As part of its total financial inclusion (TFI) and other programs to expand the reach of formal banking to cover the poor, central and state governments in India have been encouraging the issuance of debit cards along with bank accounts. It is also proposed to deliver many direct cash transfers like pensions and scholarships to beneficiaries through debit cards.
Taking access to credit one step forward, it has also been proposed to deliver cash through mobile phones in various mobile banking models under discussion. Accordingly, people can use their cell phones as a mobile personal ATM, from which they can easily transfer cash for various purchases.
While it is true that debit cards would enhance the ease of access to banking services, especially in urban areas, there is growing evidence from the research of behavioural economists that highlights attention on the cognitive biases thrown up by such easy access.
Behavioural economists have found that people, especially poor people, exhibit dynamically inconsistent preferences, wherein they attach a higher value to the present than any future time, "a preference for one that arrives sooner rather than later". Such hyperbolic discounting models of human behaviour show very high discount rates for the immediate against a very low one for distant time horizons.
The commonest manifestation of such time inconsistent preferences is the self-control problem. This relates to a variety of topics including procrastination, addiction, efforts at weight loss, sending children to school, deferring consumption, and saving for retirement. In this framework, extensive research done over the past decade on savings among the poor point to self-control problems that plague people's savings and consumption decisions. They have found that people succumb to the choice of spending on immediate needs and demands than saving for the future though they had originally planned to save for a future need (like child's education or building a house).
Accordingly, behavioural economists have advocated use of commitment savings products and default savings options that lock in savings and increase the cost of withdrawl so as to overcome the inconsistency in inter-temporal preferences. By the same argument, facilitating easy access to bank accounts works towards amplifying their preference for the immediate and against the future.
In the circumstances, access to banking services through a debit card (or mobile phone) enables people to withdraw their savings easily from the nearest ATM center, without having to physically visit and endure the formalities of withdrawing the money from a regular branch. In a scenario where customers have a simple no-frills account and easy access to ATM centers, the debit cards (and mobile phone banking) may end up exacerbating the self-control problem and encourage people to withdraw available money for immediate consumption than future needs. Ironically enough, the relative illiquidity of a savings bank account may be preferable to the liquidity of a debit card (or mobile phone account)!
In other words, technologies like debit cards and mobile phones come up against a trade-off problem. On the one hand, they enable easier access to formal credit mechanism. On the other, they also run the risk of feeding into people's self-control problems, which has the potential to lower their savings appetite while exacerbating their consumption urges. Therefore, while embracing such interventions that facilitate easier access to formal credit mechanisms, it is important to strike the appropriate balance.
Showing posts with label TFI. Show all posts
Showing posts with label TFI. Show all posts
Monday, April 19, 2010
Tuesday, March 16, 2010
Addressing petroleum and diesel subsidies
I have blogged recently about how developments in UID and TFI opens up considerable opportunities in re-designing various subsidy disbursement channels to both improve targetting and increase its economic efficiency. This includes the possibility of transferring subsidies directly as cash (into the UID-linked bank account of the beneficiary) and thereby dismantle price controls or more accurately target the subsidy (like in case of PDS) towards its intended beneficiaries.
However, addressing the most salient and much-debated petroleum subsidies could be much more difficult. Since petroleum is directly or indirectly consumed by everyone in different forms, accurate targetting becomes very difficult. Apart from the difficulty of estimating the relative impacts of the higher prices, such direct cash transfers are also too complex to administer.
Compounding the problem is that eliminating price controls, while politically difficult, will also have a ripple-on effect on the economy. Unlike all subsidized products, petroleum is a critical input in the production of most other goods and services. Its price is a function of the cost of production of all these goods and services. Most critically (and politically damagingly), a sudden dismantling of the subsidy will surely have a cascading impact on the prices of food and other essential commodities.
