Friday, December 6, 2013

Welfare goals overlooked

Welfare goals overlooked the moves from those at the helm of national affairs, , the government is gradually slipping away from the goals for which its flagship welfare programmes have been conceived, contends K Veeraiah
The Achilles’ heel of fiscal discipline is now going to hit the so-called game changing flagship programmes of UPA hard. On the one hand, different agencies under UPA II are preparing to bank on their “ game changer” flagship programmes. On the other, the finance ministry is circulating guidance notes to curb the funds for the same flagship programmes. Immediate motivation might have come from the quarterly review of economy that was released by the finance ministry for the quarter ended by September 2013. It states the Centre is moving fast beyond the fiscal deficit target for this financial year.
Just before the finance ministry’s fiscal discipline drive, the government has announced new schemes, programmes and intentions hoping that they will help the government to sail through the forthcoming elections. The 11th Five Year Plan document visualized this linkage and said, “ though the 10th Five Year Plan achieved 7.7 % growth, it is perceived that the growth is not sufficiently inclusive for many groups, especially SC, ST, minorities. Gender inequalities remain a passive problem”.
To bridge this gap in developmental indices the UPA came up with idea of flagship schemes and floated 13 such programmes. Though the schemes which were proposed under this banner are not at all completely new, recognizing the role of their economic linkages ushering in comprehensive development is a new phenomenon. Some of them are completely new whereas some are restructured programmes of old ones. Over the time three more were added to the kitty and thus, as of now, 16 such programmes are under implementation.
The ultimate objective behind the flagship programmes is to achieve broad-based improvement in the living The ultimate objective behind the flagship welfare programmes is to achieve broad-based improvement in the living standards and to ensure that growth is widely spread so that its benefits are adequately shared by all, especially the poor and weaker sections of the society. Additionally, on the eve the general elections, the central government  some more schemes such as delivering to rural working women, primarily agricultural labour, educational reforms worth Rs 3 lakh crore, rechristening of Swarja Jayanti Swarojgar Yojana into National Urban Livelihood Mission and so on apart from the game changer National Food Security Act.standards and to ensure that growth is widely spread so that its benefits are adequately shared by all, especially the poor and weaker sections of the society. Additionally, on the eve of the general elections, the central government cleared some more schemes such as delivering mobile hand sets to the rural working women, primarily agricultural labour, educational reforms worth 3 lakh crore, rechristening of Swarja Jayanti Swarojgar Yojana into National Urban Livelihood Mission and so on, apart from the game changer National Food Security Act.
Since beginning of these flagship programmes the neo-liberal intellectuals cried foul and worried about the return of so-called welfare state. But the Comptroller and Auditor General of India in its latest report ( Report 1 of 2013- Financial Audit), laid bare the claims of the government when it reviewed the expenditure on flagship schemes in different years. Over the last four years cumulative spending in the name of seven flagship schemes stood at 4,07,058.5 crore against the budgetary allocations of Rs 4,13,307.69 crore.
In another sense contrary to the general perception that the UPA government is spending more on the social welfare schemes, the table explains the gradual reduction in expenditure under these schemes. Certain schemes such as RGGVY experienced drastic reduction upto 62% whereas the election winning MGNREGA programme seems to have lost the favor of the government. This is evident that in any single year the government failed to utilize the budgetary allocations for the same.
Way back in 2009 itself finding problems in implementation, the Prime Minister’s Office set up a Delivery and Monitoring Unit to coordinate and sort out the delivery mechanisms. Despite that arrangement, there is no major improvements in on the ground. Recognising this, the National Advisory Council, which advises the government on policy matters constituted a three member sub committee to review the implementation problems and suggest way out under the chairmanship of Mihir Shah, who also happened to be a Planning Commission member. The Mihir Shah committee came out with recommendations on three basic aspects of the implementation of flagship schemes. They are, a) streamlining the funds flow, b) improvements in transparency aspects, c) preparing the knowledge banks at district level implementation. Mihir Shah committee also finds it difficult when it comes to the financing the schemes. That is why its first recommendation centres around streamlining of fund flows. This is what the CAG report also indicates when it looks at the budgetary allocations and expenditure levels under different programmes.
