Renu Pokharna

Archive for January, 2011|Monthly archive page

Help microfinance, don’t kill it

In Microfinance on January 31, 2011 at 7:39 am

The microfinance sector in India is in deep crisis. Last month the government of Andhra Pradesh (AP) promulgated an ordinance that retroactively waived loans where a sum of twice the principal had been repaid, required that repayment collections occur at panchayat offices, and added onerous regulation that requires registration of microfinance institutions or MFIs with district authorities who may, at any time, cancel it. Predictably, this has caused large-scale defaults by borrowers in AP, withdrawal of liquidity by banks and a severe loss in capital (SKS Microfinance, recently feted by the stockmarkets, has seen a 54 per cent drop in its share price in the last two months). Unless immediate action is taken by the Central government, the AP government, the RBI and the MFIs themselves, the viability of the entire industry could be threatened, not only in AP but throughout the country.

Microfinance fills a key need in developing countries like India: the provision of financial services to low-income clients who traditionally lack access to formal banking for several reasons. Those could include the absence of collateral or any evidence of ownership of assets; informal employment; unverifiable credit history; and high transaction costs per rupee loaned, due to the small loan size. Microfinance loans provide financial access to the poorest that allows many of them to start new businesses, grow existing businesses, insure against shocks due to bad weather and illness, and smooth consumption. In the absence of microfinance, the poor will have no choice but to approach the unregulated local moneylenders who provide services that are fast and flexible, but charge usurious interest rates in the range of 60-120 per cent per year — and who may often enforce repayment by illegal and exploitative means.

In contrast, although delivering credit to the poor through any means is an expensive endeavour resulting in above-average interest rates, some of the biggest MFIs in India recently announced an interest rate cap of 24 per cent. We estimate that the break-even interest rate for MFIs in India ranges between 20-38 per cent, depending on the size and age of the MFI. Costs are primarily driven by the expense of giving small loans to the poor caused by the difficulty in identifying customers in rural areas and urban slums, appraising them to select the creditworthy, disbursing money, collecting repayments and the cost of raising funds.

Ironically, some of the largest Indian MFIs charge rates substantially lower than MFI rates in many parts of the world: for instance, in Mexico and the Philippines, rates are often above 60 per cent per annum. The MFI contract, however, is fragile. If borrowers are encouraged to default en masse, the system will fall apart and a valuable financial product may become unviable. It is very likely that this is happening in AP, with the current high default rates not reflecting that the average borrower was in distress but rather the effect of recent actions encouraging borrowers to default wilfully.

Microfinance is not without its problems, mostly relating to its rapid recent growth, especially in Andhra Pradesh. In 2007, there were about 8 million borrowers and around Rs 40 billion in microcredit in the country. Today there are over 25 million borrowers and around Rs 225 billion. This expansion has been accompanied by anecdotal evidence of over-indebtedness of clients due to careless lending practices, largely rooted in the inability of MFIs to verify clients’ amount of outstanding debt with other institutions. There have been rumours of debt-related suicide, though no systematic investigation into the claims.

While these reports of heavy debt burden on the poor are distressing, it is important to keep in mind that rural indebtedness is not the result primarily of MFI activity — in fact, the majority of debt among households in poor areas is non-MFI loans. A recent survey by the Centre for Microfinance has revealed that a staggering 93 per cent of the households in AP have a loan outstanding. Of these the vast majority, 82 per cent, were from informal sources (57 per cent borrowed from friends with interest, 17 per cent from a moneylender), and only 11 per cent had a loan from an MFI. Moreover, multiple borrowing from the same source is most prominent among those who borrowed from informal sources: only 30 per cent of active MFI borrowers had more than one loan outstanding, compared to 85 per cent of rural households who were active borrowers from informal sources

As microfinance expands, there will undoubtedly be frictions between MFIs and clients, government schemes, and politicians. Some will be genuine, others motivated by a desire to get loans waived, and yet others from attempts to increase influence or protect the interests of existing moneylenders whose business may be threatened. Unless there are some clear, universal regulations binding MFIs, there will be continued attempts by local political entrepreneurs to intensify these frictions for political gain. Yet over-regulation of the industry will certainly destroy it, by increasing the costs of lending to unsustainable rates — forcing us to depend once again on public sector efforts for financial inclusion that have largely been unsuccessful.

Given this obvious tradeoff, regulation should be less focused on fixing interest rates or limiting profits, and more focused on institutional reform that makes it easier for MFIs to screen borrowers and thereby lower the cost of their products, as well as encouraging MFIs that charge reasonable rates. The following could be immediate starting points for reform:


1. The AP government should withdraw, or at least suspend, its ordinance until a more comprehensive way of achieving its legitimate aims is worked out.

2. A consumer grievance redressal process should be created as part of a larger structure for consumer protection, as suggested by the Committee for Financial Sector Reforms (myriad agencies for grievances will increase confusion and costs).

3. While regulation that sets strict interest rate ceilings should be avoided, regulation should reward MFIs that charge reasonable interest rates as well as those that introduce innovative products that provide flexibility in repayment. For instance, built-in insurance that protects the borrower during times of distress.

4. The establishment of a well-functioning credit bureau to which all MFIs are required to report their entire portfolio of lending is key to preventing over-indebtedness. The introduction of Unique IDs greatly facilitates the establishment of such a bureau, which would benefit the industry as a whole.

5.MFIs recently created a Microfinance Institutions Network (MFIN) that adopted a code of conduct that focuses on fair practices with borrowers. The industry should accelerate MFIN implementation as well as the credit bureau. The RBI should examine, approve and monitor the implementation of this code of conduct, which could form the basis of future regulation.

When it works well, microfinance can be a win-win situation, as the poor can borrow money at rates that may look high, but are much lower than those offered by moneylenders; and banks can make a sustainable business in lending to the poor. All this rests as much on a social contract as on a legal contract. MFIs need to be more diligent in their lending and screen borrowers better — if too many borrowers can’t repay their loans, the social obligation will start to fall apart.