Here are a few possible theoretical solutions. The first one to have a dual pricing system (a la PDS for petrol and diesel) and then target the subsidies as cash transfers through UID-linked accounts is both a step backwards and comes up against the aforementioned problem of cascading effect. The second one is to eliminate price controls and disburse subsidies, using the UID-linked bank accounts, as a revenue-neutral cash transfer to an identified group of beneficiaries. This will mitigate any possible inflationary impact of rise in petroleum prices and thereby smoothen the sudden shock arising from it. The cash transfer can have a built-in sunset clause whereby the subsidy would decrease continuously and expire over a period of time.
Another alternative would be prepare a widely-debated (build some level of consensus) self-acting action plan (even a legislation, linked to say the Fiscal Responsibility and Budget Management Act!) to gradually phase out the subsidies. This action plan can be back-ended and fairly long-drawn out to mitigate any adverse impact and manage inflationary expectations. Finally, a more optimistic alternative is to wait for global petroleum prices to fall to $30 a barrel and then use the resultant price cushion to dismantle price controls and thenceforth let the domestic retail market prices respond to the global market prices. But the problem with this approach is that when the reckoning comes, instead of dismantling the price controls, the clamour will be to pass on the benefits of lower price to the consumers!
The government's current policy on petroleum subsidies is clearly to make piece-meal increases when the crisis deepens. Such efforts come up aginst stiff political opposition, even within the ruling party's, and for every successful effort there are possibly three or four failed ones!
However, addressing the most salient and much-debated petroleum subsidies could be much more difficult. Since petroleum is directly or indirectly consumed by everyone in different forms, accurate targetting becomes very difficult. Apart from the difficulty of estimating the relative impacts of the higher prices, such direct cash transfers are also too complex to administer.
Compounding the problem is that eliminating price controls, while politically difficult, will also have a ripple-on effect on the economy. Unlike all subsidized products, petroleum is a critical input in the production of most other goods and services. Its price is a function of the cost of production of all these goods and services. Most critically (and politically damagingly), a sudden dismantling of the subsidy will surely have a cascading impact on the prices of food and other essential commodities.
Here are a few possible theoretical solutions. The first one to have a dual pricing system (a la PDS for petrol and diesel) and then target the subsidies as cash transfers through UID-linked accounts is both a step backwards and comes up against the aforementioned problem of cascading effect. The second one is to eliminate price controls and disburse subsidies, using the UID-linked bank accounts, as a revenue-neutral cash transfer to an identified group of beneficiaries. This will mitigate any possible inflationary impact of rise in petroleum prices and thereby smoothen the sudden shock arising from it. The cash transfer can have a built-in sunset clause whereby the subsidy would decrease continuously and expire over a period of time.
Another alternative would be prepare a widely-debated (build some level of consensus) self-acting action plan (even a legislation, linked to say the Fiscal Responsibility and Budget Management Act!) to gradually phase out the subsidies. This action plan can be back-ended and fairly long-drawn out to mitigate any adverse impact and manage inflationary expectations. Finally, a more optimistic alternative is to wait for global petroleum prices to fall to $30 a barrel and then use the resultant price cushion to dismantle price controls and thenceforth let the domestic retail market prices respond to the global market prices. But the problem with this approach is that when the reckoning comes, instead of dismantling the price controls, the clamour will be to pass on the benefits of lower price to the consumers!
The government's current policy on petroleum subsidies is clearly to make piece-meal increases when the crisis deepens. Such efforts come up aginst stiff political opposition, even within the ruling party's, and for every successful effort there are possibly three or four failed ones!
Saturday, March 6, 2010
Why PDS should continue to remain disbursed through FPS
The Public Distribution System (PDS) which distributes food rations among those classified Below the Poverty Line (BPL) in India deserves every ounce of the criticism heaped on it for being the embodiment of corruption, inefficiency, and political patronage in the delivery of welfare benefits. Not only does it not meet its desired objectives, but it also ends up very badly distorting market incentives. In this context, over the years, there have been numerous efforts to reform it ranging from re-surveys, vouchers, bio-metric validations, smart cards and so on.