Notwithstanding the moves from those who are supposedly directing the affairs of the government, the establishment is gradually slipping away from the goals for which these flagship programmes are conceived and started applying the fiscal discipline yardsticks. Let us consider the allocations and actual expenditure for financial year 2011-12 as test case.
The cumulative allocations for seven flagship schemes for the 2011-12 financial year stand at Rs 126312 crore and actual expenditure at Rs 109379 crore. Except in the case of PMGSY in the year 2010-11 which experienced almost double amount spent than the budget allocation, for all the flagship schemes, the situation stands same. Year by year the expenditure on these schemes is decreasing.
Look at the nature of the schemes. The MGNREGA is the only scheme that is intended to enhance the livelihood sources and wages for the majority of the rural poor. Hence out of the near about Rs 4 lakh crore of allocations, MGNREGA component itself is about Rs 1,79,079.2 crore. But actual expenditure is only 125842 crore short of nearly Rs 53, 237.2 crore which One must remember the fact that whatever the budget announcements, the government is governed by the budget responsibility and fiscal irrespective of the ruling parties at the centre. This fiscal responsibility and budget management act ( popularly called as FRBM act) imposes the ceiling on the over all expenditure of the government and also fixes the bench mark in terms of is a whopping 29.72 %. That means, over the last four years itself, out of the allocations under MGNREGA, the government could not spend nearly 30% of allocations ! Having stated the facts from government report itself, the finance ministry’s proposal for universal reduction of 15 % for flagship programmes means a further deep cut of their spending as well as reducing the coverage which in all likelihood may go against the spirit of the flagship programmes.
This implicit drive could not help the government to meet its fiscal deficit targets mandated by Fiscal Responsibilities and Budget Management Act 2003 forcing Finance Minister Chidambarm to go overboard in asking concerned ministries to reduce their spending. Majority of the spending under these flagship programmes flows into rural economy unless stifled under the corrupting influence of administration.
The indicators already show that the economy is at snail’s pace and urban consumption has failed to pick up despite all the tax concessions imparted by the government. Surveys from McKinsey to Fitch show that the growth of economy is dependent on the possibility of increase in rural spending. Without money flowing into rural economy under these flagship programmes, no one can expect the rural sectors of economy to contribute to the overall economy of the nation.
P. ChidambaramThe government, it seems, is all out gearing itself to please the international rating agencies whose wrath Chidambaram faced during his latest visit to Washington. Though the Indian media played its due role in airing the news as if the Chidambaram took on the rating agencies as well as the IMF and World Bank for their growth projections, what went behind the screen is altogether different story.
With the latest announcement from the finance ministry it can be construed that the finance minister himself gave a commitment to the international community of finance capital that he would do his best to meet the fiscal deficit within the permissible limits.
One must remember that whatever the budget announcements, the government is governed by the budget responsibility and fiscal management, irrespective of the ruling parties at the centre. This fiscal responsibility and budget management act ( popularly called FRBM act) imposes the ceiling on the overall expenditure of the government and also fixes the bench mark in terms of fiscal deficit. As we know, for more than a year the neo liberal policy analysts, both foreign and indigenous experts, are warning the government about the widening current account deficit. The finance minister’s statement suggesting the universal cut of 15 % on all government expenditure is an indication to this effect. Under this mandate only the finance minister is emboldened to ask the concerned ministries to reduce their budgets. By doing this, it is obvious that the finance ministry is pressing the wrong button.
According to the calculations of CBGA, cumulative tax concessions given out to super rich corporates between 2005-06 and 2012-13 financial years amounts a staggering Rs 31,88,760 crore ! Of this, mere corporate income concessions amount to Rs 474346 crore which is equal to the FRBM deficit target for the current financial year, which is higher than the cumulative allocations for flagship programmes over the last four years. Additionally, another Rs 271512 crore worth personal income tax concessions was doled out during this period which means a grand 20 % of the total tax concessions were accrued to the kitty of few super rich sections.
At the same time, this is also a period during which the government failed to meet the FRBM targets and dwindling tax : GDP ratio. Simply warding off to these telling facts, the finance minister prefers to cut back on the public investment which is life line for rural India. In a simple analysis, to ensure the smiles on the face of a handful bunch of super rich in the country and those in the world of international finance capital, the finance ministry has decided to trample upon the livelihoods of more than 3/4ths of Indians.
