All Poor are equal, but some Poor are more equal than others

“Poverty and deprivation get covered as events” writes P. Sainath in his critically acclaimed and bestselling book ‘Everybody loves a good drought stories from India’s poorest districts’ “Yet, poverty is about much more than starvation deaths or near famine conditions. It is the sum total of a multiplicity of factors… Hunger-again just one aspect of poverty-is far more complex here. It is more low level, less visible and does not make for the dramatic television footage that Somalia and Ethiopia do.” Off late, with release of movies like Slumdog Millionaire and with tourist coming here solely for the purpose of clicking the deprived class, the poverty and the poor has seen massive dramatization in India and the world. But when it comes to counting them for the purpose of their welfare, the whole task becomes much more complicated as understanding the poverty as a process in India.

The Central Government on Thursday May 19^th, 2011 approved the proposal of head counts of poor in the country, for the sole purpose of better targeting of the numerous welfare schemes it operates. First such census was done in the year 1992 to count the number of families below poverty line. This time it would be a paperless exercise using handheld devices manufactured by Bharat Electronics Limited. Apart from counting rural poor, which used to be done earlier, this time urban poor would also be enumerated. The Ministry of Rural Development, Housing and Urban poverty alleviation, which is the nodal ministry to conduct this exercise, along with Registrar General of India would jointly conduct this exercise. A new methodology for determination of poor would be used, according to Business Standard “The new methodology for the rural census would divide the rural poor into three sections. One set of the population would be included in the BPL category, while another set of people — the economically affluent but socially deprived — would be excluded from the BPL category. A third set of the population would be enumerated on the basis of seven socio-economic parameters. The methodology for the rural census would consider the economic conditions of the family and attach only moderate importance to factors like social backwardness. The urban population would be enumerated on the basis of three criteria — residential status, social vulnerability and occupational vulnerability.” However there is a catch, for the first time religion and caste would come into picture, that is, the religion and caste of those counted would also be determined.

Although this mammoth exercise of determination and labeling of poor would be undertaken by the Ministry of Rural Development, Housing and Urban poverty alleviation along with Registrar General of India. But those who will get benefits would be only identified by the Plan Panel. As report in Mint says, “While the Planning Commission estimates the number of poor in the country, the ministry of rural development identifies the poor. The processes used by the two are different: the Planning Commission estimates poverty based on consumption, while the BPL census uses socio-economic characteristics such as household assets.” Therein lays the anomaly. Though data would be determined on a different basis, the information from it would be extracted from it using totally different criteria.

This only shows serious lacunae in Government policy making at the highest echelons of the governance. The editorial in the Mint bluntly puts it like this,” On the list of this government’s most serious lapses in policymaking, this one should rank somewhere near the top. The below poverty line census, due to its methodology approved on Thursday, will identify more poor households than officially estimated. But, because the government has also decided that the official estimates will serve as a ceiling, the additional poor families will not benefit from poverty alleviation schemes. In other words, the government will pick and choose who is to be officially poor and who isn’t. India has always had trouble with the ways and means of defining poverty and identifying the poor. But Thursday’s decision says something about the government’s confusion over the political handling of poverty. It is almost as if the aam aadmi’s government was telling some of its votaries: “You may be poor, but you ain’t poor enough”.”

More than Rs. 612, 000, 000,000/- (Rupees Six Hundred Twelve Billion) is spend annually by the Government on welfare of poor and how much actually reaches them is the mystery of the millennium. As it is no state secret that government programs for welfare of poor are usually not in sync with actual requirement and often the money flows out through the bureaucratic leakages. If they are not, the schemes provide incentives for diverting the resources meant for poor, for example, in National Rural Employment Guarantee Scheme (or loot if you prefer) monies are given for digging up pits and filling them up and calling it work.

 

Now if to this determination of poor, if we add in the factors of religion and caste, instead of a portable solution to this chronic problem, it would only provide a heady cocktail to the political parties, dry gunpowder which can be lightened up by smallest spark. Further, Supreme Court in many occasions has pulled up Plan Panel for putting a ceiling on the number of poor in the country as if putting a ceiling would end India’s poverty problem. The Mint reports that in one such instance the Honorable Court observed,” The bench made the critical remarks while dealing with a PIL filed by Peoples Union for Civil Liberties (PUCL) complaining about large scale corruption and irregularities in the PDS mechanism of the country. Questioning the plan panel rational in fixing 36% as the percentage of BPL families in the country, the bench said, “It is astonishing as to how you can fix 36% people in the BPL category in 2011 by relying on the 1991 census data… How can you fix such a limit when the per capita income varies from state to state?... The bench also questioned the Commission for fixing the per capita daily income of Rs. 20 in urban areas and Rs. 11 in rural areas to determine the BPL category…How can you justify fixation of this meager amount when even in the rural areas the amount is not enough”, further the Bench also extolled Deputy Chairman of Plan Panel to file a comprehensive affidavit in this regard. Now with such arbitrariness in determination and selection, isn’t the government is playing with the taxpayer’s money.