Now, in view of the possibility of a unique identification (UID) number and a Total Financial Inclusion (TFI) bank account becoming available for all citizens, there is a theoretical possibility of even eliminating the Fair Price Shops (FPS) that deliver PDS rations. It can be argued that the BPL beneficiaries could purchase their rations from the market by paying the PDS prices and then the shops could get their subsidy reimbursed on production of proof (bills/vouchers) of their BPL sales. I am inclined to argue that this arrangement will fail for the following reasons
1. Unlike petrol, diesel or LPG prices, food grains are decontrolled and their prices vary widely across markets, often within the same city. Further, there are numerous varieties of rice, wheat, sugar etc. Even within the same variety, there are considerable variations in quality. All these makes standardization (across the state or country) and quantification of the extent of subsidy difficult and therefore its administration near impossible.
2. Food prices are subject to wide fluctuations, often within a short time. Further, the same variety of food grains undergoes different price changes at different places at the same time. There is no reliable and universal index that reflects these variations. In the circumstances, the volatility in food prices and the need for dynamic adjustment of the proportionate subsidies becomes a herculean administrative task.
3. The number of outlets/shops vending these products are too many. Therefore the logistics of administering them becomes extremely difficult. Many of the retailers, especially in rural areas and in smaller towns, work outside the formal economy and bringing them into a formal UID-linked subsidy reimbursement channel poses a whole new set of challenges.
4. FPS are the primary outlet for government's buffer-stock and open-market operations to stabilize food prices at times of shortages and price spikes. In its absence, governments will have to off-load stocks in the open market, which could end up being hoarded and thereby put upward pressure on prices. Private retailers could game the market by driving up the prices to pocket ever larger subsidies. Such price gouging can be even more pronounced in certain areas, especially with a few monopoly/oligopoly retailers/traders. Food security could be seriously compromised.
In view of all the aforementioned, it is inevitable that FPS's remain the outlets for delivering PDS rations. The objective should be to ensure that the delivery of rations from these shops are done after due validation checks, so that pilferage of rations by way of bogus cards and without the presence of the actual beneficiary is eliminated. This can be done in both on-line (the database is hosted elsewhere and real-time validation of all accounts and identities are carried out) and off-line (the database is hosted in the systems at the FPS and is updated with some periodicity over a dial-up connection) environments using biometric or iris-based smart cards, depending on the local conditions (electricity supply/telephone services).
Now, in view of the possibility of a unique identification (UID) number and a Total Financial Inclusion (TFI) bank account becoming available for all citizens, there is a theoretical possibility of even eliminating the Fair Price Shops (FPS) that deliver PDS rations. It can be argued that the BPL beneficiaries could purchase their rations from the market by paying the PDS prices and then the shops could get their subsidy reimbursed on production of proof (bills/vouchers) of their BPL sales. I am inclined to argue that this arrangement will fail for the following reasons
1. Unlike petrol, diesel or LPG prices, food grains are decontrolled and their prices vary widely across markets, often within the same city. Further, there are numerous varieties of rice, wheat, sugar etc. Even within the same variety, there are considerable variations in quality. All these makes standardization (across the state or country) and quantification of the extent of subsidy difficult and therefore its administration near impossible.
2. Food prices are subject to wide fluctuations, often within a short time. Further, the same variety of food grains undergoes different price changes at different places at the same time. There is no reliable and universal index that reflects these variations. In the circumstances, the volatility in food prices and the need for dynamic adjustment of the proportionate subsidies becomes a herculean administrative task.
3. The number of outlets/shops vending these products are too many. Therefore the logistics of administering them becomes extremely difficult. Many of the retailers, especially in rural areas and in smaller towns, work outside the formal economy and bringing them into a formal UID-linked subsidy reimbursement channel poses a whole new set of challenges.
