kind of vibrant economic activity that will generate sufficient employment and higher income for the rural population.

Handouts will not solve poverty. The poor want jobs and not benevolence. A market-based approach to poverty reduction will result in income and wealth creation, and lay the groundwork for the next generation to avail of a wider range of opportunities with enhanced resources.

Copyright © Abraham M. george, 2006