Major flagship programmes : actual expenditures and budget estimates (BE in crores)
Sr. No


Statistics for the years 2009-10 to 2011-12 are from CAG Report 1 of 2013. Data for the year 2008-09 collected from different government sources.
Abbreviations :
SSA = Sarva Shiksha Abhiyan,
MDM = Mid Day Meal Scheme ,
MGNREGA = Mahatma Gandhi National Rural Employment Guarantee Act,
RGGVY = Rajiv Gandhi Gramin Vidyudeekaran Yojana,
IAY = Indira Avas Yojana,
PMGSY = Pradhan Mantri Gram Swarojgar Yojana,
NRHM = National Rural Health Mission
( From, December 2013 issue)

Sunday, October 20, 2013

Poverty as an electoral weapon

Poverty as an electoral weapon

Poverty in India reflects a sad state of affairs. Instead of removing this economic and social aberration, the political class has been using poverty as an electoral weapon. The recent poverty data touted by the government to virtually claim that the scourge has been all but conquered reveals only the UPA-II’s stunted state of mind, argues Veeraiah Konduri 

The Planning Commission’s updated poverty estimates for the year 2011-12 basing on the National Sample Survey’s 68th round survey on monthly per capita expenditure (MPCE) throws new light on the trend of poverty reduction in India. The timing and comparative presentation of estimates turned out to be an occasion to unsettle the debate on poverty and its dynamics in India one again. Several economists and activists, including some politicians commented already. A crowning comment came from the future Prime Ministerial candidate, Rahul Gandhi, when he said, “ poverty is just a state of mind. It does not mean scarcity of food, money or material things.” According to the revised estimates, the percentage of persons below the Poverty Line in 2011-12 has been estimated as 25.7 % in rural areas and 13.7 % in urban areas and 21.9 % for the country as a whole. The respective ratios for the rural and urban areas were 41.8% and 37.2% for the county as a whole in 2004-05. It was 50.1 % in rural areas and 31.8% in urban areas and 45.3% for the country as a whole in 1993- 94. In 2001-12, India had 270 million persons below the Tendulkar Poverty Line as compared to 407 million in 2004-05, that is reduction of 1327 million persons over the seven year period. The press note issued by the Planning commission surmised its conclusions by saying, “ The decline in poverty flows from the increase in real per capita consumption. The clear inference is that ( a) the real monthly per capita expenditure increased by much more in the second period ( 2004-09 to 2011-12) as compared to the first (1993-94 and 2004-05), (b) that the increase was fairly well distributed across all deciles of the populations, and (c) the distribution was particularly equitable in rural areas. The first national poverty line was computed by YK Alagh committee in 1978 followed by Lakdawala committee in 1993 and the last in that series is the Suresh Tendulkar committee which deviated from calorie norm while computing the poverty figures to compute the poverty line basket which includes expenditure on food, cloths and health and came out that a person who spends Rs 32/- in urban areas and R 25/- in rural areas can not be treated as poor. The Planning Commission which spent Rs 35 crores only to renovate two bathrooms in its building decided that a person can live with Rs 32/- in urban India ! Suresh TendulkarThe poverty estimates, beginning from 1970s are being revised and updated once in every five years basing on the NSSO’s household consumption and expenditure survey. Against this the UPA –II government ordered an interim survey stating that it can not base on 2009-10 survey results as it was sever drought year. Perhaps this is the first time for the Planning Commission, the premier policy guidance body of Indian establishment out rightly siding working to boost the government-of – the day’s prospects. On the first reading of the estimates, one will get an impression that this magnitude of poverty reduction is only possible because of the economic reforms. And particularly the findings are designed to suit the UPA-II’s political objects as it is about to go on an electioneering in which these findings may be flanked as its achievements. Because of the seriousness of the criticism none other than the government’s chief statistician TCA Anant came out with a rejoinder denying this. The findings also wants us to believe that the economic reform induced growth finally trickled down and translated into increasing the per capita consumption of individuals. Also the pink press wrote editorials celebrating this decline and some even gone to the extent that the political establishment is worried because of poverty reductions. On the other hand, the estimations met with such a stiff objections that the Planning Commission member has to come out in open to say that these poverty estimates are nothing to do with the allotment of entitlements which are under pipeline and even claimed that for the first time in India the poverty estimates and fixation of entitlements are delinked to serve the poor better. The estimates are questionable on multiple grounds. The government is yet to come out with satisfactory explanation on