4. FPS are the primary outlet for government's buffer-stock and open-market operations to stabilize food prices at times of shortages and price spikes. In its absence, governments will have to off-load stocks in the open market, which could end up being hoarded and thereby put upward pressure on prices. Private retailers could game the market by driving up the prices to pocket ever larger subsidies. Such price gouging can be even more pronounced in certain areas, especially with a few monopoly/oligopoly retailers/traders. Food security could be seriously compromised.
In view of all the aforementioned, it is inevitable that FPS's remain the outlets for delivering PDS rations. The objective should be to ensure that the delivery of rations from these shops are done after due validation checks, so that pilferage of rations by way of bogus cards and without the presence of the actual beneficiary is eliminated. This can be done in both on-line (the database is hosted elsewhere and real-time validation of all accounts and identities are carried out) and off-line (the database is hosted in the systems at the FPS and is updated with some periodicity over a dial-up connection) environments using biometric or iris-based smart cards, depending on the local conditions (electricity supply/telephone services).
Friday, March 5, 2010
Delivering welfare benefits
CCT, UID, and TFI
Recent government initiatives on total financial inclusion (TFI) and unique identity number (UID) makes it possible to design a strategy that unties the gordian knot on effective delivery of goverment's welfare programs to intended beneficiaries.
The leakages in government welfare programs for the economically deprived are mainly two-fold - targeting of beneficiaries and pilferage in the actual delivery of benefits. The former gets manifested in the form of ineligible, duplicated and even fictitious beneficiaries, and the latter in the form of beneficiaries getting less than their actual benefits.
Administering the delivery of welfare benefits in a massive and complex country like India poses enormous challenges. Policy makers designing programs for the entire country are faced with conflicting choices and a difficult trade-off between ensuring efficiency in delivery and minimizing corruption. In an effort to eliminate leakages and target the delivery, they design programs with multiple layers of monitoring mechanisms, uniform standards for beneficiary selection and strict guidelines outlining the process of delivering benefits to the consumers. Unfortunately, the result is a tangle of bureaucracy that ironically enough increases inefficiency and spawns both rent-seeking and wastage, broadly in the form of the aforementioned leakages.
Designing a program that avoids getting entrapped in the bureaucratic tangle of norms, components and guidelines, while preserving the basic administrative requirements to effectively monitor and ensure that the program meets its objectives, is one hell of a challenge. Simplistic prescriptions like people's participation and local decision-making, while easy to preach are very difficult to implement.
A paradigm shift in the delivery of welfare benefits can be achieved with a combination of unique identity and bank account for each citizen, and delivery of welfare benefits in the form of cash transfers. Fortunately, recent developments make it possible to implement all three policy alternatives and realize the expectedte benefits in effectively targetting social welfare programs.
The government have already initiated a high-profile Unique Indentification (UID) project to allot a unique number to all citizens over five years. The equally ambitious Total Financial Inclusion (TFI) project seeks to provide access to formal credit mechanisms by giving them a bank account to everyone below poverty line. The missing piece is conditional cash transfer (CCT) programs that directly transfers cash to the recipients, conditional to their achieving certain health, educational land nutritional outcomes.
CCT schemes are based on the premiss that each family knows what is best for them, what are their needs and wants and how the money can be most effectively spent. They are already the most discussed idea in development policy making, rising to prominence with its considerable successes in Brazil and Mexico during the last decade. Nancy Birdsall of the Center for Global Development has described CCTs as the "closest you can come to a magic bullet in development" and they are gaining widespread acceptance as the most effective poverty-fighting strategy.
A UID number is the most fool-proof method of ensuring targeting of beneficiaries and would also save the massive transaction and administration costs associated with the process of selecting beneficiaries. The various welfare benefits - from CCT programs, pensions, NREGS wages, interest and other subsidies, loans etc - can be directly transferred into the respective accounts of beneficiaries and thereby eliminate pilferage of benefits.
