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BW Businessworld

What Villagers Need

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There are reports that the Reserve Bank of India will soon act on the report of its Malegam committee and implement its major recommendations. To summarise, the committee recommended registration of microfinance institutions, a cap on the interest rates they can charge and the margin they can make on the funds they borrow, a ban on loans to borrowers unless they are members of joint liability groups and their household earnings are below Rs 50,000, a cap of Rs 25,000 on a single loan and Rs 50,000 on all loans to a family, a minimum tenure of a year if the loan is for less than Rs 15,000 and two years if it is of Rs 15,000-25,000 (loans over this limit being banned), and at least three quarters of the total amount lent must be for income-earning activities. The report was criticised by this magazine for its neglect of competition, lack of fairness, and its ignorance of economics, especially of the concept of product differentiation. It is pointless to criticise the report beyond this point for two reasons. It is so limited in its vision that it would be better to junk it than try to improve it; and when government institutions get into their self-righteous, save-the-poor mode, they cease to be open to reason. But it is worth asking what a more rational government would do to improve the conditions of the poor.
Before they can be helped, the poor must be identified. The government leaves identification to its junior civil servants. This is a perfect formula for generating corruption. All that the civil servant like gram pradhan has to do is to make fake lists of the poor and pocket their benefits. The government has devised many formulae for identifying the poor; they are all arbitrary. The government created MGNREGA in the belief that only the poor would use it — none but the poor would choose to do physical work in the open in the heat of the day. This argument is erroneous in two ways. First, if the poor must be made to work, it must be productive. Throwing stones and dust on tracks for them to be washed away in the next rains is not worth doing. And second, it is wrong to use unpleasant work as a way of identifying the poor. They deserve a subsidy merely on account of being poor, without any further conditions. By world standards, most people in India are poor. So it is not necessary to identify them. Giving a subsidy to all would make identification and the corruption it can create unnecessary. As long as the subsidy is modest and some effort is involved in getting it, the rich would not bother to take it.
The poor are by definition deficient in purchasing power; the simplest way to make them less poor is by means of a cash subsidy. The government does not agree. It prefers to give the subsidy in the form of goods and services that it thinks the poor should have — foodgrains, education, good advice, etc. It is worthwhile giving a subsidy in kind if it creates in the poor a capacity to earn more; this is the rationale for giving them education and medical services. But when the government provides them, these services are invariably of very poor quality; it is better to give the poor cash, and let them choose the school, doctor or hospital. So the best anti-poverty programme would be to give everyone, rich and poor, the same dole, and to save the money being spent on food procurement, public distribution, MGNREGA and other anti-poverty programmes.Money does not always solve the problem; there are poor with special needs. For instance, old people may need to be looked after; orphans may need family care or equivalent; sick people may need medical care. Again, government service providers work poorly; it is better to leave these services to local communities, and to subsidise them.
Should the poor be helped to start enterprises? Enterprises should be competitive and commercially viable; hence they must not be subsidised. The success of Mohammad Yunus's Grameen Bank has tempted the government to jump on the bandwagon; but it must not. Self-help groups share risk and thereby reduce it; that makes them creditworthy. They are perfectly feasible without subsidy; subsidies will only distort the incentives. There may be a case for legislation to give SHGs legal recognition, as also to regulate the relationship between them and institutions that lend to them. But the need must arise out of experience, not presumed; and the legislation can probably be embodied in acts relating to banks and cooperatives. For these reasons it is our view that the Malegam committee report should be scrapped and the government should simply wait and watch the MFI movement.