But politicians also need to be wary — in taking aim at the occasional overstep, they may find themselves inadvertently destroying the whole business, at great cost both to the poor, and the financial institutions that have stepped in to work with them. If we are not careful we may end up in the pre-microfinance world. That would be a great disservice to the poor, and their hope of climbing out of poverty.


26 Nov 2010, Indian Express

Miracles and methods

In Poverty Eradication on January 31, 2011 at 7:35 am

I once saw a miracle. It was near a ragged wall of broken rocks near Udaipur. One side of the wall had patches of yellowing grass, not taller than an inch, with the occasional dry stalk. The other side, protected from goats by the wall, was a sea of green and yellow grass, up to a couple of feet tall. Here was something utterly simple that had the power to bring life back to these barren hillsides. Or so I thought. It took a friend, familiar with the area, less than five minutes to set me straight. I was forgetting, he observed, all the grass from the unwalled side that had already fed some passing goat, and all the grass that someone had cut and sold. If we added up all the grass that had grown on the unwalled side, while the grass on the other side grew tall, we would probably end up with close to what was there across the wall. We might still support building the wall on the ground that tall grass is good for soil conservation and water retention, but we should not be expecting a miracle.

It is easy, especially if you are an enthusiast, to find miracles where there are none. Assessing benefits of an intervention, as I learnt the hard way, requires thinking hard about the appropriate metric and it is easy to get it wrong. For example, as Jonathan Murdoch has shown, the Grameen Bank of Bangladesh has shown the way in profitable lending to the poor, in part by counting its fresh deposits as a part of its earning. But it has forgotten that these deposits would eventually need to be repaid. If measuring benefits is hard, measuring costs can be a nightmare. You have an innovative programme that involves the community in managing the local greenery and it is quite apparent that your programme is doing wonderful things for the environment. But you also know that you have a lot of charisma and suspect that it might have a lot to do with the way the community has involved itself in your programme. How do you, short of cloning yourself, even start to come up with the cost of reproducing the programme elsewhere? Making the programme scaleable from the beginning is probably the best way to avoid this problem, but it does impose constraints on the process of innovation. Once you have solved the problem of measuring costs and benefits, you hit the really hard problem � that of figuring what would have happened had you not implemented the programme. For example, you have a novel scheme for teaching children mathematics. At the end of one year of teaching, the children are clearly doing much better. You want to congratulate yourself, announce a miracle, except that you realise that the children are also a year older and have spent an additional year in school. That itself would make them better at solving problems.

Indeed in the area of education it is only a rare programme, whose effect outweighs just what you would get by letting the child spend another year at school. How then are you supposed to figure out how much of the improvement in test scores is your miracle, and how much comes from the normal process of growing older? You can try to find a group of kids who look and feel like the kids in your programme and use their improvement as a benchmark, but how do you determine that these kids were just like your kids? The only really reliable way to solve this problem is to do what drug companies do when they test new products: randomly assign the programme to some locations and not to others, and then compare results.

This is actually easier than it might seem: many non-governmental organisations, such as pratham in Mumbai and Seva Mandir in Udaipur, have shown us the use of this technique. All this takes commitment and forward planning, as well as painful care to ensure that costs and benefits are accurately measured. Miracles in social interventions are almost always announced without being subjected to this crucial test. This is perhaps why, after so many miracles, the world�s problems look as daunting as ever.


Poverty Action Lab

Buying time and secrecy?

In Corruption, Politics on January 28, 2011 at 4:59 am

The apex court of the country had to once again come to the rescue of the country and fill the executive vacuum left by the Congress-led UPA. Its observations on the revelation of the names of Indians holding money in Swiss accounts are rather embarrassing. Adding to the shame is a wishy-washy press conference by the finance minister which obscured the issue, rather than clearing it up.

Usually the Supreme Court refrains from making harsh comments, but it seems that the judges were aghast at the government’s arguments — hence phrases like “pure and simple theft” and “gigantic amounts plundered from national economy” and “how many zeros are there in that”.

The necessity of such words, usually not part of court language, should turn any government red with shame. The bench vividly expresses bewilderment and anguish that, while the West is growing more active in producing evidence for illegal transnational transactions, India has taken a complete U-turn on the issue.

Worldwide, countries have joined ranks to battle against tax havens, and have consistently been working to end banking secrecy which veils underhand transactions. The most recent example: UBS, the largest Swiss bank, was compelled by the US administration to reveal the names of tax evaders under the threat of being sued. The Swiss authorities amended bank laws and gave the desired data to the United States.

Our prime minister instead says that black money information cannot be made public because of international treaty obligations. The worst was when he himself said that there is no instant solution to bring it back. While doing so, the PM had completely forgotten his earlier commitment to the nation: he said he would initiate steps to recover more than one lakh crore rupees illegally stashed in Swiss banks within 100 days of assuming power.

The former Himachal Pradesh chief minister and Rajya Sabha MP, Shanta Kumar, raised this issue recently. In a parliamentary delegation to participate in the UN General Assembly on the anti-corruption convention in October last year, Swiss representative Matthias Bachmann told him the Swiss government was committed to returning what it considers to be “stolen money” — and, besides, they had signed and ratified the UN convention against corruption. Indeed, the Swiss ambassador has categorically stated that there is no request whatsoever from the Indian government to reveal the names of those people whose money has been kept in Swiss banks. Such absolute inaction in this regard makes the Manmohan Singh government in some way culpable.

Shanta Kumar stated that out of 142 signatories of the UN convention on corruption, only 22 have not ratified it; India figures prominently amongst them. A GoM is still debating whether corporate and private houses have to be brought under the convention or not — indeed a flimsy excuse. Apparently, the government is overtly and covertly attempting to cover up the black money issue.

