Some Ideas to Further India’s New Financial Inclusion Initiative!

Some Ideas to Further India’s New Financial Inclusion Initiative!

Ramesh S Arunachalam

In India as well as other developing countries, inclusive growth has always been seen as the imperative for achieving equity and equality objectives. While that point is well taken, the experience of the last few years, and especially during the global financial crisis, suggests that inclusive growth is perhaps essential to even sustain the overall growth momentum. That said, while the UPA sadly failed in creating a really inclusive growth paradigm (despite having a great chance to do so), I really hope that the NDA learns from the experiences of the last 10 years and ushers in a practical and yet effective inclusive growth program that yield dividends on the ground. Several aspects need emphasis here:

First, in emerging market economies like India, a huge proportion of the population (over 60% at least) is based in rural areas, where agriculture is the primary source of livelihood. And any further (substantial) increase in demand for manufactured goods and services will have to come primarily from this large rural population[i], which mainly depends on agriculture and allied sectors. And barring a couple of years (2005/6), by and large, the performance and growth of agriculture has been rather indifferent and continues to be so. Even when agriculture performs, the benefits accrue to the larger and better off (corporate) farmers and not the small/marginal farmers.

Indeed, what has become more apparent with this kind of skewed growth is the dualistic nature of the Indian economy - where the gaps are indeed deepening and widening across various sections of the society. The classic manifestation of these gaps and the failure of the economy to re-adjust and ensure equitable economic opportunities for wealth creation, especially in relation to the work and inputs, can hardly go unnoticed –one manifestation is suicides by small and marginal farmers and others  at the grass-roots. That several farmers and low-income people have committed suicide in the last few years tells us the causes of these problems are not short-term – they are, mainly due to serious structural weaknesses in livelihoods systems of low-income people that require urgent and systematic attention.

Why is this happening? What are the consequences in a country like India, where over 60% of the population is engaged in agriculture and related activities? The key point to note here is that the case of farmer suicides is neither a cotton specific problem nor a paddy crop germane issue. Rather, it concerns fundamental problems[ii] associated with one of India’s largest livelihood sectors, agriculture and allied activities – a sector where over 600 million people and a majority of India’s low income and poor[iii] people earn their living. More importantly, it is a sector without whose produce/products, we will be deprived of sustenance and cannot survive in the long run. Therefore, without question, agriculture and allied areas, as sectors, and the low income people dependent on it for their livelihoods must be “included” in the overall growth paradigm. That is an urgent imperative in India today and the inclusive finance paradigm must take the lead in facilitating/enabling this.

Second, as noted above, from the perspective of supply-side management, growth in agriculture is very vital for keeping manufacturing prices under check, ensuring food security and keeping inflation under control. India knows this better from its own (past) experience. Price stability is not merely important as an anti poverty measure but also as an instrument to ensure stable and sustained growth. Again, the lessons of the last five years should not be forgotten and especially, with regard to prices of essential food items as well as from a food security perspective. That the farmers who grew these commodities hardly got returns/rewards commensurate with their effort, investment and risks taken can hardly go unnoticed. This again points to very fundamental weaknesses in the structural aspects concerning agriculture and low income livelihood systems. Here again, financial inclusion can play a major role in enhancing the bargaining and staying power of such low-income people.

Third, higher growth in agriculture and rural areas coupled with demographic dividend (i.e. growing proportion of population in the working age group of 15-65) should result in a rise in the savings level, which, in turn, should facilitate financing the increasing level of investments required to maintain the overall momentum with regard to growth. This is again a very crucial aspect and the role of local and small savings should not be discounted in any serious measure. Its potential to support inclusive growth is phenomenal and appropriate incentives must be provided in this regard to encourage local/small savings as a resource alternative in any new inclusive growth paradigm. This is perhaps where responsible micro-finance/grass-roots banking can usher in a new era of savings led micro-finance in India, subject to various kinds of MFIs/other institutions enhancing the quality of the internal control/other systems. Perhaps, it may be better to use MFIs and others as business correspondents (BCs) to tap savings and, here again, policy may want to address inherent weaknesses in the business correspondent (BC) model, which has prevented this so far.

