The Hindu Business Line : A grassroots approach to growth

The latest scorecard of the country puts the GDP growth at an impressive 9.4 per cent and confirms the likelihood of India joining a select club of trillion-dollar economies.

But the success story would not be complete unless this growth trickles down and impacts the bottom of the pyramid. This would call for a closer look at another economic indicator — United Nations Human Development Index.

HDI is a comparative measure of life expectancy, literacy, education and standard of living of countries. It is also used to measure the impact of economic policies on the quality of life. In the HDI ranking, India ranks 126 among 177 countries, much below Namibia, Tajikistan, and Morocco. If India wants sustainable growth, its low-income segment must be roped into the economic play — be it financial system, education or employment — and its standard of living improved.

In the light of this situation, the 10-point code of conduct suggested by the Prime Minister assumes increased relevance. As he said, An inclusive approach would ensure that the prosperity of economic growth is distributed to the grassroots level rather than creating cesspools of prosperity. An improved purchasing power at the bottom of the pyramid will give an upward push in the demand for goods and services and act as the power engine for the economy. A strong domestic demand will, in turn, insulate turbulence on the export front.

Financial System

One of the reasons attributed for farmer suicides is their exclusion from institutional finance and the absence of knowledge about credit lines. About 46 million farming households do not have access to institutional finance. With a population of over a billion, there are only 300 million accounts covered by 220 commercial banks having 70,000 branches. This means a tremendous opportunity for banks to reach out uncovered areas. For an equitable and broad-based economic growth, the Finance Ministry even set up a committee on financial inclusion.

In its Mid-Term Review of the Annual Policy 2005-06, the Reserve Bank of India advised commercial banks to make available “basic banking” and open “zero balance financial inclusion account.” to the excluded sections of society. This is a promising move that will introduce formal banking to the rural underprivileged. Under this scheme, the banks are encouraged to give general-purpose credit card with 50 per cent of the outstanding amount treated as indirect finance to agriculture — a priority sector. But without clearly-defined rules, it needs to be seen how allowing free access to lines of credit will move the rural households away from local moneylenders.

To provide inclusive finance to the rural and semi-urban households, a Bill is before Parliament seeking to regulate and promote micro-finance institutions (MFIs). About 75 per cent of micro-finance clients are handled by non-banking finance companies and non-profit organisations. The Bill allows mobilisation of deposits only by registered MFIs, societies, trusts and cooperatives and excludes NBFCs and non-profit organisations. Second, the Bill envisages regulation of the MFIs by the National Bank for Agriculture and Rural Development (Nabard).

Hence, there will be dual regulation in the micro-finance sector, one by the RBI on NBFCs and the other by the Nabard on MFIs. This anomaly demands government attention. The question is with the micro-credit volume estimated at Rs 130, 000 crore, can the RBI be left out of this sphere.

For wider reach, commercial banks have to be innovative and design affordable products and improve delivery methods. They have a vital role to play by becoming the “knowledge centres of the rural areas”. Linkage models — that is, tying-up banks that have funds but not the reach with MFIs that have the reach but are limited by capital and risk management techniques — are already being developed. This is a healthy development where the MFIs will make the credit calls and service credits for a share in banks’ interest, thus paving the way for networking of specialisation.

Agriculture

In recent years, the farm sector’s contribution to GDP has been falling. Nevertheless, its growth is vital for sustained economic development. The government has proposed a Rs 25,000-crore investment plan for agriculture.

Inclusive growth demands steps to harness the research and development work happening at agricultural universities and researches establishment.

The Training and Visit programme must be strengthened to make extension farming a participatory development programme for the rural families. Such programmes must also be used to generate farm data so as to develop an effective early warning system.

Today, to avoid living in perennial debt, the farmer is more worried about net income than productivity.

Agriculture being a ‘State’ subject, the Centre must adopt an inclusive approach by encouraging private investments and having meaningful dialogues with the States. This will help achieve the target farm GDP growth of 4 per cent-plus.

Small medium enterprises

For inclusive growth, the SME sector needs effective government support. SMEs account for 40 per cent of domestic production, 50 per cent of exports and 45 per cent of industrial employment.

While producing 8,000 value-added products, they give employment to 28 million people. Policy-makers must appreciate the importance of SMEs and empower them to face competition, particularly their Chinese counterparts — both in the domestic and international markets.

China’s 42 million SMEs (compared to three million in India) account for 99 per cent of all enterprises and provide 75 per cent of the jobs in the urban areas. Thus, the Chinese Government is implementing a special law for promoting and protecting these units.

Unfortunately, in India, SMEs do not have such level of support. The preferential lending policy announced in the Budget for SSIs is a non-starter.

Other incentives for SMEs remain on the drawing-board. The Finance Ministry is considering a knowledge enterprise fund with an initial outlay of Rs 500 crore. Much more needs to be done to prepare the SMEs for global exposure and recognition.

India is on the threshold of becoming a manufacturing hub, and only an inclusive approach would pave the way for accelerated and sustained growth.

(The author is a Chennai-based chartered accountant.)