There is a symbiotic relationship between the two - grassroots needs the professional game to be attractive to participants, professional game (in particular Rugby because of its complexity and position on the Australian sporting landscape) needs grassroots to buy its product.
Both should be able to operate reasonably free of financial burden from the other.
The only caveat to this is the development pathways that turn a grassroots players, coaches and referees into professionals. This should be paid for by the professional organisations with revenue from selling the professional game, with some support from the grassroots organisations, and the players themselves.
If, in Australia, professional teams can't compete with international clubs, you can't go into debt to keep your best players - you need to select your second best. Its a challenge, but option 1 is not sustainable, as we are unfortunately finding out.