Fourth, the limitations on increasing production and productivity in agriculture are forcing people to migrate to urban areas, which results in increased population pressure in urban areas as well as larger numbers of urban poor. And this burgeoning urbanization has several important consequences for low income people, who tend to migrate and live in slums. As an NSSO survey revealed (a few years ago), nearly 40 per cent of farmers claimed that would like to quit farming, if they have the option to do so. Unfortunately, there is little option for them except moving into urban slums[iv].

Thus, in reality, migration to urban areas primarily implies greater growth of urban slums, which hold a lower quality of life for the poor, many of whom have migrated from rural areas in search of better livelihoods. This growth of urban slums, typically, is associated with greater unemployment for the poor living there, harsh living conditions, enhanced crime, greater negative impact on health and several aspects including environmental degradation[v]. Therefore, the major point to be noted is that the infrastructure in urban areas is simply not enough to cater to the growing needs of these migrants. Huge and appropriate investments are therefore needed in housing, sanitation, water, lighting and power, solid and other waste management, education, health, and so on and so forth. Therefore, we need “inclusive and enabling investment” in the above areas to deal with the huge and ever increasing flow of low-income migrant population into urban areas. This is yet another new area of focus for the new financial inclusion paradigm. This also calls for a paradigm shift in urban planning, which must also become more inclusive.

Fifth, in countries such as India, the growth process is essentially knowledge-based and primarily services led. These new growth areas will continue to have a lot of potential going forward. Hence, the requirement of skilled labour is rather huge in comparison to the current levels of availability. Therefore, in order to ensure availability of adequate supply of labour skilled to tackle opportunities in new growth areas mentioned above, we also need huge enabling and inclusive investments in areas such as practical education and skill development. This is to enable the vast majority of people who have the latent potential but cannot afford these services to gain access to such practical skills and knowledge, and thereby perform to their potential. The role of financial institutions (MFIs, banks etc) in servicing the last mile end users clients and facilitating such enabling and inclusive investments must be seriously explored.

Last but not the least, whenever we talk of rural areas, the sector that comes first to our mind is agriculture. However, there is the (unorganized and informal) non-farm sector which continues to play an increasingly important role in absorbing large numbers of rural people. Make no mistake, all put together, this non-farm sector and value added agriculture enterprises (MSME) sector have huge potential for growth. This again requires investment in  `inclusive infrastructure and enabling mechanisms’  for ensuring easier/quicker access to assets, skills, appropriate technology, wide range of vulnerability reducing financial services (including credit for post harvest and post production) and fair linkage to various markets and other market development infrastructure (both private sector and government procurement). Without question, the financial inclusion paradigm should lead such efforts, and facilitate these hitherto excluded sectors to become expanding bases for wealth creation for low-income people in a competitive manner.

Therefore, to reiterate, it is critical to ensure that growth takes place in: (a) agriculture, allied and non-farm sectors as well as service (enabling) sectors in rural areas; and (b) amongst urban poor so that they (also) serve as a growing market for the goods and services produced by the expanding industrial sector including those produced by MSMEs. However, this growth cannot be mere dumping of goods and/or provision of services in rural areas or among the urban poor. It has to be responsible growth and delivered in an ethically sound and transparent manner. This is one of the most important lessons from the Andhra Pradesh/Indian micro-finance crisis and growth story. Otherwise, all the gains will be lost.

Thus, it is clear that a new paradigm of inclusive growth is very necessary for sustainable development and equitable generation of wealth and prosperity. However, achieving this inclusive growth is the biggest challenge in a democratic country like India as it translates to the concern of integrating 600 million people living in rural India, and several million living in urban slums, into the mainstream economy.