Milton Friedman once quipped about government spending,” There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.” With such anomaly at the highest level which in fact will direct expenditure of billions of rupees, done with arbitrary manner, is it worthwhile to ask, whom the government is trying to please, itself by claiming poverty is down, its finances by claiming they are doing things efficiently or the electorates by providing benefits to chosen few and beating its chest to the rest about reduction in poverty.

“All animals are equal, but some animals are more equal than others” writes George Orwell in his famous book ‘Animal Farm’, today a poor might say, “All poor are equal, but some poor are more equal than others.”

© Tarun Mitra

References:-

1.      Mint, “Quick Edit | Uncommon incertitude”, May 20, 2011

2.      Mint, “UPA courts trouble with BPL census”, May 20, 2011

3.      Business Standard, “Cabinet approves BPL census”, May 20, 2011

4.      Mint, “SC slams govt over fixing BPL criteria”, April 20, 2011

The Microfinance Muddle

The saying goes ‘the whole is more than sum of parts’ and when it is applied to the Microfinance institutions, it couldn’t be more appropriate. After all, it is the small foundation of microloans upon which their empires of millions are being built.

It is not the criticism of the business; in a capitalistic economy everyone has the right to do ethical business within the framework of law. Such endeavor is entitled for its benefits, that is, profits. However, a business whose foundation is usually based upon service of the downtrodden without any expectation of profits and this very fundamental character of being not-for-profit gets altered with growth of business surely raises eyebrows. It is the business of Microfinance, where such thing has happened and is happening. It not evil though, provision of credit to the poor, banking to the unbanked. But it is the way and manner of conducting of business which puts this sector into spotlight.

The model of microfinance is not unique to India; it first gained prominence when it was introduced in Bangladesh by Nobel Laureate Prof. Muhammad Yunus. As success has got many relatives, from there it spread across the world from Mumbai to Mexico City touching as many rural and urban poor who are in need of credit.

Microfinance can be defined as provision of broad range of financial services like loans, deposits, payment services, money transfer, insurance products etc to the poor or low income households, for their microenterprises and small businesses, to enable them to raise their income levels and improve their living standards. But what differentiates it from normal banking is its willingness to provide credit without any collateral and for taking such risks it charges rate of interests, which are normally twice or thrice the bank rate. The Microfinance Institutions or MFIs usually bets on the reputation of its customers, because irrespective of any hardship the poor will payback. It is a business of informality, personal touch, relations and contacts, therefore not surprisingly given the scale; millionaires can be made out this very basis of small loans.

In an editorial in The Economic Times, Delhi Edition, Mr. Arvind Panagariya, Professor at Columbia University and Non-Resident Senior Fellow at the Brookings Institute, expounded that there are three players in the microcredit market; the Self Help Groups or SHGs which are principally promoted by the government, the Microfinance Institutions of MFIs which are either NBFCs or Body Corporate or NGO or a not-for-profit enterprise and the local money lender. These three constitute the entire spectrum of microcredit to the needing masses.

SHGs works on the principle of applying collective wisdom of the group and peer pressure by which it tries that credit is productively used and loan is repaid. MFIs can be in form of NGO, not-for-profit enterprise or an NBFC, it accepts almost no collateral and since it seldom gets any help from the government it charges interests which can be twice or thrice of bank rate. Local money lender can be any person who may not be registered with any authority and provides credit at a high rate of interest with or without collateral.

From an analysis of the characters of these players it can be deduced, as Dr. Y.V. Reddy former Governor of Reserve Bank of India puts, that MFI is essentially a leveraged money lender, whereas the local money lender normally lends out of his own funds, MFIs are actually borrowing monies from depositors, bankers or from shareholders, private equity funds etc and lending the same. SHGs on the other hand depend primarily on government, and given the political compulsions that ruins a democracy, the government usually shows an eagerness to waive loans. This very tendency creates a moral hazard which leads to non-payment and when a financially strapped member of SHG approaches another SHG for loan it makes the entire structure of SHGs weaker and steroidal. This in turn also gives an impression that for profit MFIs are sound, hiding their weaknesses and coercive practices.

Having come this far, it would be prudent to focus on the type of customers on which MFIs usually cater. Usually at the fringes of the society, they are primarily unbanked and do not have any recourse to credit. Even if they have any, it is usually the money lender who can charge high interest and is coercive in recovery of his loans. These people rank really low on creditworthiness and solvency. On these people MFIs with their borrowed money bank upon.

I am not suggesting that poor do not have any right to grow or they do not have any right to do business, but easy credit is a tempting hazard and that is why more and more people are finding themselves drowned in perpetual debt trap. There can be two reason for this, firstly there is a stiffer competition amongst various MFIs to gain new members, irrespective of their solvency or credit history, and secondly the sources of funds of these MFIs. Since sources of funds of MFIs are banks who lend at commercial or market rate and investors who ask for good return, MFIs have to charge an interest rate which is usually charged on credit cards. Further, there are many MFIs in the market with similar sources of funds all wishing for good return on investment. These very pressures usually lead to cost control amongst the MFIs which can only be done through outsourcing and coercive collection practices.

