India needs Jan Dhan, and not just Jan Dhan accounts

Even after giving the BJP the benefit of doubt on intent, there is much to be said about the direction and magnitude of the progress. Photo: Pradeep Gaur/Mint

In the run-up to the 2019 general election, the Bharatiya Janata Party (BJP) has started its media blitz, outlining the achievements of the last four years. It is hard to miss, given that the laundry list of development programmes covers the entire front page of most major newspapers. The tag line for the campaign is “saaf niyat, sahi vikas” (clean intentions, right progress). Even after giving the BJP the benefit of doubt on intent, there is much to be said about the direction and magnitude of the progress.

One way to measure sahi vikas is to analyse individual programmes. The Pradhan Mantri Jan Dhan Yojana (PMJDY) is a good starting point. There is little disagreement over the need to increase financial inclusion in India, and as a single-target programme, one does not have to wrestle with the usual complexities of measurement. It was a high-priority programme spearheaded directly by the prime minister. The question is whether the self congratulatory pat on the back is, in fact, deserved.

With the PMJDY, the goal is simple: to bring all Indians within the formal banking system. Historically, most people were left outside the formal banking system. The worst-affected are typically from the most disadvantaged areas, and their poverty and lack of access to identity cards, etc. has excluded them from the benefits of the formal credit system. Bank accounts for the poor are also a good way to ensure that welfare programmes reach beneficiaries directly instead of getting siphoned off by middlemen. With bank accounts, government can also provide access to cheaper credit and insurance. PMJDY intends to solve this and more. The progress report of PMJDY claims 316 million beneficiaries. Between 2014 and 2017, account ownership in India rose by more than 30% among women as well as among adults in the poorest 40% of households, a significant step toward financial inclusion. But is this programme a success?

Unfortunately, it might be a little soon for a victory lap. Under tremendous pressure from the top to reach targets of new bank accounts, bank employees and bureaucrats opened fake accounts, or converted existing accounts into Jan Dhan accounts. These fake and existing accounts are estimated at about 10% of all the new accounts, implying that 90% of the accounts were for new beneficiaries. The World Bank Group’s Global Findex Database reports that almost half the new bank accounts were inactive in the last 12 months. Globally, about 20% of account owners report an inactive account (i.e. without a single deposit or withdrawal in the past 12 months). At 48%, India has the highest rate of inactive accounts in the world, and about twice the average of 25% for developing economies. Even the accounts that are active are scarcely used, with a high reliance on cash transactions.

And therein lies the question—what constitutes sahi vikas for financial inclusion? Quite obviously, the poor don’t want bank accounts as the end goal. These are a means to greater access to the formal financial and credit system. Why then are they reluctant to use free government-provided access to the formal system?

Unsurprisingly, in India, the rich are more likely to have bank accounts than the poor, though this gap has shrunk. Similarly, the rural-urban gap has shrunk as the share of rural bank account holders doubled in India since 2011, but rural bank account usage is still low. Those active in the labour force are more likely to have bank accounts than those who are not part of the labour force. The gender gap also points to some possible answers. In developing countries, female account holders are about 5% more likely than male account owners to have an inactive account. In India, this gender gap is about twice as large. Only 43% of the men reported an inactive account compared to 54% women with inactive accounts. Women tend to be poorer and have disproportionately lower labour participation in India. This suggests that the problem of financial inclusion is not simply an issue of bank accounts.

A very large part of the problem is that the operation of most of the labour force, small businesses, and small entrepreneurs is in the informal economy. These individuals work in spaces that rely largely, if not entirely, on cash transactions. Daily wage labourers in the informal sectors need financial inclusion quite desperately, but have little use for a bank account. What they need is protection within the formal sector that results in a steady job and steady wages. Only then will the ability to leverage the formal financial system have meaning for them. In the informal economy, for these individuals, cash is king, and the amounts are small. It’s easier to get by without bank accounts.

The inactive bank accounts and the infrequent use of active bank accounts points to a bigger problem with this government’s obsession with technology. Technology, digitization and transfers using the new bank accounts solve the last mile problem for financial inclusion. The steps prior to this last mile necessarily require deregulation, labour law reform, and a genuinely simple tax system that actually bring more than half the economy into the formal sector. In short, Prime Minister Narendra Modi is good at mobilizing the state machinery to hit targets. The problem is that many of these issues cannot be solved by meeting misplaced or simplistic targets through a central command system.

Instead of tackling genuine reform, the current government has put a technological and digital face to the same old programmes. In this, the government is tremendously successful, but unlikely to lead us to sahi vikas.

Shruti Rajagopalan is an assistant professor of economics at Purchase College, State University of New York, and a fellow at the Classical Liberal Institute, New York University School of Law.

Comments are welcome at views@livemint.com