Previous Year Questions in Mains
- With a consideration towards the strategy of inclusive growth, the new companies bill, 2013 has indirectly made CSR a mandatory obligation. Discuss the challenges expected in its implementation in right earnest. Also discuss other provisions in the bill and their implications.
- “In the villages itself no form of credit organization will be suitable except the cooperative society.” – All India Rural Credit Survey.
Discuss this statement in the background of agricultural ﬁnance in India. What constraints and challenges do ﬁnancial institutions supplying agricultural ﬁnance face? How can technology be used to better reach and serve rural clients?
- Capitalism has guided the world economy to unprecedented prosperity. However, it often encourages short-sightedness and contributes to wide disparities between the rich and the poor. In this light, would it be correct to believe and adopt capitalism for bringing inclusive growth in India? Discuss.
- Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this for financial inclusion of the poor section of the Indian society? Give arguments to justify your opinion.
- Comment on the challenges for inclusive growth which include careless and useless manpower in the Indian context. Suggest measures to be taken for facing these challenges.
- What are the salient features of ‘inclusive growth’? Has India been experiencing such a growth process? Analyse and suggest measures for inclusive growth.
- It is argued that the strategy of inclusive growth is intended to meet the objectives of inclusiveness and sustainability together. Comment on this statement.
The United Nations Development Programme’s (UNDP) perspective of inclusive growth is based both an outcome and process. Inclusive growth implies participation and benefit-sharing ensuring that while everyone can participate in the growth process (both in decision-making and in participating in growth) and benefits of growth are shared equally.
Why inclusive growth?
Inequalities in most part of the world has increased during the last three decades. Some of the plausible reasons are rapid growth in GDP, liberal and expansionary fiscal policy, large public debt, rapid improvement in technology and the changes in the nature of production using more capital, increasing share of services in GDP, unfavourable policies and institutions, etc.
Beyond the rise of inequality, there have been other profound changes in labour markets over recent decades. These arise from technological change, increased migration, ageing societies in some countries and youth bulges in others, and shifting employment patterns. The direction of these changes has unfortunately often drifted the economies away from inclusiveness and social justice and these forces will also continue to evolve.
The new ‘disruptive’ technology and new global digital infrastructure has changed the face of ‘work’. Many existing jobs are vanishing and new ones are emerging. Robotics and automation may impact many routine and skilled jobs. For India, there is need to move from routine and less productive work like agriculture and low productive industry and services and seize the opportunity in other spaces in areas of exports, tech start-ups, etc.
Inequality in participation of women in the workforce is another important economic and social issue. Overall, female labour force participation is an important driver of growth in any country and even the SDGs have targeted to reduce this gender gap. In a “full potential” scenario in which women play an identical role in labour markets to that of men, as much as $28 trillion, or 26 per cent, could be added to global annual GDP by 2025. India is expected to gain the maximum from parity in labour force participation – complete parity would imply a 60 per cent increase in GDP by 2025.
Inclusive growth = Pro-poor growth?
Inclusive growth is not the same as pro-poor growth. Pro-poor growth measures the impact of growth on poverty reduction by implementing poverty alleviation measures, whereas inclusive growth concentrates on both the pace and pattern of growth with productive employment rather than income distribution.
The definition of inclusive growth is in line with the absolute definition of pro-poor growth but not the relative definition. According to the absolute definition, growth is considered pro-poor as long as poor people benefit in absolute terms. In contrast, in the relative definition, growth is pro-poor if and only if the income of poor people grows faster than that of the population as a whole i.e., inequality declines.
However, while absolute pro-poor growth can be the result of direct income redistribution schemes, for growth to be inclusive, productivity must be improved and new employment opportunities must be created. If poverty reduction is the objective, then the absolute definition of the pro-poor growth is the most relevant.
In other words, pro-poor growth focuses on people below the poverty line, while inclusive growth is arguably more general as it intends growth to benefit all strata of society. Inclusive growth is built on three pillars of inclusive growth.
1) Economic: High, efficient and sustained economic growth, an economic dimension, is a necessary condition for inclusive growth but it is not sufficient. It is the key to creating productive and decent employment opportunities, absorbing surplus labour and generating resources for the government to invest in education, health, infrastructure, social protection, safety nets, etc.
2) Institutional: The institutional set-up must lead to social inclusion that ensures equal opportunities to all sections of society. To exploit these opportunities human capabilities, especially of the marginalised and disadvantaged sections of society, should be enhanced. Thus, access to education, basic health and infrastructure facilities becomes an integral part of social upliftment.
However, according to the World Bank (2008), expansion of human capacities would not ensure equal opportunity for all if there is no equal access to employment opportunities, protection of their rights, complementary factors of production and equal returns on their capacities. Social and economic injustices reflect wrong policies, weak governance mechanisms, faulty legal/institutional arrangements or market failures.
3) Social: This dimension covers social safety nets to protect the chronically poor and vulnerable sections of society. It caters to the basic needs of people who cannot participate in and benefit from emerging opportunities generated by the growth with protection from ill health and from extreme deprivation. Broadly, social safety nets consist of labour market policies and programmes, social insurance program, social assistance, welfare schemes and child protection. Good governance and strong institutions form a foundation for these dimensions where members of the society can benefit from and contribute to the process of the growth.