While no one knows the actual amount, several sources claim more than Rs 130 lakh crore was stashed away by 2001, which exceeded Rs 285 lakh crore by 2007, showing an increase of more than 80 per cent in six years. There is nothing surprising about this; that several wealthy Indians have quietly siphoned money to Swiss banks and tax havens around the world, while evading taxes and being conduits for illicit deals, is obvious. There could be wild allegations made against the top brass of the Congress, a fine political opportunity to many for mudslinging. And the more time passes, the more time there is for those under the scanner to shift their cash to safer houses.

And this in spite of the fact that, on July 30, 2009, Manmohan Singh categorically told the Rajya Sabha that action has already started for getting back money belonging to Indians from Swiss banks. He intervened, suo motu, to refer to the statement of the finance minister in his reply to the Finance Bill in the House, stating that the FM had specifically dealt with this aspect and had said that action has already started.

It is noteworthy that, whether it is the 2G scam, whether it is Swiss bank money, or any other issue related to corruption under the UPA, the SC has been compelled to intervene.

In the light of the SC’s remarks, it would be desirable for the PM to clarify whether he chose to mislead the House by making a statement which has been contradicted by the SC. It is a matter of propriety and also a matter of privilege of the House. A straight answer from the PM would enable Mr Clean to keep his conscience clear. The finance minister’s press conference just raised more questions; his suggested five-pronged strategy fully establishes the government’s intentions to postpone the core issue: disclosing the names of the guilty.

The delays and time-buying techniques all deserve a reply from no one other than the prime minister.


27 Jan 2011, Indian Express

State of the onion

In Agriculture on January 28, 2011 at 4:55 am

Yes, food has become too expensive. And yes, government could fix that. But not, sadly, quite the way you think.

Or the ways they’ve tried. Wheat exports have been stopped, for example, although there is no shortage of wheat in India, and it isn’t wheat prices that are driving up food inflation. Meanwhile, interest rates have been hiked, which might be good news for anyone with a bank account — those unlucky individuals who are wealthy enough to have savings currently have to put up with earning negative interest, once inflation is factored in — but is unlikely to impact the price of gobhi.

There are several reasons for this policy confusion. The first is that our reaction to a crisis is usually a knee-jerk ideological reflex.

The left believes, in this case, for example, that speculators drive up prices; that organised retail in groceries permits multinationals to gouge the poor; that freeing trade always causes our resources to disappear overseas. Hence we do not have functioning futures markets to stabilise prices; we stop exports, reducing farmers’ income; and we won’t examine why we permit small traders to perpetuate a system that allowed tomatoes at the Agra mandi to cost 250 per cent more than at mandis in Delhi during last summer.

The right, meanwhile, believes government spending means inflation, and that state intervention to support farmers always makes things worse. And that high real growth means people can afford more, not less. So we waste energy on trying to imagine spurious links between fiscal expansion and food inflation; between minimum support prices given to farmers and the price of baigan at your local sabziwallah. And we don’t, ever, deconstruct the actual effects of nine per cent growth — why should growth give us inflation, we shout — but more on that later.

Meanwhile, those left in the centre are puzzled, angry and vocal: we’re producing more, we’re growing, why can’t we feed people?

The answer lies, it is true, in increasing agricultural supply. But, and this is crucial, that doesn’t mean that it is supply which has caused the problem. If we misdiagnose that, we’ll just tinker one way or the other — re-introducing futures as the right would want, or banning organised retail, as the left would demand. But the rises and fluctuations we are seeing simply are not going to be fixable until we understand why they are happening. We will go on blaming them on supply shocks or supply-chain inefficiencies. But the problem is not, at its root, caused by supply. It is caused by demand.

Nine per cent growth is a lot. It means aspirations change overnight — or in the course of a decade. It means that the upper middle class eats more meat; it means the lower middle class demands a greater variety of vegetables; it means that those in the working class who have seen incomes grow have added veggies to a carb-heavy diet. The last alone will be a big deal: if even just a 100 million people have moved out of poverty in recent years, it would be absurd to suppose that they won’t change what they want to eat. The first, most basic aspiration is to eat better.

Yet there are deep-seated reasons why we never think clearly about demand changes. Partly it’s just the cynicism that’s absurdly common these days: if something is going wrong, we must have done it to ourselves. And, again, received wisdom can get between you and insight. Some on the left resent any suggestion that growth has benefited enough people to change the demand for food. (There is a well-known claim that some people have consumed fewer daily calories since 1991 which turns precisely on this unwillingness to believe that demand can change.) Nor does the right intuitively understand changing demand; in Neoclassical Economics 101, you learn that people consume more of the same if budgets increase, not something else altogether.

To its credit, the government might be beginning to figure some of this out. The prime minister’s office said on January 13 that milk, eggs and meat, in particular, are seeing a structural increase in demand. (The increase in demand for eggs has been stark, between 15 and 20 per cent a year.) But that is true of vegetables, too, and even perhaps dal, as people move to more desirable varieties.

And yet, periods of high growth in the past have always been accompanied by changes in consumption patterns — and price increases, especially in food. Containing this pressure was one of the main aims of state control in communist economies; in Marxian economics the terms of trade between manufacturing and agriculture is a constant, tedious focus. In freer countries, we can’t expropriate the peasantry, as China managed to do in the past. (It’s failing at that now; eggs and milk in some Shanghai suburbs are selling this January at US prices.)

And if demand increases to this degree, then, even if supply is stepped up, we are still in trouble. Onion production went up from 4.5 million tonnes in 2000-01 to 13.5 million tonnes in 2008-09; the yield went up nearly 60 per cent as well, so we can’t blame stagnant productivity. Yet prices in 2000 averaged Rs 4 a kilo. Now they are a degree of magnitude greater.

If we are bumping up at the very edge of what we can supply, that explains the odd price swings that we get, too. The best explanations for oil prices in the past few years are provided by what economists call queuing models, which predict price behaviour in markets approaching 100 per cent capacity. Instead of prices achieving a new, higher, long-term stability, they will react wildly to every small short-term variation in demand — hence onion prices, high today, were low enough last year for farmers to throw them away in disgust.

So, yes, we didn’t have a supply problem; but growth has given us one — a problem of overall capacity, not the details of market structure.