This "magic bullet" triptych of UID-TFI-CCT would considerably enhance the ability of governments to assist specific categories of economically and socially deprived citizens with customized welfare programs. A whole series of assistance measures, hitherto thought difficult or even impossible to administer, can be delivered easily and effectively. Instead of messing with prices through the plethora of market distorting price controls (for food, fertilizers, seeds, kerosene, petrol and diesel), it becomes possible to deliver subsidies as direct cash transfers to respective individual accounts. Similarly, tax credits can be provided to specific categories of people.
This triptych also enables the economically deprived people to more easily access the wider market and private businesses to penetrate the massive market at "the bottom of the pyramid". It increases the efficiency and reduces the costs for private businesses to deliver certain services, especially to economically deprived people who were most likely to have been denied access to this market.
The UID number, with related bio-metric identification mechanism, will ensure that only the intended beneficiary avails of the benefits. With time and the network effect arising from the expansion in the use of UID database for delivery of different welfare and other (even private) services, it also becomes possible to means test and screen beneficaries for their eligibility to access various benefits.
The TFI bank account will ensure that payments are delivered directly to the individual, cutting through the different layers of bureaucracy, without pilferage at any level.
CCT programs, by directly transferring money, will ensure that the commonplace wastages associated with government procurements and service delivery are avoided or atleast minimized. More importantly, direct transfers through CCT programs involving cash or vouchers (for say education, housing, health care, food grains, employment training etc) minimize market distortions arising from practices like dual pricing, with its resultant corruption and emergence of parallel markets.
Taken together, TFI and CCT enables the government to deliver a wider range of welfare assistance - interest subsidies, matching contributions, tax credits, lump sum transfers, externality credits etc - in addition to the regular types of subsidies. It also helps the use of technologies like mobile phones and internet to be more widely used to target and deliver assistance to the target beneficiaries.
This tryptich will radically enhance the effectiveness of delivery of the myriad government programs like delivery of pensions, self-employment benefits, PDS, education loans, health insurance, farm subsidies, and so on. They deliver much greater bang for the development buck by lowering transaction costs, ensuring better tragetting, removing ineligible beneficairies, and minimizing the costs arising from market distortions due to direct government interventions that tinkers with prices.
With such policies it becomes possible to deliver subsidies without tinkering with the price signals and distorting incentives. The government can deliver subsidies directly into the TFI bank accounts of the beneficiaries after validating their UID numbers. The subsidy can be for a fixed quantity of the product or service at a pre-defined flat rate on its price. The beneficiary will purchase the product or service from the market by paying the regular market price. This subsidy can be redeemed either by presenting vouchers or consumption bills. In order to account for inflation, the subsidy rates can be benchmarked to the Consumer Price Index (CPI) or some other price index.
While the PDS will continue to deliver foodgrains, fuels like kerosene and LPG can be delivered using vouchers. These vouchers can be used to purchase kerosene and LPG from the retail market, then produced at the Fair Price Shops (FPS) and redeemed after UID validation of the smart card. The subsidy can be transferred directly to the UID-linked bank account.
This approach can address the problems posed by free-power to farmers. A fixed amount of electricity can be given to farmers at subsidized rates by transferring the subsidy into their bank accounts after validating their UID numbers and their consumption bills. This arrangement give the flexibility to target the amount of subsidies for specifically the harvest period and deny the same for off-seasonal activities. The same approach can be adopted to deliver subsidies for water and various agricultural and industrial equipments and inputs. Fertilizer subsidies too can be delivered through this arrangement.
Update 1
Interesting figures from here. Responding to a Parliamentary Question in December 2009, the Minister of State for Consumer Affairs, Food and Public Distribution revealed that 2006, 5,300,000 bogus ration cards had been identified in West Bengal, 1,046,000 in Andhra Pradesh. Orissa was amongst the lowest at 250,000. A recent UN Population Agency (UNPA) found that a mere 8% of beneficiaries under the Janani Suraksha Yojna (JSY) - a program that entitles pregnant women with a cash transfer (at the time of delivery) if they undergo an institutional delivery - in Bihar received their money when discharged while Orissa topped the list at 20%.