MFIs cater a market which banks do not touch, that is, people with low solvency. Ultimately, as Mr. Reddy points out, it is some sort of sub-prime lending. This is type of lending where the credit is forwarded to person who have low ability or have no ability to pay back. As a MFI grows in size and institutionalizes, it’s very basis of informality and intimacy between the borrowers and lender ceases. In addition, when a MFI hits the stock market, it is then entrusted with newer responsibilities to governance, return, compliance and performance.

This very sector of microcredit is unregulated, that is, there are no standards of maximum interest to be charged or to whom loan is to be provided. Often it has been found that people, who have obtained loan from one MFI, take loan from another MFI for repaying their first loan and fall in debt trap. This practice plagues the MFIs with the same disease with plagues the SHGs. This story is same across the world wherever MFIs operate and have resulted in converting a boon into bane.

An effective regulation of the sector, in letter as well as in spirit, is the necessity of the moment. Already it is been speculated that many MFIs would shut shop as their sources of finance, that is the bank loans, have dried up and government diktat of controlling the interest rates would lead to loss. It is imperative that the sector is needed to be regulated but such regulation should be only from one authority, which will give some predictability and clarity to this sector. Multiple regulators can only act as nails to the coffins of this ‘sunrise’ sector.

It is a season of scams and scandals, and in this we are lost in the maze of Niira Radia, 2G and CWG. Why not? Once exposed they give us a good punching bag to trade punches without being hit back, and if there is any sense of ‘justice’ left we might even get a scapegoat. But just take out few minutes of time to think about this, whatever may call it, I’d prefer to say muddle, which directly affects our banks, economy and the very person who brings our milk, washes our dishes or even produces our food. This muddle affects them directly, and if you don’t think about it now, few months we might again be arguing. What is government is doing about poverty?

© Tarun Mitra

1. http://en.wikipedia.org/wiki/Microfinance

2. http://www.businessweek.com/magazine/content/07_52/b4064038915009.htm

3. http://microfinance-in-india.blogspot.com/

4.http://www.bsp.gov.ph/downloads/regulations/attachments/2001/circ272.pdf

5.http://economictimes.indiatimes.com/opinion/comments--analysis/Getting-it-right-on-microfinance/articleshow/6979476.cms

6.http://economictimes.indiatimes.com/opinion/interviews/For-profit-MFIs-worse-than-money-lenders/articleshow/6973551.cms

7. http://www.livemint.com/2010/11/22232535/Hollowness-in-banking-a-major.html

Will this termite be allowed to last?

“The Central Bureau of Investigation (CBI) told Chandigarh trial court on December 24 that it wanted to close the case it was investigating against Justice Nirmal Yadav of the Punjab and Haryana High Court not because it was convinced of her innocence, but because the government and the Chief Justice of India refused to grant it sanction to prosecute her”

This is the first paragraph of Headlines of today’s newspaper (Hindustan Times, New Delhi, January 8, 2010 edition) ‘CBI hands tied against judge’. Last few years, especially with the advent of new millennium has seen the judicial hyper-activism in India which aptly established the Judiciary and backbone of Indian democracy. However, in the pursuit of becoming the backbone does Indian Judiciary forgot the termites within it?

There are more than 30 million pending cases in Indian courts; many of them are for more than 30 years. It takes more than 10 years to liquidate a company and in many cases a rape victim gets justice (or whatever left of it) only after becoming a senior citizen. And to add on this there is corruption in the judiciary itself.

It would be myth to say corruption in judiciary is a new phenomenon which got accelerated only after liberalization of economy. It would be debatable to say whether such corruption got accelerated after opening up of the economy. However unanimous agreement is that it is there and has being there for long.

Any common man like us, who has dealt scores of Law Enforcement Agencies, knows what it is like there. How Mahatma Gandhi keeps smiling in every hands it passes through; how virtues of that man, printed on note, is shared. But it is really of recent phenomenon that these are coming into light.

Justice Dinakaran is accused of amassing wealth, Justice Nirmal Yadav is accused of taking bribes and forgery, R. Vasudevan of Company Law Board is mired in a corruption case and this is only a tip of iceberg. There are many to be dug up, many to be discovered. And still a lot stink to be raised.

But here in this given case where government and Chief Justice could have acted to stem the rot they chose otherwise. Approval of Government and Chief Justice is required to implicate a Judge. They refused the same. Will this termite be allowed to last?

© Tarun Mitra

1. http://economictimes.indiatimes.com/infotech/software/Arrest-of-CLB-chief-may-raise-questions-on-Satyam-scam-probe/articleshow/5265454.cms

2. http://www.rtiindia.org/forum/2385-nearly-30-million-cases-pending-courts.html

3. http://timesofindia.indiatimes.com/india/CBI-cites-CJI-to-close-graft-case/articleshow/5379653.cms

4. http://www.hindustantimes.com/CBI-hands-tied-against-judge/H1-Article1-495023.aspx