And this requires that we let go of our narrow conceptualization of inclusive financial services and broaden the paradigm to ensure that financial services play a very vital role in addressing two critical supply-side issues: (i) by creating an effective ecosystem for delivery of a wide range of financial services to facilitate productive and enabling investment in largely excluded but employment impacting sectors such as agriculture, value added agriculture, MSMEs etc as well as hitherto excluded areas and for enabling low income and excluded people (living in rural India and urban slums) to realize their latent untapped potential; and (ii) by driving large scale investment in inclusive infrastructural facilities and enabling mechanisms like watersheds, irrigation, rural/urban reconstruction, social infrastructure such as health care, education and sanitation and the like.

 So, how can this be achieved on the ground in India today, where financial inclusion is narrow implemented either as micro-credit for consumption or as access to no frills accounts opened by banks. As noted earlier, without question, mere credit[vi] to low-income people can do very little for inclusive growth and it is time to bell this cat. Only a new paradigm of inclusive finance can help usher in an era of real inclusive growth in India and I hope that the NDA government expands its financial inclusion program of today!

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[i] And this issue becomes even more critical when one considers the fact that the average monthly per capita consumption expenditure (MPCE) in urban areas in India is near double that of rural areas. And in some States (like in Central or Eastern India), these disparities are even more glaring.

[ii]  “Farming is both a way of life and the principal means of livelihood to 65 per cent of India's population of 110 crore, Our farm population is increasing annually by 1.84 per cent, The average farm size is becoming smaller each year and the cost-risk-return structure of farming is becoming adverse, with the result that farmers are getting increasingly indebted. Marketing infrastructure is generally poor, particularly in perishable commodities. The support systems needed by farmers, like research, ex-tension, input supply and opportunities for assured and remunerative marketing are in various stages of disarray. Small farmers are forced to borrow money from money-lenders at high rates of interest, since less than 60 per cent of the credit requirements of farmers is met by institutional sources.” (Dr M S Swaminathan, Chairperson, National Commission on Farmers, 2006 as cited in The Hindu Survey of Agriculture).

[iii] Despite significant progress made by India during the last decade or so, about 30 – 35% of the total population still lives below the poverty line.

[iv] INDIA has always been considered a country that lives in its villages. But increasingly rural Ind1a is moving towards the town and the city.  The 2001 Census established that almost one- third of India's population, an estimated 285 million people, lived in urban areas. By 2020, half the country's population is expected to be city-based.

[v] In fact, as the data suggest, almost 50% of country’s population and a large majority of the poor are likely to reside in urban slums in India by 2020. And Noted environmentalist Chandrasekar confirms the above trends and summarizes the issues with rapid urbanization, “Although on paper all cities have some kind of development plan, the actual development follows no particular pattern except that dictated by expediency, patronage and privilege. As a result, every city in India is the epitome of urban chaos - lacking in adequate water and sanitation, affordable housing, all weather roads, decent public transport and clean air. Cities generate wealth but increasingly Indian cities have become home to the urban poor. Every city is marked by the informal settlements where the poor are forced to live without access to basic services like water and sanitation. City administrations are unable to check the flow of poor people into the city and have failed to build affordable housing where the poor can live. As a result, in some cities like Mumbai, for instance, half the population lives in slums. And in Maharashtra, India's most urbanized state, 61 cities and towns have slum populations that together makeup over 27 per cent of the total urban population and a third of the total population of the State. Indeed, the slum has now become an inescapable part of the Indian urbanscape” (The Hindu, 2006).

[vi] Several factors like market imperfections and other factors (like poor infrastructure and production practices etc) severely constrain these low income people in their efforts to build sustainable livelihoods and enhance their economic security - as a result of fragile livelihoods, they often go through a cycle of being financially included and excluded at various times.  The key point is that, in the absence of other infrastructure and mechanisms, the use of loans by poor and vulnerable people renders them into greater debt.