The Gist of Yojana: July 2016

The Gist of Yojana: July 2016

Unleashing Growth Through Empowerment

The Government of India since May 2014, has been making efforts to reinvigorate India and help growth reach its potential of above 9 per cent. Since then, in a series of measures that Government of India announced, the focus has been on development- oriented policies to achieve higher rate of growth. The country, under foreign rule for nearly eight centuries, suffered from depletion of resources and lower rate of per capita economic growth. In 1951, 53 per cent (200 million) of population was below the poverty line and India was considered a very low income country. The post- independence era witnessed adoption of mixed pattern of society where socialist planning was pre-dominant. Consequent to a series of initiatives and policy measures, some due to severe crisis, India was recognized as an important emerging market economy by early 2000s. Since 2015; India is the fastest growth economy of the world which successfully reduced poverty levels, despite revised and higher benchmarks, to less than 30 per cent of the population.

To achieve growth, and ensure build-up of industrial base, availability of finance, besides many other factors, is the most important. In this context, in the initial stages of development, the banking system plays an important role and therefore, efforts were made to not only establish a network of banking institutions, but also ensure that banking penetration is high and that financial resources are easily available to citizens who require them. Then, there is also a need to create an eco-system where, in addition to financial resources, there is ease of doing business and availability of hand-holding when required. The government, after ensuring availability of bank accounts under the Prime Minister’s Jan Dhan Yojana (PMJDY), announced other initiatives like MUDRA Bank, Start-up and Stand-up India, and Atal Innovation Mission in a well sequenced manner.

To ensure a steady growth, a robust financial system is necessary, especially banking, to facilitate efficient allocation of resources from savers to investors with productive investment opportunities. The banks undertake asset transformation whereby, a depositor can place resources in a bank and the bank, in turn, can lend to the market. Banks can also help reduce poverty in an economy through facilitating growth and by providing universal access to financial services. An ineffective financial system also exacerbates income inequality among the poor as it keeps capital from flowing to wealth- deficient entrepreneurs.

To ensure widespread availability of banking finance, especially in rural areas, State Bank of India was nationalized in July 1955. To address the apprehension that a few business houses might acquire control over the country’s banking assets through banks, and to achieve economic growth with social justice, the Government nationalized 14 commercial banks in 1969, and 6 more banks in 1980. The Indian banking system underwent a structural transformation since then and authorities were successful in directing substantial amount of credit to the agricultural sector, micro, small and medium enterprises, and industry. The Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) vigorously pursued financial inclusion to provide access to banking services to excluded sections of society. Despite these measures, Cerisus 2011 revealed that, in India, out of 24.7 crore households, only 14.5 crore (58.7 per cent) households had access to banking services. In rural areas, out of 16.8 crore households, only 9.1 crore (54.5 per cent) were availing banking services.

Therefore, in August 2014, Government initiated PMJDY which aimed at ensuring universal access to financial services viz. banking and deposit accounts, remittances, credit, insurance and pension in an affordable manner. PMJDY was successful in opening 21.7 crore accounts by April 27, 2016, a quantum leap when compared with an outstanding number of 122 crore existing accounts held in all commercial banks on March 31, 2014. It is noteworthy that 17.9 crore accounts have been issued RuPAY cards, 9.7 crore are Aadhaar seeded and 83.6' per Cent are operational. The public sector banks accounted for 20.9 crore accounts of which 12.8 crore were in rural areas. The largest number of accounts were opened in Uttar Pradesh (3.3 crore) followed by Bihar and West Bengal (2 crore) each.

PMJDY is also included in JAM number trinity, i.e. Jan Dhan Yojana- Adhaar-Mobile Number, which focuses on providing support to poor households in a targeted way. Technological developments and standardization of procedures, under JAM, can help in availing banking services, including loans, from mobile phone, without the need of visiting a bank branch.

The Prime Minister, most recently in April 2016, launched the Stand-up India programme to promote entrepreneurship especially amongst the deprived sections of society and women, providing loans in the range of Rs. 10 lakh to Rs.l crore. Earlier, in the Union Budget, the Government had announced a series of measures to encourage and strengthen Start-ups in India, allocating resources, initiating skill programs, providing tax concessions, and facilitating ease of doing business. The Budget announcements and later developments aimed to strengthen the Start-up initiative launched still earlier in January 2016 to take India to the much needed fast-forward ‘job-creation’ mode.

An issue of Interest Rates-It needs to be recognized that though money lenders charge high interest rates, borrowers tend to go to money lenders ignoring a branch of a commercial bank even if it is closer. Therefore, there is a need to study reasons as to why the money lender is persistently successful despite high interest rates. There is a probability that it may not just be the interest rate that is a factor that influences borrowing decisions. After all, historically, according to literature, Chanakya’s interest rate structure was risk-weighted, and the rate of interest would increase with the risk involved in the borrower’s business. Illustratively, interest rates that prevailed in ancient India were 15 per cent per annum for general advance while traders were charged a rate of 60 percent.

MUDRA Bank: It will require a substantial change in the mindset of commercial bankers to lend to micro enterprises, especially those activities covered under MB. The need is to sensitize bankers about the requirements of micro units and make schemes friendly for extension of credit to micro sector.

Stand and Start-Up Initiatives: To strengthen Stand-up and Start-up initiatives, there is need to have an eco-system to create entrepreneurs. India, now needs to consider world-class institutes and courses on entrepreneurship - probably setting up of Indian Institute of Entrepreneurship on lines of IITs, IIMs and agriculture universities. Also, emphasis of educational policy could now shift to setting up more world-class colleges, across India, specializing in commerce, law and business studies.

To create a conducive eco-system for entrepreneurs to flourish, faster Government approvals and’ more incubators, could be helpful. Illustratively, since 1982, only 500 start- ups were promoted annually in the existing 110 incubators and only 40,000 technology jobs have been created since then. And finally, to nurture entrepreneurship, provide mentors hip and share experience, dedicated channels on television and radio, similar to agriculture, could also be considered by the Government.

India is a fast growing economy with a very young population. The demographic dividend can only be availed if there are sufficient opportunities to grow. The Government, in the last two years, has been making efforts to not only provide banking facilities universally, but also to create conducive environment for self-employment and growth. Consequently, empowerment of youth is expected to help India achieve its growth potential of above 9 per cent. This is necessary if India has to rise to be a global power in the near future.

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