Opinion Mind the gaps
Only a good financial inclusion plan can prevent acute income disparity.....
A somewhat different perspective on the global financial crisis was recently articulated by Raghuram Rajan,a reputed economist who also formally advises Prime Minister Manmohan Singh. He has argued that greedy bankers and lax regulators were not necessarily the root cause of the US financial meltdown. Growing income inequality was perhaps a deeper problem which persisted for a long enough period to eventually cause an organic crisis. There is a big lesson in this for India.
Income inequality within middle America became very acute through the 80s and 90s. According to Rajan,the wages of the median worker at the 50th percentile,such as factory workers and office assistants,have not grown relative to the wages of office managers at the 90th percentile. No wonder,the real median wage in America today is possibly not much higher than it was a decade ago. Mind you,this problem had been developing through the 80s,which was seen as a high growth phase in the US economy.
The stagnating wages of large sections of industrial workers created a new political consensus for delivering housing loans on a massive scale to the poor without looking at their repayment capacity. Therefore,it is quite possible that both bankers and regulators had a tacit understanding that there was a sort of licence,through broad political consensus,to do the kind of bank lending and trading in derivatives that was going on.
The median wages of workers has been stagnating in real terms even in some of the advanced EU economies like Germany. This has been causing some fragmentation in the German polity,reflected in the relative decline of the two-party system there.
Two broad lessons can be drawn from the US and German experience. Earlier,Indian policy-makers generally believed that high GDP growth sustained over several decades would eventually reduce income disparities. When China had embarked on its market-based growth path in the late 70s,Deng Xiaoping had declared it was natural that some people will get rich faster than the others during the initial phase of capitalist development. India has also experienced massive wealth creation in the past two decades,though it has been considerably skewed in favour of the top 10 per cent of the population. The UPA had coined the inclusive growth slogan precisely to address this skew in income growth.
However,the US and German experience shows that incomes can get skewed very badly even in an advanced stage of capitalist development. This is what has come as a bit of a surprise to many. The political establishments response to this income skew has varied in the US and Europe. The American political class chose to deliver massive housing credit to the lower income groups through the banking system whereas EU nations relied more on direct government borrowings and higher taxes to take care of the lower income categories.
Indias per capita income,currently about $1,000,will also double in a decade from now as we get an average GDP growth of 8 per cent plus. Overall,there will be a lot of wealth creation but there is a flip side to this growth story. The political class will face a serious backlash if this growth is accompanied by a big skew in income distribution. The American experience shows that sustained capitalist development alone is not good enough to guarantee social and political harmony. Our political class has figured this problem but no one yet has any clue as to how a more broad-based and inclusive market-based growth strategy can be put in place.
At present,Indian policy-makers are merely doing some firefighting operations by putting more money in the hands of the poor through various economic programmes such as rural employment guarantee,farm loan waivers,pay commission awards,etc. But these are not long-term income and productivity enhancing exercises.
Of course,there are some long-term productivity enhancing strategies being worked out through the financial system. The government is embarking on a massive financial inclusion programme by taking banking access to the bottom 400 million poor. This is an ambitious plan to create 100 million new bank accounts in rural India over the next five years. The finance ministry is committed to taking banking access to 72,000 new villages with a minimum population of 2,000. Rural incomes have indeed gone up in the past decade or so. However,high cost of penetration has deterred banks from reaching out to the scattered villages to collect deposits from small depositors. This is being attempted through the banking correspondent model where individuals acting as extensions of bank branches reach out to smaller villages and deliver financial services with the help of mobile and other technologies.
Therefore,in the Indian context,the meaning of financial inclusion has also undergone a fundamental change. It is as much about garnering the dormant savings of the self-employed in rural India as about lending to them. If implemented well,the banking system could easily garner an additional 4-5 per cent of GDP as savings in the form of rural deposits. This is important from a macro perspective too. An additional $40-50 billion of savings could come in handy for India at a time when capital flows from the West are becoming somewhat uncertain. There are signs that the stringent financial regulation bill passed by Obama will reduce the quantum of free cash that financial institutions and hedge funds are able to leverage for global investments.
Consequently,India needs to make its own financial system far more robust so that optimal savings are garnered from every possible source. Rural savings will indeed play a big role in filling the demand-supply gap. Equally,banks will have to shed their elitist lending habits. Today,since banks do not penetrate rural India beyond a point,micro-finance institutions are lending to rural customers at 25 per cent annual interest rate. This is untenable,especially when urban dwellers get loans at 10-13 per cent for housing and other purposes.
Only a rational financial inclusion programme will ensure that income disparity in India does not exacerbate over the next few decades,causing a US- or EU-type crisis at a later stage. This must
be done through an astute mix of market and state-led initiatives.
The writer is Managing Editor,The Financial Express
mk.venu@expressindia.com
Share