the doubts raised over the Suresh Tendulkar formula of computing the poverty line, which basically deals with the methodological issues. AnantThe reading of the figures doled out from the NSSO computations followed by the Planning Commissions conclusions confirms that the unprecedented, uninterrupted intensive growth that India undergone from 2004-05 to 2010-11 helped to uplift 137 million people above the poverty line. Even after such a tremendous achievements, India homes for 269.3 million which is nearly half of the total poor in the world. Several commentators including those from the Planning Commission attributed this achievements to the economic reforms, thus wish to justify the clamor for accelerated reforms or in Prime Minister’s own wards, “ further unleashing the animal spirits in the economy”. According to the data, the rate of poverty reduction stood at 7.4 % per year during 2004-05 and 2009-10, when the average growth rate of economy stood at 8.5 % per year. The rate of poverty reduction increased to 7.9 % during 2009- 10 and 2011-12, when the average rate of growth of economy was reduced to less than 6 % ! That means the lower growth also leads to poverty reduction, according to the neo liberal argument ! The essence of the reformists’ argument is that the people are able spend more than the poverty line basket standards which implies that their incomes are looking up the sky. Some even went to comment on the changed food pattern with an inference to the increased cost of expenditure on account of fruits and milk. There is a fundamental problem with this assumption. In any economy, the if the incomes of it’s people looking up the sky, they must be employed in income generating activities or the government is increasing its social welfare spending, which both are not facts in today’s Indian context. The poverty line basically considers the spending on food articles, so let us consider the social welfare spending, the Congress’ MPs themselves calculated that the during 2003-04 and 2013-13, the share of food subsidy decreased from 57 % of GDP to 39 %, a clear 22 % down from its 2003-04 levels. Hence the increase in the expenditure on food articles can not be attributed to welfare spending by the government. According to the data, the rate of poverty reduction stood at 7.4 % per year during 2004-05 and 2009- 10, when the average growth rate of economy stood at 8.5 % per year. The rate of poverty reduction increased to 7.9 % during 2009-10 and 2011-12, when the average rate of growth of economy was reduced to less than 6 % That means the lower growth also leads to poverty reduction, according to the neo liberal argument ! Let us assume that the capacity to spend by aam aadmi went up as they are got gainful employment during this period. But the assumption is negated by none other than the NSSO surveys themselves. According to the latest NSSO survey on employment and unemployment, the man days generated reduced from 2.83 billion in 2009-10 to 2.16 billion in 2011-12 which means economy lost about 67 billion man days, there by the potential income generated by these man days. Not only that, according to Manas Chakravarty, the employment elasticity of Indian economy gone down from 0.44 in 1999-2000 and 2004-05 and to 0.01 during the period 2004-05 and 2009-10, ruling out the possibility of providing the gainful employment. The employment elasticity of manufacturing sector gone down from 0.76 between 2000-2004 to negative growth of – 0.31 between 2004-09, which are the years of high average growth. During this decade, the 14 million farmers lost their source of income, land and turned joined the ranks of agricultural workers. For the better part of UPA regime, the employment potential of economic activity in rural India gone down enormously which forced the government to come up the MGNREGA to resume the basic economic activity. No same mind can think of these developments contributing to the income and expenditure by people. Finally, a source of logic can be find in average rate of inflation. According to one analyst, average annual growth in inflation is at 12 % during this period which contributed to the rise in cost of living. A person who bought one liter toned milk for Rs.26/- in 2009 is now buying the same for Rs.32/- in 2013. Similar trend can be found in case of any other food articles. Still the people are buying as they have sustain their energies to live one more day. This does not mean that their incomes are rising that is why they are able to meet the ever galloping inflation burden. This can even be met through rising hand loans through non-formal channels, which means the rising expenditure on food articles and basic needs such as health and shelter are financed by debts rather than by increase in income. We are only discussing the unidimensional aspect of poverty. Had we gone into multi-dimensional poverty, our standing will be on the lowest bottom as it reflected in the annual human development index. With out taking this into consideration, the policy makers are enthusiasm about showcasing the glory of globalization and economic reforms using the deflated poverty estimates reveals nothing more than the UPA-II’s stunted state of mind.

