Kuldip Maity

When the conventional wisdom shouts and tells us that traditionally a village economy is change resistant it doesn’t spell out one important assumption embedded in it – the village economy lacks connectivity and empowerment to change. The same assumption also got seeped into the making of policies to develop the rural economy. Let us for example take the case of education. Prof Amartya Sen while commenting on the Indian development connundrum repeatedly pointed out the fact that the Indian policy makers always assumed that the village poor needed to be trained in trade so that they could be self-sufficient. While countries like China and the then USSR focused on general education at the basic level, India’s policy focus treaded a different course thereby restricting the provision of choice and options to the rural human capital.

With changes inititated in the nineties that gradually opened the economy and rising connectivity both physical and otherwise things started to change in the rural economy as well. The rural folks long understood as change resisitant started to challenge the conventional wisdom. Youngsters started to migrate out of the villages into city and when they returned they validated the changes blowing across the country.

Among changes that would go down the history as an important one was the emergence of the microfinance industry. From the day India won its freedom the aim of the nation was to get rid of poverty and tread the path of self reliance. However initiation of the transition of the concept from the macro to micro wasn’t an easy traverse. With the burgeoning microfinance industry the road towards self sufficiency has started moving towards a new horizon by creating micro enterprise and generating employment chains along the way.

One must remember that employment as an outcome directly related to microfinance is not yet available at the macro level and support to the claim being made here is mostly experiential. Our experience tells us that every micro business has a considerable employment generation impact. Take for example the case of goat rearing. In the villages a goat rearing unit can be set up with little capital. Some goats can be made to kid twice in 18 months. They are not difficult to keep and can be reared to yield various benefits.

Our case study shows that funding a goat rearing unit would soon lead to creation of jobs as gothard for more that two persons. A simple back of the envelope calculation shows that just by funding a family to rear goats would not only leverage it off poverty but would also create earning capacity of two more persons at the least and would thereby create support for two more families. And we are talking about creation of an indirect employment chain.

There are similar examples from other trades as well but to understand the impact that the industry is maing towards the cause of poverty alleviation let us extend the goat rearing example. If there are 100 households in a village, a conservative estimate to understand the magnitude of the spread effect, one support goes on to create sustenance for three families directly – three percent of total cohort in the village. Not only that it creates demands in the local village economy that has a multiplier impact.

It also has a social impact. The connectivity has also made the poor aware of the value of education. With the creation of surplus through boosting micro enterprise the microfinance industry is also creating a social impact with varied but all positive impact. With the creation of surplus and greater awareness gained through microfinance interaction those under such finance umbrella now aspire their children to be educated in schools for general instructions. What Prof Amartya Sen rued as the failure of the policy – a push factor – is now being gained through pull because of financial capacity being created by the microfinance activities.

Let me round up by saying that microfinance activity is creating employment directly and indirectly and also employability in future by directly creating a social impact conducive to boosting aspirations for education.

Eighties provided the Black Swan to the Indian Economy. As the decade drew to a close the most improbable thing happened. For the first time the economic narrative of India changed and the journey from a public sector economy to a market driven economy began.

Why Black Swan? Because, before the discovery of Australia, everybody thought that a swan was white. When Australia was discovered it was seen that there was a black bird that actually resembled a swan. It literally shook a global belief by catching it by the scruff of its neck and forcing a new reality through the gullet of the civilisation. Much later, around 2008, Nassim Nicholas Taleb -- essayist, statistician, trader and many more – coined the term to explain defining trigger for changes in the history of civilisation. And all those changes were higly improbable till the time it happened.

Similarly, till India stepped into the nineties nobody could think that the Indian govenrment would ever withdraw from controlling the economy the way it used to, that the subsidy regime would slowly shrink and the defining role of the government in the alleviation of poverty would take up a totally new hue in the form of spreading the culture of entrepreneurship. Self sufficiency from being a macro concept would metamorphose into ‘to each on his own’ with the government and the private initiative becoming partner in spreading entrepreneurship at the base of the pyramid. It happened because of the huge financial crisis – the Black Swan – that the Indian government faced at the beginning of the nineties and was forced to change its strategy of development through direction and allow the market to take over the direction setting role.

