The Hindu Business Line : Is financial inclusion the recipe for poverty alleviation?

As a measure to reduce poverty, the concept of financial inclusion has a novel but hollow ring to a problem still haunting us sixty years on, says ASHOAK UPADHYAY.

More than half the rural population is financially bereft.

On February 29, 2006, the Finance Minister, Mr P. Chidambaram, introduced a new term into the economic lexicon of policymaking. Noting the findings of the NSS 59th Round (2003) that of the total number of cultivator households only 27 per cent receive credit from formal sources and 22 per cent from informal sources, the Finance Minister informed the House that the remaining households, mainly small and marginal farmers, have virtually no access to credit.

“With a view to bringing more cultivator households within the banking fold, I propose to appoint a Committee on Financial Inclusion. The Committee will be asked to identify the reasons for exclusion, and suggest a plan for designing and delivering credit to every household that seeks credit from lending institutions.”

It is no accident that the concept of financial inclusion came to the forefront in 2006-07, in retrospect, the high point of the organised economy’s sustained high growth. Barring agriculture, just about every indicator that year seemed to vindicate the decade-long reforms, for which understandably the government claimed credit for.

That warm glow of prosperity only seemed to throw in sharper relief a countryside of declining fortunes and farmer-suicides, the worst manifestation of a systemic crisis that had been brewing for years and had been tiptoed around. Not this time.

The Finance Minister and the Prime Minister reminded the country that they were tuned to the woes of the blighted, that they had a programme to fix the crisis and a new name for it: financial inclusion.

Concern without anxiety

Subsequent to the Budget announcement, the Reserve Bank of India appointed a committee with Dr C. Rangarajan to flesh out this term. Nabard naturally was roped in and, in that same year, the central bank voiced a similar sentiment about financial inclusion and lack thereof in its Credit Policy.

The term had entered into economic discourse, a concept that seems so simple in its implications and operation. After all, what better way to start including than by determining who is excluded. The term did more than anything else to strip the problem of deprivation — most small and marginal farmers without any access to credit — of all anxiety and judgment.

It is the post-modernist response to “Garibi Hatao” and before that “Land to the Tiller!” and various slogans against usurious money-lending, symbols of peasant movements from West Bengal to Kerala via Andhra Pradesh.

Financial inclusion/exclusion is bereft of all praxis, every ideological or judgmental response to a shameful neglect of the most vulnerable sections of society. The term formalises a human problem into an abstract and vaguely organic process of movement, the welcoming of the outsider into the fold.

But who are the financially excluded? Mr Chidambaram told the House in 2006 and subsequently that more than half the household cultivators, small and marginal farmers had no access to credit at all. Dr Rangarajan prefaced the Nabard report on financial inclusion by bemoaning the dismal cover of the formal banking system despite its “vast network”.

Even the 27 per cent farm households indebted to the formal sector were bound usuriously to the moneylender. In comparison they are privileged because 51 per cent do not enjoy even the dubious privilege of an entry in the moneylender’s books.

This is not just about lack of money; it means an absence of all links to the exchange economy and transactions. Come to think of it, to be financially excluded like that where even a moneylender would not consider you fit to squeeze must mean a complete loss of self.

Decline of self worth

Who knows if that kind of nothingness or its prospect which has also afflicted relatively well-off farmers squeezed by the high cost of cultivation, was not responsible for the ultimate act of despair?

To end a life empty of relevance in an exchange economy is the culmination of that tragic journey of self-worth the distressed farmer had travelled from the days of organised resistance and struggle for a better life.

But the concept of financial inclusion captures neither the poignancy of that journey into a private hell nor the realisation that its persistence nearly 60 years after Independence is more a reflection of abysmal failure than wise reckoning.

That is because policymaking has a wonderful way of reinventing itself. The Nabard report does that with sincerity of purpose. Its preface makes it clear in case there was any doubt that “access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and social cohesion”. Something similar was said in the early 1960s by Profs Dandekar and Rath in their seminal work, Poverty in India. The context — social cohesion — remains; the language has changed,

With more than half the rural population financially bereft, perhaps emotionally secluded in their despair, all that remains for the concept of financial inclusion is its measurement on a global scale.

Globalisation of poverty

Ms Mandira Sharma of the ICRIER has done just that by evolving an index and putting India on it to figure just how poor our poor are on a world scale. If Indian billionaires can be measured against the Western ones, why not the poor against their hapless counterparts elsewhere?

Ms Sharma defines financial inclusion not simply as an absolute norm of access to financial resources but by the “ease of access” That makes sense in the context of an index for cross-country comparisons.

The financial index measures access on a scale from 0 to 1. The index is meant to capture information on various aspects of the inclusion process. Cross-country comparisons require that kind of computation given the possibility that single indicators of inclusion can often be misleading.

Russia, for example, tops with bank accounts per 1000 but is the lowest for bank branches per 100,000 adult people. For this index, Ms Sharma restricts herself to three indicators — banking penetration, availability of services and usage of the banking system.

How excluded are Indian poor?

Having computed the index that is admittedly limited for lack of adequate information, we find India 50th, below Kenya and Morocco, among the 100 countries that were ranked.

Just what this means from a policy viewpoint is not clear, but for the first time we have a measure of how far India has to climb up that inclusion ladder.

The idea of poverty alleviation through financial alleviation has moved from the dirt and grime of adopting change to seminars and conclaves in Delhi and Mumbai on just how to innovate financial inclusion.

The ICRIER study is the first and more will follow, honing the index further perhaps. For all practical purposes though, the Finance Minister’s citation of NSSO data, showing more than half the farmer households out of reach of every conceivable money source but their own after all these years, will have said it all.

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