Saturday, August 3, 2013

Can Job-Loss Growth be Really Inclusive?

Can Job-Loss Growth be Really Inclusive? Veeraiah Konduri THE results of the 68th round survey of the National Sample Survey Organisation (NSSO) on employment and unemployment reflect the deep-rooted convulsions that are taking place in the labour market in general and in rural India’s labour market in particular. The survey findings are based on a large sample of 1,01,724 households covering 7,469 villages and 5,268 urban blocks. The findings of the survey counter the government’s claim of inclusive growth and of benefits reaching out to a higher percentage of the working age population, vis-à-vis the overall population --- a claim which is typically coined in the policymaking circles as reaping of the demographic dividend. The survey, in fact, confirms the persistence of job-loss growth in India. The latest survey’s findings bring out three basic features. The first is about the transformational changes in Indian agriculture, the second relates to informalisation of the job markets and the third is about the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). FINDINGS IN A NUTSHELL It would be appropriate to consider a comparison of the results of 61st, 66th and 68th round surveys in order to assess the developments in job market during the UPA’s tenure, as this is the first government which has continued for more than one term in succession since India embarked on the globalisation policies. To present the findings in a nutshell, the rate of employment creation slipped from 39.2 per cent in 2009-10 to 38.6 per cent in 2011-12 while it was at 42 per cent in 2004-05. That means the nine years tenure over nearly two terms of the United Progressive Alliance saw our employment generation capacity going down by 3.4 per cent. This happened when the GDP growth graph rose more than nine per cent along with all three sectors witnessing upward change. (See Table 1 alongside.) The 68th survey findings are being interpreted in such a way, however, as if the fall in the growth rate of economy is the reason behind the slide-down in employment generation. The pace of economic growth is no doubt on a downturn for the last two years, but the downturn in employment generation goes far back, and the record over the last nine years which clearly indicates the job-loss growth. TABLE I Indicator (per cent) 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 GDP 7.60 9.49 9.60 9.30 6.70 8.40 8.39 6.88 Agriculture 1.6 5.1 4.2 5.8 0.1 1.0 7.0 2.5 Industry 9.4 9.7 12.2 9.7 4.4 8.4 7.2 3.9 Services 9.4 10.9 10.1 10.3 10.0 10.5 9.3 9.4 Several studies about the development of capitalism in our society talk of the need of an economic system in which the overall dependence on agriculture for employment is replaced by dependence on wage labour. To put it simply, in a capitalist economy, gainful employment through industrialisation has to be higher than that in agriculture. Since independence, several analyses have criticised the government for not taking steps to reduce the pressure on agriculture. But for the first time now in India’s economic history, the overall dependence of the labouring population on agricultural work has come down to less than 50 per cent. Table 2, given alongside, reflects the sectoral composition in terms of employment, as the changes in abstract numbers. On an average, the table says, 840 people out of 10,000 opted out from agriculture between 2004-05 to 2011-12, which reflects the reduced potential of employment generation in agriculture. The table presents the distribution of workers (per 10,000) according to the Usual Principal Status by Industry in different rounds of NSSO surveys. TABLE 2 Indicator 68th Round 66th Round 64th Round Primary sector 4890 5320 5730 Secondary sector 2426 2250 1870 Tertiary sector 2686 2540 2410 The working age population -- labour force -- which stood at 400.8 million in 2004-05 (61st round survey of NSSO), increased to 423.9 million by 2009-10 (66th round survey) and further to 431.7 million by 2011-12 (68th round survey). That means the growth in workforce increased by 30.9 million between 2004-05 to 20011-12 whereas it could add only absorb 15 million during the last nine years in the actual working population. Though it looks like a great achievement, when compared to the levels of job creation during the period 2004-05 to 2009-10, it could only add up one million new jobs while the remaining 14 million jobs were added during the second term of the UPA, which is a major addition but comes in the form of jobs generated by the MGNREGA. It is thus clear that the working population actually declined during the most sizzling phase of economic growth. But while less labour force is coming into the job market, the economy is using them as an instrument to displace the formal or regularised workforce. However, their inclusion in the informal sector is nothing but a loss for both types of labour. The creation of decent employment outside agriculture is one of the biggest challenges that confront India which is trying to achieve faster, sustainable and more inclusive growth, at least in the words of policymakers. INFORMALISATION OF WORKFORCE Now we come to the second feature, i.e., informalisation of workforce. During the 11th Five Year Plan period