Update 2 (26/6/2010)
The penetration levels and access to finance across the country are quite meager - six out of 10 Indians do not have access to a bank account; home mortgage as a proportion to GDP stands at barely 7%; and insurance penetration is under 4%.
The leakages in government welfare programs for the economically deprived are mainly two-fold - targeting of beneficiaries and pilferage in the actual delivery of benefits. The former gets manifested in the form of ineligible, duplicated and even fictitious beneficiaries, and the latter in the form of beneficiaries getting less than their actual benefits.
Administering the delivery of welfare benefits in a massive and complex country like India poses enormous challenges. Policy makers designing programs for the entire country are faced with conflicting choices and a difficult trade-off between ensuring efficiency in delivery and minimizing corruption. In an effort to eliminate leakages and target the delivery, they design programs with multiple layers of monitoring mechanisms, uniform standards for beneficiary selection and strict guidelines outlining the process of delivering benefits to the consumers. Unfortunately, the result is a tangle of bureaucracy that ironically enough increases inefficiency and spawns both rent-seeking and wastage, broadly in the form of the aforementioned leakages.
Designing a program that avoids getting entrapped in the bureaucratic tangle of norms, components and guidelines, while preserving the basic administrative requirements to effectively monitor and ensure that the program meets its objectives, is one hell of a challenge. Simplistic prescriptions like people's participation and local decision-making, while easy to preach are very difficult to implement.
A paradigm shift in the delivery of welfare benefits can be achieved with a combination of unique identity and bank account for each citizen, and delivery of welfare benefits in the form of cash transfers. Fortunately, recent developments make it possible to implement all three policy alternatives and realize the expectedte benefits in effectively targetting social welfare programs.
The government have already initiated a high-profile Unique Indentification (UID) project to allot a unique number to all citizens over five years. The equally ambitious Total Financial Inclusion (TFI) project seeks to provide access to formal credit mechanisms by giving them a bank account to everyone below poverty line. The missing piece is conditional cash transfer (CCT) programs that directly transfers cash to the recipients, conditional to their achieving certain health, educational land nutritional outcomes.
CCT schemes are based on the premiss that each family knows what is best for them, what are their needs and wants and how the money can be most effectively spent. They are already the most discussed idea in development policy making, rising to prominence with its considerable successes in Brazil and Mexico during the last decade. Nancy Birdsall of the Center for Global Development has described CCTs as the "closest you can come to a magic bullet in development" and they are gaining widespread acceptance as the most effective poverty-fighting strategy.
A UID number is the most fool-proof method of ensuring targeting of beneficiaries and would also save the massive transaction and administration costs associated with the process of selecting beneficiaries. The various welfare benefits - from CCT programs, pensions, NREGS wages, interest and other subsidies, loans etc - can be directly transferred into the respective accounts of beneficiaries and thereby eliminate pilferage of benefits.
This "magic bullet" triptych of UID-TFI-CCT would considerably enhance the ability of governments to assist specific categories of economically and socially deprived citizens with customized welfare programs. A whole series of assistance measures, hitherto thought difficult or even impossible to administer, can be delivered easily and effectively. Instead of messing with prices through the plethora of market distorting price controls (for food, fertilizers, seeds, kerosene, petrol and diesel), it becomes possible to deliver subsidies as direct cash transfers to respective individual accounts. Similarly, tax credits can be provided to specific categories of people.
This triptych also enables the economically deprived people to more easily access the wider market and private businesses to penetrate the massive market at "the bottom of the pyramid". It increases the efficiency and reduces the costs for private businesses to deliver certain services, especially to economically deprived people who were most likely to have been denied access to this market.