Solving it will not be easy. Historically, only one thing has worked during high-growth periods, when demand has so outstripped supply: changing agriculture around totally, expanding and capitalising holdings. That is as painful as it sounds dramatic. In England, it was accompanied by decades of riots, the enclosure of the countryside, the Corn Law repeal, and the expansion of the franchise.

If you must be cynical about inflation, don’t be cynical about the cause. Be very, very doubtful that our politics is up to lowering food prices. And nobody ever will act if we keep on fooling ourselves about why it’s happening.


27 Jan 2011, Indian Express

The man and the machine

In Civil Services Reforms, Corruption, Politics on January 28, 2011 at 4:53 am

The CVC (Central Vigilance Commissioner) and the CAG (Comptroller and Auditor General) have been in the news lately, though for different reasons. (Curiously, both are senior IAS officers, from the Kerala cadre.) What role have these and some other constitutional or statutory bodies played in governance?

It would be recalled that the Election Commission, in the pre-Seshan era, functioned as a mild, government affiliated body meekly overseeing a corrupt electoral process, where the government agents and local goons were able to terrorise whole neighbourhoods and distort the electoral process. During his civil service period, T. N. Seshan was known to be a highly “loyal” civil servant. However, once he became a constitutional authority, he tore off his whiskers, and shook up the system single-handedly, exercising his constitutional powers to clean up the electoral process, much like Thomas Becket stood up during the time of Henry II. It is true that the electoral process still reeks of money power, but at least he largely eliminated muscle power. Indeed, we now need Seshan in a new avatar to clean up the use of black money in our electoral system.

Most chiefs of such regulatory agencies, chosen from among retiring or retired civil servants, are unable to visualise themselves as representing a major public need to keep watch and control the government; they continue to perform as meek, unobtrusive and obedient file pushers, toeing the government’s line and not wanting to displease the “masters”; they forget that they no longer work for the government, but their new masters are the people of India, who have charged them with the responsibility of oversight on government; and given them enormous powers to do so.

Sadly, the Peter Principle overtakes them. The Central Vigilance Commission, for example, has functioned hitherto as an adjunct office of the government, and over the past 60 years or so has a near-zero record of uncovering major malfeasance or thuggery indulged in by government servants. I have known many CVCs, and they are generally honest and decent human beings; sadly they never realised their capacity to reform the system, to root out corruption — the specific job assigned to them statutorily.

It is wrong to pillory P .J. Thomas at this juncture — it is not Thomas who appointed himself as CVC; it is the government which committed the blunder. Thomas is, and will continue to be, innocent until and unless he is found guilty. The tragedy is not on this point; the potential for far-reaching damage lies in the manner in which the selection committee functioned, with the PM and a minister outvoting a dissenting member representing the opposition — as if the appointment was for a political job, using voting power as the instrument.

Clearly, the intention of setting up the committee was to find consensus in each case, not to function through brute majority. It is unconscionable and indefensible if one member from a panel proposed by government is chosen, overruling the objections of the opposition representative, when she offered to support any of the other two members on the same government panel. Such a farcical selection process has not been condemned adequately — in future, this should never happen. I sympathise with Thomas for landing in a situation for which he was not responsible. In any case, the institution of the Vigilance Commission has been in the limelight for totally the wrong reason — generally it has been a very passive, docile agency.

Then there is the CBI, which is often in the news — mostly not for bringing culprits to book, but for allowing blatant, major criminal acts to be covered up, and for allowing large-scale national looters to escape. It is unfortunate that this agency has been used as the handmaiden of the party in power, forced to look the other way when people with influence are involved; and now and then to deliberately rope in the innocent with a false charge. It is imperative that the CBI should be made autonomous, and brought outside the purview of government control. No institution in India is ever able to govern itself; and a suitable independent, credible, oversight machinery for the CBI is also an equal imperative.

It may be pertinent to mention the admirable role played by the Union Public Service Commission over the past six decades. Not one voice has been raised against the UPSC for using influence in selection for the all-India services. This is a great achievement, considering that service commissions in many states have sullied themselves with blatant examples of corruption and nepotism. Clearly, the corroding influence of politics has not penetrated this institution. It is another thing that these bright young officers, over time, are exposed to our political system, and an unconscionably large proportion compromise their intellectual, moral and financial integrity sooner or later.

It is in this context that the achievement of the CAG needs to be evaluated. Current incumbent Vinod Rai’s report, complete with facts, figures and logic, has handed over a case, ready for crossing the t’s and dotting the i’s, to the prosecuting agency. I had a nodding acquaintance with Rai as a young officer in the commerce ministry in the early 1980s. He came through even then as serious, motivated and dedicated — he clearly has preserved these wonderful qualities.

I have had occasion to mention to many previous CAGs that they were too soft, too polite, too friendly, too pusillanimous and by implication, not discharging the constitutional responsibilities cast on them. At last we have one CAG who is interpreting his post in the manner it ought to be. He may fail, given the prevailing atmosphere; at least he would have tried. We need such examples so that outstanding civil servants, with the courage of their conviction, can still influence the course of governance in these difficult times.


27 Jan 2011, Indian Express

Identifying a billion Indians

In Bureaucratic Delays, Corruption, PDS, Poverty Eradication, School Vouchers, UID on January 28, 2011 at 4:44 am

IN A small village north-west of Bangalore, peasants queue for identities. Each man fills in a form with his name and rough date of birth, or gets someone who can read to do it for him. He places his fingertips on one scanner and stares at another. A photograph of his face is snapped. These images are uploaded to a computer. Within a few weeks he will havean identity number.

The Indian government is trying to give all 1.2 billion Indians something like an American Social Security number, but more secure. Because each “universal identity number” (UID) will be tied to biometric markers, it will prove beyond reasonable doubt that anyone who has one is who he says he is. In a country where hundreds of millions of people lack documents, addresses or even surnames, this will be rather useful. It should also boost a wide range of businesses.