the average GDP growth was eight per cent whereas the average annual growth in employment generation was down to a mere 0.6 per cent. This indicates the fact that a higher GDP growth did not translate into a higher rate of employment generation. Since the global depression, employment slid down further in tandem with the overall growth rate of Indian economy. In the interim period unemployment rate went up to 10.2 per cent. A more critical structural shift in Indian labour market comes from the agriculture sector. The proportion of workers engaged in farm related activities now accounts for only 49 per cent. Of the remaining, manufacturing absorbed 24 per cent and the service sector, 27 per cent. The pace of employment generation in these sectors, in numbers as well as in percentage, slowed down, leading to a dramatic decrease even in the number of the self-employed. But the Planning Commission refused to acknowledge the fact as well as the survey results till recently. Self-employment came down from 25.8 crore to 23.3 crore between 2009-10 and 2011-12 --- a clear 2.5 crore fall. However, it is not that this reduction in self-employment was counter-balanced by any growth in formal employment. These 2.5 crore self-employed individuals who lost their livelihood joined the casual labour force which went up from 13 crore to 15.3 crore --- a clear indication of the informalisation of labour force. This shift reflects the fact that the labour force is moving away from low value employment in agriculture to underpaid employment in the informal sector instead of moving up on the value scale by becoming parts of the formal labour market. TABLE 3 NSSO Survey LFPR WPR UR 61st Round 66th Round 68th Round 392 365 364 380 374 354 31 25 27 Table 3 helps us to understand the changing dynamics of labour market in India. All the figures are about the usual principal status. Decline in Labour Force Participation Ratio (LFPR), an indication of an economy’s inability to put to use the labour power for productive gain, is increasing, which is not a good indication. The LFPR was down from 40 per cent in 2009-10 to 39.5 per cent in 2011-12. The reason for the decline in labour force participation rate is the failure of manufacturing and service sectors to absorb the labour force that has moved out of agriculture; these people in turn had had to join the standing army of the unemployed or the casual labour force. This indicates that the economy has kept aside a considerable section of the working age population, preventing them from taking part in nation building by being gainfully employed. Also, this indicates a decline of the share of labour in the GDP and national wealth. When it comes to the women workforce, during the last nine years, it witnessed a steep reduction. As per the survey findings, it witnessed 90 lakh reduction in women workforce from causal labour. Out of every 1,000 women capable of working, only 327 could be employed in 2004-05, and the proportion went down to 261 by 2009-10 and further to 248 by 2011-12. On an average, the rate of reduction of women in the workforce was around 4.5 per cent between 2004-05 and 2009-10, which slightly improved by 2011-12, thanks to the MGNREGA. As the chances of being employed by the rural economy are drying up, male workers are migrating to urban locations, leaving the agricultural operations to women workers. Had the MGNREGA not been there, the fate of women workers would evidently have been much worse. As for the third feature, the findings of the 68th round NSSO survey brought out an important fact about the MGNREGA which is being ridiculed by various sorts of thinktanks and self-declared experts. There has been a widespread misinformation campaign that the pressure of wages is increasing due to the high benchmark set out by the MGNREGA. The average daily wage received by casual labours in rural areas engaged in public works other than the MGNREGA work was Rs 121 whereas those engaged in the MGNREGA earned only Rs 107 a day. At the same time, the average daily wage received by casual labours engaged in works other than public works was Rs 170 in urban areas. This confirms that the MGNREGA is not functioning as an impediment in the job market. After the implementation of the MGNREGA, the number of jobs generated by it went up substantially, as mentioned above, by around 14 million, out of which women accounted for an addition of 3.5 million. This is one third of those who lost their livelihood sources during the pre-MGNREGA period. It is evident that while the agrarian distress is pushing the workforce to move out of agriculture and other rural employments in order to try their luck in urban areas, the rural as well as overall employment scenario would have much worse than this if only, contrary to the criticism being mounted by a few, the MGNREGA had not been there. In sum, the 68th round of NSSO survey confirms that India is now undergoing a phase of what has been called job-loss growth. But job-loss growth excludes and restricts a considerably large number of working population from entering the job market, and this has its own spiralling effects on the economy in the long run. It is clear that any job-loss growth can never be inclusive in its nature, no matter what our policymakers shout from the rooftops.

