Policymakers have been going around in circles with regard to the issue of “inclusion”. Be it “growth with redistribution” or “redistribution with growth”, priority sector lending, microfinancing or financial inclusion, the same issue has been addressed since the mid-1970s or even earlier in different forms, without much success.
Haseeb A. Drabu
However, when one looks at all these strategies in a more intensive and granular manner, a certain nuanced differentiation emerges. This takes two forms: The first is the context in terms of the growth cycle and the second is the understanding of the growth process.
Thus, for example, the growth with redistribution theory emerges when the economy is going through a phase of high growth. Quite remarkably, the redistribution with growth paradigm gains currency when the economy is experiencing a severe crisis which was attributed to a “home market” constraint.
In terms of the understanding of the growth process, the latter was based on the classical Marxist “under-consumptionist” argument to explain slow growth and, hence, the need for an interventionist redistribution. In the former case, a more neo-classical view prevailed and it was felt that growth will have a trickle-down impact and will address the issue of exclusion — those days this was called poverty!
What have been the policy options that emerged? First, of course, was that of priority sector lending. The understanding that underlies this intervention is that sectors such as agriculture and allied activities and small lending are not a profitable proposition and hence a regulatory diktat is required. This changed dramatically with the Grameen Bank success story in Bangladesh and a new mantra of “microfinancing” emerged.
Little recognition is given to the fact that Grameen story was a social process rather than a credit distribution anomaly.
Then came the “profits from the bottom of the pyramid” model and policymakers discovered “inclusion”. It changed the context and the content. The most important breakthrough it made was to see the bottom as a proper commercial proposition, rather than a moral or social issue.
Two basic changes have determined our changing understanding of growth process. First, of course, is the greater financial intermediation or deepening of our economy. The second is the advent of technology. The first drives demand and the second has driven distribution.
On the policy side, a dwindling scope for use of fiscal and public policy for redistributive purposes but a greater role for monetary policy also helped the cause of inclusion. With monetary policy becoming all-important, the focus on credit as the driving variable becomes obvious.
But the paradox which is emerging is that the growth process unleashed is marginalizing people across sectors and spaces. It is impossible for any static interventions to negate or compensate these effects of a dynamic process.
In other words, it is not possible for a programme or a series of programmes to undo the effects of a self-generative process. Also, all inclusion programmes are developed in a “reactive” framework, rather than a “proactive” one.
All this is compounded by the fact that institutions, which have been given the job of executing these interventions, public or private, are not only not equipped to do so but also operate in a policy framework that doesn’t support their doing so. Take the case of banks that are currently leading the charge on financial inclusion. Opening a no-frills account for everyone in an area makes up for financial inclusion. It is a definitional, not an operative or a functional form of financial inclusion.
The fact of the matter is that, in today’s macro-monetary environment, banks ought to be bending backwards to get low-cost deposits from the retail segment in the interest of better liability management. Yet, the availability of alternative, more attractive instruments in urban areas and higher transaction costs in rural areas impair their effort.
So, to start with, the interventions must be backed not only by an institutional but also a policy framework that supports and complements effort to deliver financial inclusion. It is here that the problem lies. Even as the Reserve Bank of India (RBI) has been pushing financial inclusion, it has never been an intrinsic part of the financial reforms.
The reforms initiated in the early 1990s have attempted to enhance allocative efficiency, not distributive gains. As such, RBI made reformist changes in the structure and development of financial markets, especially the money, government securities and forex markets in view of their critical role in the transmission mechanism of monetary policy.
Reform of the credit market was conspicuous by its absence. One is tempted to compare this with the overall economic reforms in general and agricultural reforms in particular that have been carried out without land reform!
The moment credit markets are restructured as a part of the overall agenda of financial sector reforms, financial inclusion will get under way in a self-sustaining manner and will not be seen as some kind of corporate social responsibility.
Haseeb A. Drabu is chairman of Jammu & Kashmir Bank Ltd and economic adviser to the J&K government. He will write on the macroeconomy. Respond to this column at firstname.lastname@example.org