The UID number, with related bio-metric identification mechanism, will ensure that only the intended beneficiary avails of the benefits. With time and the network effect arising from the expansion in the use of UID database for delivery of different welfare and other (even private) services, it also becomes possible to means test and screen beneficaries for their eligibility to access various benefits.
The TFI bank account will ensure that payments are delivered directly to the individual, cutting through the different layers of bureaucracy, without pilferage at any level.
CCT programs, by directly transferring money, will ensure that the commonplace wastages associated with government procurements and service delivery are avoided or atleast minimized. More importantly, direct transfers through CCT programs involving cash or vouchers (for say education, housing, health care, food grains, employment training etc) minimize market distortions arising from practices like dual pricing, with its resultant corruption and emergence of parallel markets.
Taken together, TFI and CCT enables the government to deliver a wider range of welfare assistance - interest subsidies, matching contributions, tax credits, lump sum transfers, externality credits etc - in addition to the regular types of subsidies. It also helps the use of technologies like mobile phones and internet to be more widely used to target and deliver assistance to the target beneficiaries.
This tryptich will radically enhance the effectiveness of delivery of the myriad government programs like delivery of pensions, self-employment benefits, PDS, education loans, health insurance, farm subsidies, and so on. They deliver much greater bang for the development buck by lowering transaction costs, ensuring better tragetting, removing ineligible beneficairies, and minimizing the costs arising from market distortions due to direct government interventions that tinkers with prices.
With such policies it becomes possible to deliver subsidies without tinkering with the price signals and distorting incentives. The government can deliver subsidies directly into the TFI bank accounts of the beneficiaries after validating their UID numbers. The subsidy can be for a fixed quantity of the product or service at a pre-defined flat rate on its price. The beneficiary will purchase the product or service from the market by paying the regular market price. This subsidy can be redeemed either by presenting vouchers or consumption bills. In order to account for inflation, the subsidy rates can be benchmarked to the Consumer Price Index (CPI) or some other price index.
While the PDS will continue to deliver foodgrains, fuels like kerosene and LPG can be delivered using vouchers. These vouchers can be used to purchase kerosene and LPG from the retail market, then produced at the Fair Price Shops (FPS) and redeemed after UID validation of the smart card. The subsidy can be transferred directly to the UID-linked bank account.
This approach can address the problems posed by free-power to farmers. A fixed amount of electricity can be given to farmers at subsidized rates by transferring the subsidy into their bank accounts after validating their UID numbers and their consumption bills. This arrangement give the flexibility to target the amount of subsidies for specifically the harvest period and deny the same for off-seasonal activities. The same approach can be adopted to deliver subsidies for water and various agricultural and industrial equipments and inputs. Fertilizer subsidies too can be delivered through this arrangement.
Update 1
Interesting figures from here. Responding to a Parliamentary Question in December 2009, the Minister of State for Consumer Affairs, Food and Public Distribution revealed that 2006, 5,300,000 bogus ration cards had been identified in West Bengal, 1,046,000 in Andhra Pradesh. Orissa was amongst the lowest at 250,000. A recent UN Population Agency (UNPA) found that a mere 8% of beneficiaries under the Janani Suraksha Yojna (JSY) - a program that entitles pregnant women with a cash transfer (at the time of delivery) if they undergo an institutional delivery - in Bihar received their money when discharged while Orissa topped the list at 20%.
Update 2 (26/6/2010)
The penetration levels and access to finance across the country are quite meager - six out of 10 Indians do not have access to a bank account; home mortgage as a proportion to GDP stands at barely 7%; and insurance penetration is under 4%.
Monday, December 21, 2009
Are MFIs and moneylenders complements?
Marginal Revolution draws attention to a WSJ article that appears to indicate an increase in traditional money lenders even in areas with heavy concentration of microfinance activity.