Saturday, June 15, 2013

RBI Paper Explodes Govt’s Inclusion Claim

RURAL CREDIT RBI Paper Explodes Govt’s Inclusion Claim Konduri Veeraiah WHILE releasing the progress report of UPA-2, the prime minister claimed that the growth process in India over the last decade has been more inclusive. Of late the policy documents of the government, including the finance minister’s reply to the debate on allowing more private banks, also harped on financial inclusion, which means access to formal sector financial services for all sections of the people. Apart from increasing the number of bank accounts or branches in proportion to population, another criterion to judge the extent of financial inclusion is the share of funds borrowed by the rural poor from formal financial institutions. FINDINGS BELIE GOVT’S CLAIM But recent revelations from different sources — like the RBI’s working paper, 2009-10 survey of employment by National Sample Survey Organisation, and the Census 2011 — belie the government’s claim. The research conducted by the Reserve Bank of India confirmed the fact that nearly half of India’s population is excluded from the institutional rural credit market. This is also corroborated by the recently released NSSO data. Authenticating the criticism coming from the Left, these reports conclude that the so called reforms have by and large excluded the rural people from the institutionalised credit facilities. This is one of the key components in the structure of poverty as identified by the Human Development Report 2013. The RBI’s working paper titled “Persistence of Informal Credit in Rural India: Regulatory Policies Need to Recognise Changing Landscape” clearly states that informal credit channels that were getting pushed to the back between the 1970s and the 1990s are now playing a key role in the rural credit market. In contrast to the claims about financial inclusion, the paper concludes that two-fifths of rural households still depend on informal credit which “indicates further scope for financial inclusion in rural India.” Institutional credit rose from 29. 2 per cent in 1971 to 61.2 per cent by 1991, but then started declining after it. Similarly, the non-institutional rural credit which slid down to 38.8 per cent in 1981 from its peak 92.8 per cent in 1951, started to shore up after the ‘reforms.’ This clearly indicates that the ‘reforms’ process has excluded a majority of the population from the institutional credit sources. The informal credit delivery channels gradually declined during the 1960s and very nearly broke down during the 1970s. That was the high time in terms of public policy when banks were nationalised with a mandate to expand their rural coverage and widen their ambit of priority to include agriculture and allied activities. This was extended to providing credit facilities to other forms of livelihood sources by bringing them under the ambit of rural institutional financing. (See Table I below.) TABLE I Institutional and Non-Institutional Rural Credit (in percent) Category 1951 1961 1971 1981 1991 2002 Institutional Agencies 7.2 14.8 29.2 61.2 64.0 57.1 Government 3.3 5.3 6.7 4 5.7 2.3 Co-op Society / Bank 3.1 9.1 20.1 28.6 18.6 27.3 Commercial Banks including RRBs 0.8 0.4 2.2 28.0 29.0 24.5 Insurance 0.1 0.3 0.5 0.3 Provident Fund 0.1 0.3 0.9 0.3 Other Institutional Agencies 9.3 2.4 Non-Institutional Agencies 92.8 85.2 70.8 8.8 36.0 42.9 Landlords 1.5 0.9 8.6 4.0 4.0 1.0 Rural Moneylenders 24.9 45.9 23.1 8.6 6.3 10.0 Professional Moneylenders 44.8 14.9 13.8 8.3 9.4 19.6 Traders and Commission Agents 5.5 7.7 8.7 3.4 7.1 2.6 Relatives and Friends 14.2 6.8 13.8 9.0 6.7 7.1 Others 1.9 8.9 2.8 4.9 2.5 2.6 Total 100 100 100 100 100 100 Similarly, the banking statistics released by the RBI also confirms the understanding. There is no doubt that the banking network tripled after the banks nationalisation and adoption of development banking. At the same time, mere expansion of banking network does not suffice to meet the goal of inclusion in terms of lending from formal banking channels. When we consider this, we get to understand that even after the nationalisation of banks and expansion of bank branches, these primarily worked as channels for mobilising capital from rural households instead of infusing the much needed liquid credit into the rural economy. (See Table II below.) TABLE II Year No of Offices Deposits (in Lakhs) Credit (in Lakhs) 1980 16,111 464355 264284 1991 35,134 3100980 1859897 2002 32,443 132999542 15942346 MONEYLENDERS STILL FLOURISHING In recent years, policy interventions have indeed led to a doubling of agricultural credit but the limited access of small and marginal farmers to institutional credit continues to be a matter of concern. Even now the non-institutional rural credit is being administered by three channels — landlords, rural moneylenders and professional moneylenders; all of which are the informal credit sources. After nationalisation of banks in 1969, a package of policies and initiatives