A game-changer

Financial inclusion will plug leakages from economic recovery into informal savings outfits

By Mohan Sule

Even as there is a sense of optimism, if not euphoria, over the incremental steps being taken by the Narendra Modi government to put the economy back on track, Reserve Bank of India’s Raghuram Rajan has introduced a note of caution. He feels there is a danger of foreign investors, emboldened by the loose money policy being followed by their central banks to kick-start the stalled growth, pulling out of emerging economies if the recovery in the US acquires momentum. Such a development will prompt the country’s Federal Reserve to depart from its guidance of holding interest rates near bottom this year. This raises the possibility of a repeat of what happened early calendar year 2009, when the Indian stock market melted on outflow of foreign capital despite the economy projected to expand 8-8.5% in the fiscal ended March 2009. However, a run on Portugal’s biggest bank in July shows that the mature economies have a long way to go before they can be said to be in the safe zone. Also, there is a certain comfort in knowing that central banks and governments are better equipped to deal with such kind of crises. Western nations have identified banks that are too big to fail because of the likely impact on the domestic and global markets. The Portuguese government’s bailout, for instance, contained the fallout from spreading to rest of Europe. Liquidity pumping could resume to prevent another Great Depression of the 1930s, when supply of money was restricted.

Notwithstanding his bearish stance, the RBI governor deserves gratitude for building up forex reserves to defend a run on the currency in anticipation of such a scenario. The cautiousness, which keeps the rupee depreciated and widens trade deficit, is necessary till the investment climate for foreign investors improves. If not, the Indian currency could plummet even below the current 61 a US dollar, triggering the moderating inflation to flare up. Despite hiccups such as ambiquity on retro taxation and lack of clarity on General Anti Avoidance Rules, which give the taxman arbitrary powers to initiate recovery proceedings, sentiments have improved markedly since the last week of May when the National Democratic Alliance won a decisive mandate. The market has come off from its lifetime high not because of any doubts about the prime minister’s commitment to reform but due to the uncertainty created by the US decision to undertake air-strikes in Iraq and the resultant rise in crude prices. The threat of drought is receding. Hopefully, food inflation will cool down. Though big-bang reforms may have to wait, the budget initiatives to boost infrastructure have raised hopes of higher growth. One of the most important thrusts, which could be Modi’s flagship policy just as the rural employment guarantee scheme was Sonia Gandhi’s, is financial inclusion. Connecting poor villagers with the banking network could be the most ambitious economic program to be launched in India. With memories of Indira Gandhi’s loan melas and Sonia Gandhi’s farm-loan waivers, the plan as expected has met with resistance from those who prefer the present-day banking set-up, which keeps away even the urban poor. Despite a robust credit appraisal system in place, banks are struggling with bad loans. The bribery scandal at Syndicate Bank is a confirmation of the government-owned banks’ role in fostering crony capitalism.

Nothing has illustrated the failure of traditional banking more starkly than the success of Sahara, which has been told by the Supreme Court to refund Rs 20000 crore to small depositors, mainly from semi-urban areas. If the rural guarantee scheme can hand out 100 days of wages a year to qualifying recipients without any work to show, the overdraft facility proposed as an incentive can be considered seed money to bring the non-banked into the system. The benefits of the project will be immense even if half the participants imbibe good banking habits. Future loan write-offs will be nipped. The overdraft can be viewed as a fiscal stimulus to revive the economy just as linking guaranteed wages of rural folks to productivity activities. There will be a record of delinquent accounts, which will enable the government to precisely focus fiscal policies to address the dark areas of the economy. The Modi government’s refusal to cap farm subsidies, and thereby scuttling the WTO accord, too, had received lots of flak initially. Now there seems to be a consensus emerging that the position to protect Indian farmers is justifiable. Apart from providing a powerful boost to the economy, financial inclusion will prepare the poor to participate in the imminent recovery. Besides accelerating urbanisation, wages from job opportunities will not find their way to Ponzi schemes run by scamsters.