So far the process has gone smoothly. More than 1m people have been enrolled since October, and the pace is accelerating. It needs to: 1m is less than 0.1% of the population. The scheme presents difficulties both for the people in charge, many of whom were recruited from software firms, and for the private contractors who are doing much of the work. How do you ensure that the data are accurate? How do you build a robust database containing biometric information about more people than any other? How do you deal with peasants whose fingerprints are unreadable after years of manual work? (Adding moisture to their fingertips helps.)

When an individual is enrolled, his biometric data must be compared with everyone else’s to ensure there is no duplication. Sometimes the workers who show people how to place their fingers on the scanner accidentally scan their own fingerprints. As enrolments hit a peak of about 1m a day, the system will need to carry out a staggering 14 billion matches per second.

This mighty task has been awarded to private contractors in an unusual way. There are three vendors: Accenture and L-1 Identity Solutions of America, plus Morpho of France. The firm that does the fastest, most accurate job gets 50% of the work; the others get 30% or 20%. This allocation is frequently reassessed, so if the second-best firm starts doing better, it picks up some work from the leading firm. This keeps everyone sharp.

One database, many possibilities

The government’s aim is to improve services and reduce corruption. A shocking two-thirds of the subsidised grain that the government allocates to the poor is either stolen or adulterated. When middlemen say they have delivered so many bags of rice to so many thousands of peasants, there is no way to tell if they are lying. But if each peasant has to scan her irises every time she picks up her ration, it will be harder to scam the system. Similar controls could be used to curb voter fraud.

A reliable way of identifying people would also smooth financial transactions. Some 42m poor households toil for a government scheme that guarantees them up to 100 days of work at the minimum wage each year. The money is welcome; the trek to the bank to collect it is not. Ram, a peasant in Madhya Pradesh, walks 6km (4 miles) to the bus stop, travels 14km clinging to the roof of a bus, waits two hours in the bank and then does it all again in reverse. The trip swallows a fifth of his earnings, in the form of fares and the opportunity cost of missing a day’s work.

The identity scheme could help Ram avoid this hassle. The plan is to supply scanners to village shops and link them to distant banks via mobile phones. The man could walk in, scan his fingers and authorise the bank to transfer his money to the shopkeeper’s bank account. The shopkeeper could then advance Ram the money, minus a small fee.

Small shopkeepers are salivating. B.C. Manjunath, who runs a tiny kirana store selling boiled sweets, soap and single eggs, sees two ways to profit. As well as charging fees, he would benefit from customers with more cash in their pockets. At present he has little choice but to extend credit. Customers owe Mr Manjunath’s family 20,000 rupees ($440), interest free.

Because the UID system is an open platform, businesses will be able to graft inventive applications onto it. Hospitals could match medical records with patients who are far from home. This would help make records portable, says Shivinder Singh, the managing director of Fortis Healthcare, a chain of private hospitals. Insurance would become easier to provide. Barely one in 100 Indians has health insurance, not least because identities are so hard to verify. Indeed, all kinds of insurance would be much cheaper if companies had a reliable way of discovering, for example, that a man applying for car insurance in Mumbai had been convicted of drink-driving in Delhi.

Microfinance should start to work better, too. It enjoyed a huge boom in recent years, followed by a bust. Many poor people found they could borrow more than they could ever hope to repay by going to several lenders. As a result, some microfinance outfits collapsed. The UID scheme ought to allow for greater control over such small loans.

A secure identity system will also help schools, reckons Suhas Gopinath, the boss of Globals, a firm that helps schools handle information. It would make it easier to monitor each student’s progress, he says. And if a student migrates to another state, his school records could move with him.

Even with strict controls for privacy, the UID scheme will help companies understand more about the population they serve. “It would be fantastic for just about any business,” predicts Mr Singh. There is a caveat, of course: the scheme must work. Britain has put off plans for biometric identity cards partly because of worries about soaring costs and technical snafus. Building and running India’s database is a challenge as gargantuan as India itself.

27 Jan 2011, The Economist

India Asks, Should Food Be a Right for the Poor?

In Bureaucratic Delays, Corruption, Malnutrition, PDS, Public Health on January 24, 2011 at 9:18 am

JHABUA, India – Inside the drab district hospital, where dogs patter down the corridors, sniffing for food, Ratan Bhuria’s children are curled together in the malnutrition ward, hovering at the edge of starvation. His daughter, Nani, is 4 and weighs 20 pounds. His son, Jogdiya, is 2 and weighs only eight.

Landless and illiterate, drowned by debt, Mr. Bhuria and his ailing children have staggered into the hospital ward after falling through India’s social safety net. They should receive subsidized government food and cooking fuel. They do not. The older children should be enrolled in school and receiving a free daily lunch. They are not. And they are hardly alone: India’s eight poorest states have more people in poverty – an estimated 421 million – than Africa’s 26 poorest nations, one study recently reported.

For the governing Indian National Congress Party, which has staked its political fortunes on appealing to the poor, this persistent inability to make government work for people like Mr. Bhuria has set off an ideological debate over a question that once would have been unthinkable in India: Should the country begin to unshackle the poor from the inefficient, decades-old government food distribution system and try something radical, like simply giving out food coupons, or cash?

The rethinking is being prodded by a potentially sweeping proposal that has divided the Congress Party. Its president, Sonia Gandhi, is pushing to create a constitutional right to food and expand the existing entitlement so that every Indian family would qualify for a monthly 77-pound bag of grain, sugar and kerosene. Such entitlements have helped the Congress Party win votes, especially in rural areas.

To Ms. Gandhi and many left-leaning social allies, making a food a legal right would give people like Mr. Bhuria a tool to demand benefits that rightfully belong to them. Many economists and market advocates within the Congress Party agree that the poor need better tools to receive their benefits but believe existing delivering system needs to be dismantled, not expanded; they argue that handing out vouchers equivalent to the bag of grain would liberate the poor from an unwieldy government apparatus and let them buy what they please, where they please.

“The question is whether there is a role for the market in the delivery of social programs,” said Bharat Ramaswami, a rural economist at the Indian Statistical Institute. “This is a big issue: Can you harness the market?”

