The government is trying its best to fund the unfunded, but to implement it successfully, it must listen to those who are affected by its policies
If there is one thing that the Narendra Modi government seems earnest and active about, it is bringing the unbanked into the banking fold and providing funds to the unfunded. For the first group, the government launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) one year ago, pushing banks to open no-frills accounts for the unbanked Indians with minimal know your customer (KYC) requirements and access to a debit card, insurance and overdraft facility of Rs5,000 for those who keep the accounts active. The scheme claims to have opened 174.5 million accounts which had deposits of over Rs20,000 crore at the beginning of August.
Modi sarkar seems confident that funding the unfunded—the large swathe of small traders, vendors, hawkers, kirana store owners and self-employed—could bring about a significant change in the prospects for economic growth and employment. This has some basis. Prof R Vaidyanathan, in his book India Uninc., points out that unincorporated businesses contribute a massive 45% of national income. In contrast, ‘India Inc.’—comprising the large corporate groups that hog most of media space—contribute only 15% of national income, while the even more glamorous businesses, information technology (IT) and foreign investment, contribute a mere 5% and 8%, respectively, to national income, says Prof Vaidyanathan.
So, “Start-up India, Stand Up India” was prime minister Modi’s slogan in his Independence Day speech, to implement which, a myriad different initiatives have been launched almost simultaneously to achieve the objective of creating new jobs through entrepreneurship.
• The Small Industries Development Bank of India (SIDBI) has launched two new programmes for start-ups among small and medium enterprises (SMEs) with an allocation of Rs12,000 crore: the India Aspiration Fund of Rs2,000 crore and the SIDBI Make in India Loan for Small Enterprises (SMILE) with a budget of Rs10,000 crore. Finance minister Arun Jaitley claimed that the two funds would catalyse “tens of thousands of crore of equity investment in start-ups and MSMEs, creating employment for lakhs of persons, mostly educated youth, over the next 4-5 years”.
• Under The Pradhan Mantri Mudra Yojana (PMMY), banks will be pushed to disburse over Rs1.2 lakh crore to tiny businesses. Over Rs14,000 crore have already been disbursed to 20,000 people says a news agency report, quoting finance ministry officials. These loans range from Rs50,000 (to small vendors, electricians, plumbers, etc) to Rs10 lakh, most of it without collateral and an interest rate of 12%pa. Part of this lending will be through the Mudra card which will work like an overdraft that starts at Rs5,000 and allows vendors to meet their daily needs. Depending on their credit history, the borrowing can go up to Rs50,000 or more, say sources.
• Under PMMY, the Micro Units Development and Refinance Agency (MUDRA) has earmarked Rs20,000 crore for developing start-ups with a credit guarantee corpus of Rs3,000 crore. The first loan of Rs35 crore to Satin Credit Care Network, for lending to retailers and vegetable vendors was granted on
• The banking licence to Bandhan Bank, one of India’s most successful micro-finance company, helps the strategy. Bandhan Bank, which launched with 501 branches, plans to focus on small entrepreneurs, hawkers and vendors. Speaking at the launch, finance minister Arun Jaitley talked about extending one trillion rupees worth of funds to SMEs across India, as it is they who will create jobs.
• Then, in July this year, the Union Cabinet approved the first integrated national policy for developing skills and promoting entrepreneurship 2015, which again has job creation, training, employability, incubation and mentorship for entrepreneurs as its core objective.
Add all this up and you will find that this is the first time since independence that we have such a sharp focus and multi-pronged approach to encouraging the growth of tiny, small and medium enterprises as well as the self-employed. Over 54% of India’s population is below 25 and the focus on job creation at the grassroots level is probably the fastest way to meet the aspirations and employment needs of young India.
The question is: If these programmes have to work, is availability of funding enough? Is entrepreneurship and transformation only about access to loans? Will a top-down approach to policy-making work without taking into account other factors that affect small and tiny businesses at the local level? For instance, Prof Vaidyanathan, in India Uninc
., points out that “85% of India is self-employed are subject to harassment and extortion by municipal, state and central government agencies and tax authorities.” How is any of this addressed in the many policies that have focused on skills or funding? Petty corruption and red tape have destroyed many a budding entrepreneur in India. Consider one example of how things can go terribly wrong, despite best intentions.
Sometime in August this year, the Maharashtra government released a very comprehensive “Draft of Retail Trade Policy Maharashtra 2015”. To most people, the Draft Retail Trade Policy appeared to be a welcome effort to eliminate the hurdles for the retail trade. It talks about relaxation of shop timing under the Shops & Establishment Act, filing of consolidated returns under 13 different labour laws, inclusion of food and grocery in essential services, relaxation of stocking limit under Essential Commodities Act, relaxation of Development Control Regulations, exemption from APMC (Agricultural Produce Marketing Corporation Act), allowing retailers to buy directly from farmers, set up warehouses on agricultural land, operation guidance lines for Mathadi Act, etc.
However, some hundred thousand retail traders and shopkeepers erupted in anger accusing the government of ‘back-stabbing’ them. The Swadeshi Jagran Manch, which has been at the forefront of focusing the government’s attention on small businesses, said that “the policy will promote corporate retail at the cost of traditional retailers.” They allege that the draft retail policy is so focused on large retail that it failed to take into account the operating conditions and harassment faced by tiny retailers who were apparently cut out of many of the benefits and feared victimisation through ‘inspector raj with raids, seizures and penalties’.
The truth would be somewhere in the middle; but retailers are right in being angry about not being consulted or represented when the policy was drafted, although 96% of retail is in the unorganised sector (small and medium-sized kirana stores). This underlines a current system, where large, organised businesses, with powerful lobbies, have the largest influence on policy-makers. It is also contrary to the government’s claimed focus on small businesses.
This attitude, which will ultimately decide the success or failure of the government’s many plans and programmes is, by no means, limited to the retail trade. The concept of ‘funding the unfunded’ is laudable, but it is not clear how much of these will end up as a loan mela if the borrowers cannot repay. There is also no effort to educate borrowers about consequences of default in the formal system although they are being tracked by credit information companies.
When it comes to financial inclusion, an area in which Moneylife works, we see the same reluctance to focus on real financial literacy or to address the important issue of credit histories. Lack of awareness about the consequences of such default has already blighted the future of many individuals and entrepreneurs, forcing even educated persons into the arms of informal lenders. But we see no signs of the finance ministry or the Reserve Bank of India wanting to understand or address the issue or even engage with ordinary consumers.
Ultimately, the best of good intentions will not translate into positive change, unless we see a change in mindset. A government that refuses to engage with those who are affected by its policies can only have limited success in its implementation.
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at email@example.com)