Building India’s villages better

Building India’s villages better

Discussions on infrastructure are typically dominated by large projects such as power, airports or national highways. Rural infrastructure, which serves 70% of the population, doesn’t get the attention it deserves. As the Planning Commission sets out to draft the country’s planned investments for the next five years, it is important to take note of this gap, and the innovative solutions needed to fill it.

Rural infrastructure comprises small local projects—roads, bridges, local irrigation, creation of market facilities, and so on. Such projects have long gestation periods and are rarely commercially viable on the basis of user charges. Public-private partnership (PPP) models based on such charges tend to break down. As a result, the onus of managing the projects ends up with state governments, which often do not have the required administrative apparatus. The mid-term appraisal of the 11th Plan and progress updates on Bharat Nirman show that the flagship scheme for rural infrastructure investment has a 60-65% achievement rate on planned targets compared with 85-90% on non-rural infrastructure development programmes.

There is another, more fundamental difference. Infrastructure projects have massive indirect economic benefits in the form of development of the local area. But results come only with concurrent deployment of multiple programmes. For example, a rural road leads to quicker development when it is complemented with power supply, extension of agricultural technology, and warehousing facilities. (In urban centres, market forces quickly complement public funded infrastructure such as a flyover or road). This requires coordination between different departments of the state government. It involves bringing together knowledge about other things besides road construction—the local economic dynamic, animal husbandry, soil conservation, irrigation techniques, water conservation, cropping pattern, and more. Even the most progressive state governments find it difficult to break silos between ministries and departments. Coordination is sacrificed on the altar of inter-departmental turf battles.

India’s planned investment on rural infrastructure in the 11th Plan was Rs4.4 trillion. At about 1.5% of the gross domestic product, it is one-third of China’s. Should India want to match China, its absolute planned expenditure in rural infrastructure has to go up by more than five times. That is a lot of money. Unlike urban infrastructure, this money has to come from the government. Private sector contribution cannot be counted on to fill the gap. But since the government itself may not be able to come up with such funds, it is important that whatever money is allocated to rural infrastructure is spent efficiently. Doling out even more funds to state governments in the form of Bharat Nirman grants will not be the answer. We need a value-added intervention in the process of deploying such funds to get higher returns on the investment. This intervention has three objectives—(1) to ensure coordination across state government departments; (2) to bring together multidisciplinary knowhow for each small rural project; and (3) to create annuity-based PPP where possible.

In 1982, The National Bank for Agriculture and Rural Development (Nabard) was set up as a premier state-backed institution to play a facilitative role in agriculture and rural development, refinancing agriculture loans provided by commercial and cooperative banks. Over time, Nabard came to manage the Rural Infrastructure Development Fund (RIDF) made up of money from commercial banks that did not fulfil their priority sector lending commitments. Nabard now lends the RIDF money to state governments and state-owned corporations for rural infrastructure projects. It has multidisciplinary technical capabilities in over 25 areas related to rural infrastructure and agriculture productivity improvement. It has manpower deployed in each district of the country to monitor the projects that it finances, and in state capitals to liaise and coordinate with different state departments. It is an ideal institution to scale up the government’s rural infrastructure funding. However, RIDF’s outstanding is only about Rs65,000 crore, almost like a “pilot" compared with what is required. But it is a pilot that can be scaled up. The government could channelize a portion of the Bharat Nirman funds through Nabard to ensure higher developmental returns.

Where could additional funds come from? The latest in the government’s well-intentioned initiatives in infrastructure development is the proposal to create Infrastructure Debt Funds (IDF). These long-term funds are to be raised from the markets, including international ones, and deployed in bankable-infrastructure projects. The fund manager—an institution such as the India Infrastructure Finance Co. Ltd or a bank— is expected to enhance the debt raised by these funds. It makes sense to earmark a segment of IDF for rural infrastructure. Unlike the IDF for urban infrastructure, the rural IDF would need to be able to lend at subvented rates (due to commercial non-viability of projects) to state governments, state-owned corporations involved in rural infrastructure creation, and PPPs created on an annuity basis.

The government has placed a powerful emphasis on financial inclusion, and the results will show in some time. It’s time to provide the complementary infrastructure to leverage financial inclusion. People need to have money to put in those no-frills accounts that banks are opening for them. They need to have the basic infrastructure before they can take loans to invest in their farms or small local factories.

Saurabh Tripathi is partner and director at Boston Consulting Group.

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