India’s ability, or inability, in coming decades to improve the lives of the poor will very likely determine if it becomes a global economic power, and a regional rival to China, or if it continues to be compared with Africa in poverty surveys.

India vanquished food shortages during the 1960s with the Green Revolution, which introduced high-yield grains and fertilizers and expanded irrigation, and the country has had one of the world’s fastest-growing economies during the past decade. But its poverty and hunger indexes remain dismal, with roughly 42 percent of all Indian children under the age of 5 being underweight.

The food system has existed for more than half a century and has become riddled with corruption and inefficiency. Studies show that 70 percent of a roughly $12 billion budget is wasted, stolen or absorbed by bureaucratic and transportation costs. Ms. Gandhi’s proposal, still far from becoming law, has been scaled back, for now, so that universal eligibility would initially be introduced only in the country’s 200 poorest districts, including here in Jhabua, at the western edge of the state of Madhya Pradesh.

With some of the highest levels of poverty and child malnutrition in the world, Madhya Pradesh underscores the need for change in the food system. Earlier this year, the official overseeing the state’s child development programs was arrested on charges of stealing money. In Jhabua, local news media recently reported a spate of child deaths linked to malnutrition in several villages. Investigators later discovered 3,500 fake food ration booklets in the district, believed to have been issued by low-level officials for themselves and their friends.

Inside the district hospital, Mr. Bhuria said he had applied three times for a food ration card, but the clerk had failed to produce one.

“Every time he would say, ‘We will do it, we will do it,’ ” Mr. Bhuria recalled. “But he never did.”

A farmer, Mr. Bhuria fell into deep debt six years ago after he mortgaged his land for a loan of 150,000 rupees, or about $3,200. Like most people in the district, Mr. Bhuria is a Bhil, a member of a minority group whose customs call for the family of the groom to pay a “bride price” before a wedding. Mr. Bhuria spent most of his loan on his brother’s wedding and was left landless, yet he and his wife kept having children. They now have six.

He and his wife migrated with their children to work as day laborers in the neighboring state of Gujarat. Working in Gujarat is common for farmers from Jhabua, but since none can use their ration booklets outside their home villages, they struggle to feed their families. When migrants returned to plant their fields in July, the malnutrition wards began to fill up at the district hospital.

“This is a cycle,” said Dr. I. S. Chauhan, who oversees the wards. “The mother is also malnourished. And they are migrant workers. They work all day and can’t care for their children.”

Moneylenders are common across rural India, often providing loans at extortionate rates. Some farmers hand over food booklets as collateral. Sitting in a small shop, Salim Khan said people approach him for loans when a child is sick or if they need cash to travel for migrant work.

“Until they repay me,” he said, “I keep their ration card.”

He uses the cards to buy grain at government Fair Price Shops at the subsidized rate of about 2 rupees, or 4 cents, a kilogram. He resells it on the open market for six times as much. The margin represents interest on the loan. He has held the ration cards of some migrants for seven years. “Sometimes I’ll have 50 cards,” he said. “Sometimes I’ll have 100 or 150. It’s not just me. Other lenders do this, too.”

He said he was willing to lend slightly more money to the most destitute because their yellow ration booklets made him eligible for the full 77 pounds of grain, the most available in a tiered rationing system. “The yellow ones are best for me,” he said.

This is just one of the illegalities that permeate the system, according to people in Jhabua. Bribery is also common; government inspectors are known to extort monthly payments from the clerks who sell the subsidized grain. Some clerks pay small bribes to local officials to get their jobs or keep them. In turn, moneylenders slip money to clerks to let them use the ration cards to collect the subsidized grain, sugar and fuel.

In a cavernous government warehouse, bags of grain are stacked almost 15 feet high, awaiting trucks to carry loads to different Fair Price Shops. R. K. Pandey, the manager, blamed local men for the persistent malnutrition in the district, saying they often sell the subsidized wheat on the open market and buy alcohol. He also noted that the Bhil population favored corn, not wheat, so besides buying alcohol, they also sell the grain to buy corn.

Efforts are under way to reform the national system. Officials in the state of Chhattisgarh have curbed corruption by tracking grain shipments on computers, so that officials cannot steal and resell it.

Many social advocates, suspicious of market solutions, say that such reforms prove that the system can be improved. But pro-market advocates say that issuing either food coupons or direct payments would circumvent much of the corruption and allow recipients more mobility and freedom of choice. They point to the eventual creation of a new national identity system – in which every person will have a number – as a tool that can make such direct benefits possible.

These sorts of debates seem like abstractions in much of Jhabua, where poverty and hunger are twinned. At the malnutrition ward, Dr. Chauhan said that Jogdiya, the tiny 2-year-old, had pneumonia, diarrhea and possibly tuberculosis. His health had been steadily deteriorating in recent weeks, but his father, Mr. Bhuria, had no money for either food or medicine. He had gone to Gujarat in mid-July in search of migrant work but then quickly returned after Jogdiya and Nani became sicker. A relative had warned him not to go, saying his children were too sick.

But he had felt he had no choice. “We didn’t have anything to eat,” he had said.


9 Aug 2010, The New York Times

Rotting foodgrains, starving poor

In Bureaucratic Delays, Corruption, PDS, Poverty Eradication on January 24, 2011 at 9:15 am

First, a few shocking facts, unearthed by a Parliamentary Committee: Between 1997 and 2007, 1.83 lakh tonnes of wheat, 6.33 lakh tonnes of rice, 2.20 lakh tonnes of paddy and 111 lakh tonnes of maize rotted due to either lack of storage facilities or poor maintenance of stocks in the existing facilities.

As on January 1 this year, 10,688 lakh tonnes of foodgrains were found damaged in the depots of the Food Corporation of India (FCI), enough to feed over six lakh people for over 10 years.

The storage losses of foodgrains in 2009-10 amounted to Rs 228.39 crore and transit losses another Rs 182.46 crore.

