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'Govt will continue to fail in fight against moneylenders'

Ashok V. Desai     March 13, 2015

Ashok V Desai, former chief consultant, Ministry of Finance
Ashok V Desai, former chief consultant, Ministry of Finance
The Finance Minister was far too timid. Industry is doing badly; he should have given it generous incentives, especially accelerated depreciation. He could afford it, for the macroeconomic situation is benign: inflation is down, balance of payments is comfortable, and public debt is not too high.

The new government created a "national portal" which is supposed to give information about all official activities. It lists 345 public welfare schemes. Typically, someone at the centre has a brainwave: why do we not immortalise one of our dead politicians by naming a welfare scheme after him? He talks to the finance minister, who allocates a few billion rupees. Many schemes duplicate one another; but merging them would erase a politician's memory and anger his followers. So schemes go on multiplying.

The Bharatiya Janata Party has been out of power and hence out of the scheme multiplication game for a decade; it has just started with a few schemes named after Atal Bihari Vajpayee and Deen Dayal Upadhyay. But it has not named its biggest new scheme, called Jan Dhan Yojana, after anyone, probably because it is not new. It is a combination of three old programmes. One type seeks to deliver desirable goods and services to the poor; another subsidises them, and the third seeks to enhance their earning capacity.


The first type has been the least successful. It requires thousands of people to work diligently and be honest - traders in the case of food distribution, doctors in the case of health services, teachers in the case of schools and so on. The expectation has been belied, and the programmes have generated vast corruption. Subsidies create dual markets and lead to leakages from the subsidised into the unsubsidised market. So product-based subsidies have become discredited. The recent trend has been for the government to avoid goods and services and to deliver money instead. But cash is easy to misappropriate. So the government has been trying to open bank accounts for every beneficiary and send the money directly to him.

This effort too has met with little success. The problem is that bank employees refuse to live in villages; they prefer urban luxuries. So the Reserve Bank invented an agent who was not an employee - a shopkeeper or trucker who would also be a bank agent. He is also usually a moneylender, and does not see why he should give up his lucrative business for a modest bank correspondentship. Nor do villagers see any point in keeping savings in a bank. They would leave modest sums with shopkeepers or employers; if they have more money, they would rather build a house, buy a farm or pay a dowry.

But the new government is also sold on rural banking. It wants to give benefits to villagers, and wants to pay them through banks. It proposes to sweeten rural bank accounts with free insurance, a debit card, an overdraft etc. It too wants to appoint banking correspondents in every village.

That is not going to work any better than it has in the past. What would work is two things. One is importing the e-Paisa system from Kenya. There, you can go to any shop which has an e-Paisa window, give the girl money, and ask her to send it to your wife. She will phone the e-Paisa agent in the village - usually a shopkeeper or moneylender - and ask him to pay the woman; the husband will phone his wife and ask her to collect the money from the agent. The money transfer service works well because transfer charges are quite high. The other is to give the local moneylender a kind of bank licence on a few simple conditions: that he keeps accounts for inspection, does not beat up a borrower, keeps a bank account etc. If these two things are done, a decentralised, low-cost banking service will emerge.

But it will not happen. For Indians are fed from infancy with the canard that moneylenders are vultures and have to be destroyed. So the government will continue to try and compete against moneylenders, and continue to fail.

(The author is an Economist and former Chief Consultant to the Ministry of Finance)

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