The RBI has reported that the number of registered traditional moneylenders increased 56% to 19,627 from 12,601 between 1995 and 2006. Another survey has estimated that the traditional moneylenders' share of total rural Indian household debt grew to 29.6% from 17.5% since the nineties when microfinance movement took-off.
Interestingly, WSJ sees moneylenders and microloans as complementing each other, in so far as SHG members may be drawing on moneylenders to help them keep their repayment deadlines and avoid the very powerful peer embarassment. The argue that since moneylenders may actually be helping SHG members repay their microloans in time, atleast some of the MFIs may have been bankrolled by moneylenders themselves. In this paradigm, moneylenders and MFI are some form of complementary services! Econ 101 defines two goods or services as complementary when they are bought and used together, the demand for one mirrors that for the other and vice-versa.
Speculating about the growth of moneylenders, as evidenced in the aforementioned figures, there are a few silver-linings -
1. It is possible that the proliferation of MFIs has forced moneylenders out into the open and made them register their activities. In other words, the growth of MFIs has generated a positive externality - competitive pressure on moneylenders to become more efficient (and thereby access formal sources of funding mechanisms) and transparent. Further, to the extent that older moneylenders are now getting themselves registered, the true numbers of newly enterant moneylenders may be exaggerated.
2. Even assuming that the numbers of moneylenders have been increasing, it may only underline the severe credit stress faced in rural India. One indication of this is the fact that official figures show the rate of banking credit and deposit growth as being much higher in villages than cities. A recent article in Businessline estimated the appetite for microfinance at about Rs 1.30-lakh crore a year, whereas microfinance disbursements were about Rs 28,000 crore in 2008-09.
In other words, thanks to the increasing penetration of economic growth into villages, the rural credit demand may be rising at a rate faster than what both the banks and MFIs are able to meet. And moneylenders may be only stepping in to fill in the vacuum. So we should be having more aggressive outreach of microfinance. It is also one of the most important arguements in favor of banking access and strategies like Total FInancial Inclusion (TFI).
The RBI has reported that the number of registered traditional moneylenders increased 56% to 19,627 from 12,601 between 1995 and 2006. Another survey has estimated that the traditional moneylenders' share of total rural Indian household debt grew to 29.6% from 17.5% since the nineties when microfinance movement took-off.
Interestingly, WSJ sees moneylenders and microloans as complementing each other, in so far as SHG members may be drawing on moneylenders to help them keep their repayment deadlines and avoid the very powerful peer embarassment. The argue that since moneylenders may actually be helping SHG members repay their microloans in time, atleast some of the MFIs may have been bankrolled by moneylenders themselves. In this paradigm, moneylenders and MFI are some form of complementary services! Econ 101 defines two goods or services as complementary when they are bought and used together, the demand for one mirrors that for the other and vice-versa.
Speculating about the growth of moneylenders, as evidenced in the aforementioned figures, there are a few silver-linings -
1. It is possible that the proliferation of MFIs has forced moneylenders out into the open and made them register their activities. In other words, the growth of MFIs has generated a positive externality - competitive pressure on moneylenders to become more efficient (and thereby access formal sources of funding mechanisms) and transparent. Further, to the extent that older moneylenders are now getting themselves registered, the true numbers of newly enterant moneylenders may be exaggerated.
2. Even assuming that the numbers of moneylenders have been increasing, it may only underline the severe credit stress faced in rural India. One indication of this is the fact that official figures show the rate of banking credit and deposit growth as being much higher in villages than cities. A recent article in Businessline estimated the appetite for microfinance at about Rs 1.30-lakh crore a year, whereas microfinance disbursements were about Rs 28,000 crore in 2008-09.
In other words, thanks to the increasing penetration of economic growth into villages, the rural credit demand may be rising at a rate faster than what both the banks and MFIs are able to meet. And moneylenders may be only stepping in to fill in the vacuum. So we should be having more aggressive outreach of microfinance. It is also one of the most important arguements in favor of banking access and strategies like Total FInancial Inclusion (TFI).
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