With the liberalisation, microfinance emerged, among others, as an important partner of the government in the task of reshaping the economy. The microfinance industry’s task, over a period of time evolved into that of a facilitator of not only channeling financial capital but also holding the hand of the poor in learning the use of money and thereby becoming self sufficient.

But the process also needed funding institutions that would specialise into providing funds to the microfinance industry in a dedicated way meant for the defined addressees. Lauched on 8th April, 2015, Pradhan Mantri Mudra (Micro Unit Development and Refinance Agency Ltd) Yojana is an attempt towards this end. This scheme aims at channeling upto Rs 10 lakhs per ticket to micro enterprises for manufacturing, processing, trading and services. The defined addressees by gender in the scheme are women who are the focus of the microfinance industry.

There has also been an important develoment that would go a long way to help the microfinance industry. The credit guarantee fund scheme for Stand-up India has also been enhanced from Rs 1 crore to Rs 2 crore extended to NBFCs for collateral free for medium and small enterprises loan.

The data available from the day MUDRA scheme was lauched till 2017 – i.e. the first two years – shows that 7.5 crore loan accounts availed credit exceeding Rs 3.17 lakh crore. Sanctions and lending support made during FY 2017 amounted to Rs 3708.94 crore and Rs 3337.20 crore respectively.

In short, with the new paradigm of poverty alleviation through the creation of micro entrepreneurs, Indian economic dynamics is showing a tremendous resilience and astuteness in generating appropriate institutions in promoting the cause of creating a virtuous cycle of prospertity by challenging the apparently unconquarable vicious cycle of poverty.

When Y V Reddy took over as the Governor of the Reserve Bank of in 2003, by his own admission, he didn’t bring with him the experience of a banker. But a career bureaucrat that he was, he understood the plight of the crores of citizens without any access to formal institutional finance.

By his own admission, when he started reviewing the Indian banking scenario from a customer point of view he realised that there were three things that needed to be taken into account.

A) Ensuring that the depositors money is safe

B) Ensuring an easy and affordable remittance mechanism that required using of appropriate technology.

C) A KYC structure that through periodic monitoring would screen out fraudulent and other illegal transactions.

This was the genesis of the famous financial inclusion proposition articulated in his 2005 monetary policy and set the stage for digital banking.

The now obvious but then scarcely perceived benefit of digital banking was to get around the problem of physical interface between a bank and its customers for transactions. In the rural areas where cash based transactions rule, for a rural labour to approach a bank means sacrificing a day’s earning which is a huge cost to him. Technology based banking reach-out would help cut this cost out.

The frowning of sceptics notwithstanding the digital banking is fast taking root as the affordable internet based mobile connectivity has started penetrating even the remotest of villages in the country.

The main issue here is the ease of transaction on a properly designed digital transaction vis-a-vis the cost of cash based transactions to the system. Cash – be it coin or notes – needs to be guarded against counterfeiting. That itself is expensive. While one can check notes for their veracity, it’s difficult to ensure the same for coins although adequate safeguards exist to deter the fraudsters or attempts to melt them to use the metals for other purpose. Also machines to check the notes in the villages are not easily available. All of us know what we are talking about here. There is also the issue of banks’ refusal to accept coin deposits mainly because of the claimed inconvenience of storing.

On the other hand, digital transaction based on IMPS is instantaneous and convenient for low value transactions and just needs the phone number of the payee.

Expectedly, the entire experience wasn’t encouraging. The app was evolving and affordable mobile internet network penetration was just taking shape.

Going by the RBI data, digital transactions reached a record high of 1.11 billion in January, 2018, up 4.73 per cent from the 1.06 billion in December last year. Total transaction value surged to Rs131.95 trillion compared to Rs125.51 trillion in December, 2017.

UPI enabled transactions crossed 151.7 million mark in January compared to 145.5 million in December, 2017 – a surge of 4 per cent. But the increase in value for the same period has been a mind blowing 18 per cent to Rs155.4 billion.

Over the entire 2017, UPI based transactions grew by a massive 7000 per cent.

This has happened, as I argued, mainly because of affordable mobile internet network penetrating deeper and deeper into the rural India. The higher the spread greater would be the impact of financial inclusion that would in turn benefit the economy enormously.