ensured that the share of moneylenders in rural credit fell from 61.7 per cent in 1951-61 to mere 20.9 per cent by 1981 and further to 19.7 by 1991. Despite the fact that the country witnessed a rise in rural banking and state aided, supported and financed instruments of financial inclusion such as cooperative banks, NABARD and bank branches whose primary responsibility is to take care of the cultivators’ needs in their specific areas, moneylenders not only persisted in rural India but their operations also experienced enormous expansion. The available data reflect the stagnation in rural banking with the onset of economic ‘reforms,’ particularly after the banking sector liberalisation. In the post-1991 era, the banking sector deviated from the development banking mandate and reverted back to maximising its profits. To ensure this, public sector banks started trimming their rural branches and staff to reduce their overheads. This is revealed by the 2002 AIDIS survey which concluded that 43 per cent of rural households continue to rely on informal finance. The situation today is that 15 out of the major 21 states have witnessed a fall in institutional credit. What is worrying is that the proportion of farmers taking such loans has been increasing and they have more than four-fifths of the operational holdings, thus indicating that nearly 80 per cent of small and marginal farmers are far from accessing the institutional credit to meet their needs. This, the RBI paper concludes, is due to the inadequacy of the credit received from formal institutions, that too not at the time of need, and with a lot of procedural hassles. The data also indicate that despite a considerable expansion of the scope of priority lending and an enormous expansion of financial services sector, there has been an increase in the number of private players, both foreign and domestic. During the winter session of parliament, when the government pushed through a bill to facilitate the corporate houses opening banks, the finance minister told the house that these steps would help expand and deepen the web of branch network, based on which the government intended to achieve its objective of financial inclusion. But the RBI paper says that a mere increase in the number of branches and of financial services does not automatically translate into financial inclusion. Table II clearly shows the gaps between deposits from and credit outflows to the rural economy, thus validating the criticism that nationalised banks treated rural India primarily as a source of deposit mobilisation more than an area needing credit disbursals expansion. Thus one of the reasons for continued dependence on money-lenders, as identified by the RBI, is that formal credit delivery structures have not fully stretched their penetration to villages. DEFECTIVE UNDERSTANDING The RBI paper repeatedly refers to formal credit as the flow of financial products in the country’s formal financial system. But here lies a point. The RBI treats all institutionalised lending, both private and public, as formal credit. But these also includes the micro finance institutions, thrift groups and chit fund companies like the infamous Sarada company that wrecked the life of rural poor under TMC rule in West Bengal. Similarly, though the RBI treats the so called micro financing as a formal channel, one cannot really equate it with formal nationalised banks. If we consider these two sources of rural credit — chit funds and MFIs — as non-formal channels, the percentage of rural poor depending on such channels goes close to 90 per cent. One more important aspect has to be taken into consideration. Since the beginning of the ‘reforms,’ the rural credit market has changed. Till 1991, the credit market has been primarily linked to the productive credit which is channelled to farmers in the first instance. With the central government bringing certain other welfare measures such as financing self-employment and establishing finance development corporations for the SC, ST, BC and other groups, rural credit has gradually shifted to non-farm sources of employment. At the same time, the infusion of liquid capital into the rural economy took a beating in the ‘reforms’ period. But as the state finance for rural livelihood sources dried up, it created scope for a revival of the informal, non-institutional credit channels, with the people resorting to these sources to meet their contingent requirements. That is why we find the rural labour borrowing from moneylenders, still at the level of 1999, despite the opening of private banks in large numbers and the mushrooming of MFIs across the country. Thus recent developments in financial sector have strengthened the division in which asset owning classes are garnering institutional credit in rural India whereas non-asset owning classes are left at the mercy of the private, informal channels of rural credit. This is resulting in distress situations of the kind debtors in Andhra Pradesh are experiencing.