The targeted public distribution system (TPDS) meant for families below poverty line (BPL) was unable to reach the poor, on account of both systemic deficiencies and the Government not having updated data.

The Parliamentary panel found that the requirements of foodgrains for the TPDS were being computed at 27.5 per cent of the population on the basis of the lowest poverty estimate of 1993-94 made by the Planning Commission, overlooking the calculations of much larger number made by Committees headed in recent years by Arjun Sengupta, N. C. Saxena and Suresh Tendulkar.

For instance, according to the Saxena Committee, the BPL population was 50 per cent, while the Tendulkar Committee’s estimate was around 38 per cent with the base year of 2004-05.

Normally, one would have expected the Government and the Food Minister, Mr Sharad Pawar, to be human enough to feel for the starving poor, and taken steps, on their own volition, against the rotting of huge quantities of foodgrains in the godowns or lying in the open exposed to sun and rain.

If their tears for the poor were genuine, they would not have been waiting for somebody to goad them to distribute the grains free to those below BPL in the country, especially in the context of the FCI having, as on June 1, a stock of 57.8 million tonnes against the buffer norm of 31.9 million tonnes.

Stalling tactics

As Dr M. S. Swaminathan, the renowned agricultural expert, suggested, the Government could by this time have asked the National Institute of Nutrition, Hyderabad, and the Central Food Technological Research Institute, Mysore, to examine the rotting foodgrains to sort out the quantities which were inedible, or were edible only as an animal feed, so that foodgrains fit for human consumption could have been distributed free to the poor.

But no, it did nothing of the sort. Even after the Supreme Court, while hearing a public interest petition, told the Government as early as on August 12 to discharge its bounden duty to save the starving poor by the free distribution of foodgrains which were going waste, Mr Pawar began quibbling that the Supreme Court only made an ‘observation’ and it was not an ‘order’.

When the apex court on August 31 emphatically drove home the point that its earlier remark was a clear directive meant to be carried out, Mr Pawar adopted stalling tactics. He first flatly stated that it was not practicable to implement the court’s order, then that the quantities said to be rotting were ‘hugely exaggerated’, and next, that the court’s order had not reached his hands.

It was only when he was cornered by relentless castigation by angry members in both Houses of Parliament did he finally agree to ‘honour’ the court’s decision.

Altogether an unsavoury spectacle of a seasoned Minister like Mr Pawar tying himself into knots over what essentially was a simple and commonsense proposition.

In the bargain, he made the Government look heartless and callous, causing acute embarrassment to the Congress(I) and other partners of the UPA, making it impossible for them to come to his defence.


3 Sep 2010, Hindu Businessline

What an idea, Sirji!

In Education, Financial Inclusion, NREGA, PDS, Red Tape, School Vouchers on January 24, 2011 at 9:00 am

What do programmes like the New Pension Scheme (NPS), the UIDAI, the Right to Education, the Right to Information, and many more, have in common, apart from the fact that all have been launched by the UPA? Almost all, believe it or not, were originally efforts made by individuals/NGOs which have now got mainstreamed and have the potential, in both good ways and bad, to change our lives in a big way.

The Right to Information Act, it is pretty well-known by now, was borne out of the work of Aruna Roy and her campaign to have various registers/lists made public, muster rolls of workers who were supposed to have got money from various public works programmes, lists of public works sanctioned and the money allocated to them, and so on. The list of the other parents, as it were, is less well-known, and that is what this piece hopes to correct, at least partially. The timing is a bit off since it was actually meant to coincide with the 13th anniversary of the Delhi-based Centre for Civil Society (CCS) last month, but better late than never!

Parth Shah, who set up CCS, began talking of school vouchers several years ago. Why give a subsidy to a school, which is what government-run schools essentially boil down to; why not give it to parents? That way, if parents are dissatisfied with the quality of education, they will move their children to other schools; this will then put pressure on government schools to deliver. Many others were talking the same language, but what CCS did was different—it collected money to fund the education of 400 children for a year and then used volunteers to go across to certain wards in Delhi on cycle rickshaws using loudspeakers to publicise the scheme. For these 400 students, it got over a lakh applications. Poor India wanted to vote with its feet. The Right to Education Act has several shortcomings, the principal one being the insistence that all schools must be recognised by the government, which will drive up their costs and them out of business. But CCS’s school voucher system is inbuilt into the system since 25% of all school seats will have to be reserved for RTE children for whom the government will make payments. Not bad for a 13-year old.

In 2006, Gautam Bhardwaj, along with others like Vijay Mahajan of Basix, Renana Jhabvala of Sewa and UTI’s UK Sinha, set up Invest India Micro Pension Services (IIMPS), an outfit dedicated to work on pension funds among the poor—the company has set up a proprietary IT platform and even owns the brandname ‘micro pension’. By end 2008, it had begun working with the Rajasthan government in a scheme where the government co-contributed a one-time Rs 1,000 and 50,000 persons signed up for it, contributing Rs 100 per month—Andhra Pradesh, Madhya Pradesh, Karnataka and Haryana have now announced similar schemes, and IIMPS has got queries from other Asian countries to run similar schemes for them. Meanwhile, it also signed another 1,50,000 persons for a similar programme, but without co-contributions from the government—the fund, administered by UTI, has earned around 13% per annum in the last few years. To put this in perspective, the government’s New Pension Scheme has just 11,000 members. Since NPS contributors end up giving around 10-11% of their contributions in commissions, the regulator has now announced NPS-light, with IIMPS-type minimum deposits and is also looking at working with groups like Sewa to get more contributors and at lower costs.

Around the same time, ICICI Bank’s Nachiket Mor branched out into financial inclusion and, with Fino, began figuring out how to take banking to the unbanked. Fino tied up with several banks and financial service providers, began giving biometric cards that captured all financial transactions—service outlets had card-readers and acted as banks.

Fino has 18 million customers today. It gives out money on behalf of NREGA, government pensions and even offers cashless hospitalisation in five states under the Rashtriya Swastha Bima Yojana. Unlike traditional MFIs like SKS who just lend money, Fino’s powerful backend allows banks to offer rural India insurance and money market mutual funds. Precursor to the UIDAI?

Yes, but not the only one. Anurag Gupta’s A Little World (ALW) began with smart-card based microfinance and then moved on to cardless mobile phone based banking. It has 3 million customers across 20,000 villages in 18 states. MCHQ, now mChek, the mobile payments solution, was originally developed by ALW. Others like Abhishek Sinha of Eko have improvised on this further and come up with one-time password generators for cash transfers. Rural banking, what RBI is stressing nowadays, couldn’t have come even as far as it has without these gents.

The Jawaharlal Nehru Urban Renewal Mission, similarly, was part of a process of focussing on urban planning and reform headed by individuals such as Ramesh Ramanathan (who is also an independent director of Fino and the technical advisor to JNNURM) and Nandan Nilekani.What an idea, Sirji!


14 Sep 2o10, Financial Express

Go Go Gujarat

In Bureaucratic Delays, Corruption, Gujarat, Poverty Eradication, Red Tape on January 24, 2011 at 8:17 am

As the curtain fell last week on India’s most visible business jamboree, the clumsily named biennial Vibrant Gujarat Global Investors Summit, you could be forgiven for experiencing a sense of déjà vu.

As they had two years earlier, investors pledged to sink vast sums—upward of $450 billion, or about one-third of India’s GDP—in the western Indian state’s soaring economy. As in the past, a parade of India’s top businessmen—among them Mukesh Ambani, Anil Ambani, Ratan Tata and Anand Mahindra—lavished praise on Gujarat’s progress under Narendra Modi, the state’s 60-year-old business-friendly chief minister, and a leading figure in the opposition Bharatiya Janata Party (BJP). And unsurprisingly, going by press reports, Mr. Modi retained his place as India’s most polarizing politician: loved and loathed in equal measure.

Nine years after Hindu-Muslim riots killed more than 1,000 people, three-quarters of them Muslim, the violence continues to cast a shadow over how Indians talk about Gujarat. Mr. Modi’s critics accuse him of either abetting or failing to control the bloodletting in 2002. His supporters say he is a scapegoat for events largely beyond his control.

To be sure, this larger national conversation, at its heart about morality in public life, will not disappear any time soon. (Mr. Modi says he is innocent; a team appointed by the Supreme Court is investigating the charges against him.) But it ought not to obscure another, equally important, question: What can the rest of India learn from Gujarat’s economic success?

Think of Gujarat as a slice of East Asia—say Japan in the 1960s or South Korea in the 1980s—set amidst the dust and drama of the Indian subcontinent. For nearly a decade now, the state on the edge of the Arabian Sea has averaged double-digit growth rates, the only large Indian state to do so. With only 5% of India’s 1.1 billion people, Gujarat accounts for almost one-third of the country’s stock-market capitalization, more than one-fifth of its exports, and about one-sixth of its industrial production. Per-capita electricity consumption in the state is about twice the national average.

Twenty years ago, before the advent of economic reforms, the average Gujarati was about four-fifths as rich as the average resident of Maharashtra, the neighboring state that has long been India’s industrial heartland. In 2008, according to the Reserve Bank of India’s most recent figures, per-capita incomes in Gujarat and Maharashtra were virtually identical— just over $1,000 in nominal terms—despite the latter housing Mumbai, the country’s business capital.

Under Mr. Modi, Gujarat has acquired a reputation for aggressively wooing both domestic and foreign investors. In 2008, it snagged the Tata Group’s flagship Nano car project after political unrest forced the company to flee Communist-ruled West Bengal. The state houses India’s two largest oil refineries, and one of the world’s largest automated coal terminals. Its roads, ports and power plants are among the best in the country. Among its prominent foreign investors: General Motors, Mitsubishi Heavy Industries and Canada’s Bombardier.

What explains this superior performance? In a nutshell: a fortuitous mix of geography, culture and leadership. Gujarat, which has India’s longest coastline, has been a trading culture for centuries. It also houses one of India’s most entrepreneurial populations.

In Gujarat, wealth tends to be respected rather than merely envied. The global Gujarati diaspora—with its fingers in everything from real estate in east Africa to diamond trading in Belgium to motels and newspaper kiosks in the United States—fertilizes the state with know-how, ideas and international contacts.

Mr. Modi’s supporters tend to exaggerate his contribution to the state’s prosperity. Gujarat’s culture and geography set it on the path to faster development as soon as New Delhi loosened the dead hand of the federal government with reforms in 1991. Nonetheless—apart from the major blemish of the 2002 riots—the chief minister can be proud of his record of governance.

Unlike much of India, Gujarat has streamlined and rationalized procedures for land allocation and environmental clearances. For instance, the Tata Nano project took just three days to get the green light in 2008. Foreign investors can use a web portal to track paperwork and make complaints.

In the business community, the famously frugal Mr. Modi has earned a reputation for not only being personally honest, but also for setting the tone for his administration. He is also perhaps the only major Indian politician—in a political culture built on government handouts—to espouse the gospel of small government. His motto: “minimum government and maximum governance.”

The Gujarat council of ministers has just 20 members, remarkable for a large state. Unlike many Indian politicians, Mr. Modi, a bachelor, has no loutish offspring who expect to inherit political power by right. By appealing to pan-Gujarati pride, he has largely transcended the caste equations that marked Gujarat politics in the 1980s and still define elections—and the flawed policies that flow from them—in much of India.

In the end, most states can’t hope to replicate, at least not overnight, Gujarat’s entrepreneurial culture and sensible attitudes toward wealth creation. But other elements of the state’s model—strong leadership, anti-corruption efforts, a streamlined bureaucracy and a welcoming attitude toward business—can travel without damage across its borders. And Mr. Modi, Gujarat’s longest-serving chief minister, is proof that good governance can also be good politics. The sooner more states figure this out, the better it will be for India.


20 Jan 2011, Wall Street Journal