Elements of inclusive growth
Various elements of inclusive growth (refer to figure above) can be achieved by following the steps below:
Education and Skills:
· Improve educational outcomes by reducing the prevalence of school dropouts
· Continue improving access to education at the secondary and college level and improve the quality of education
· Build human capital through massive interventions to improve nutrition, early childhood education, and improved quality of basic education
· Establish a countrywide workplace training-based vocational education system; enhance career guidance and better disseminate information on jobs
· Develop digital skills at all levels of education and training
· Promote digital literacy – Develop skilled, and trained manpower, and engaging people who can create, sustain, and maintain infrastructure and online content and services is critical to development of the Internet. Local entrepreneurs are important to develop local content and services, while also enabling income and jobs growth
· Target the low skilled in lifelong learning by facilitating integration into formal education through part-time programmes in post-secondary education and vocational training
· Increase and incentivize expenditure on R&D, both by Government as well as by private
· Invest more in rural infrastructure, such as roads connecting villages to market towns, crop storage infrastructure and access to sustainable irrigation technologies such as drip irrigation
· Take further steps towards sustainable and inclusive urbanization by: (i) improving urban infrastructure, especially housing, transport and sanitation; and (ii) increasing the resources and capacity of municipal governments, including through increased collections of property taxes
· Introduce regional infrastructure projects and introduce regional jobs and investment package
· Increasing economic transparency to build investor confidence
· Develop a robust, fiscally sustainable, and coherent social protection system
· Lower social security contributions further by shifting the financing of benefits that accrue to society at large, such as those for families, to less distortive taxes
· Streamline social assistance and integrate social security payments with the income tax system
· Boost funding for the most efficient measures, such as conditional cash transfers.
· Strengthen expenditures on eradicating extreme poverty and simplify the administrative procedure for accessing cash transfers.
· Continue efforts to create a unified database of beneficiaries
· Target transfers more effectively, improve the effectiveness of the anti-poverty programs.
· Reduce barriers to formal employment further by introducing a simpler and more flexible labour law which does not discriminate by size of enterprise and by gender
· Reduce labour market mismatch for young people by expanding vocational schools and by enhancing links between schools and firms, and periodically updating the curriculum
· Strengthen active labour market and productive inclusion programs.
· Encourage more women to join the formal labour force by improving access to quality child-care for children under three years of age and old-age care for senior citizens, and extend active labour market policies
· Focus on policies on skill development to expand the employable pool and re-skilling of those in the existing labour pool
· Promote gender diversity in leadership positions in public sector and private companies, notably by establishing gender goals in management
· Improve health infrastructure and encourage private-sector participation, but avoid creating a two-tier health system by requiring private hospitals to treat patients from the public scheme
· Need to improve the healthcare system, including rural primary care, which is too hospital-centric and fragmented and the health insurance scheme provides insufficient coverage of out-of-pocket expenses by poor and rural households
· Introduce targeted legislative amendments to manage country’s public sector banks and to enhance the government’s ability to detect and deter money laundering and terrorism financing activities
· Improve efficiency of financial and payments system
Asset building and entrepreneurship:
· Support growth in the manufacturing sector by developing comprehensive measures for each sector including developing key technologies, laying a foundation for strong market infrastructure and industrial structure innovation
· Support regional development, fostering domestic production in strategic sectors and high technology industries, giving incentives to research and development and innovation through project-based incentives
· Support entrepreneurial and innovative activity by facilitating business operations and collaboration between industry, researchers and government, and improving access to investment and capital
·Expand investment actively and guide more fund to fields that will help to strengthen weak areas, drive structural adjustment, and encourage innovation
· Increase broadband speed, lower rates for Internet services
· Decrease cost and time of starting a business and promote start-ups.
Inclusive Development Index (IDI):
World Economic Forum (WEF) publishes Inclusive Development Index (IDI) report every year. The latest report was published in January 2018. The report compared progress of 103 countries basis three individual pillars, i.e., growth and development, inclusion and inter-generational equity. This index took into account the living standards, environmental sustainability and protection of future generations from further indebtedness.
India was ranked at 62nd among 74 emerging economies on Inclusive Development Index 2018 released by World Economic Forum (WEF). Norway again ranked as world’s most inclusive advanced economy. Among the emerging countries Lithuania topped list of emerging economies. India’s position was much below China (26th) and even Bangladesh (34th) and Pakistan (47th) among emerging countries. In 2017, India’s position was 60th among the emerging countries.
Human Development Index:
India’s rank in the Human Development Index (HDI)1 improved to 129 in 2018 from 130 in 2017, out of a total of 189 countries. The value of HDI for India reached to 0.647 in 2018. With 1.34 per cent average annual HDI growth, India is among the fastest improving countries, and ahead of China (0.95), South Africa (0.78), Russian Federation (0.69) and Brazil (0.59). To sustain this momentum in human development and to further accelerate it, the role of public sector in delivery of social services such as education and health is critical.
‘Financial Inclusion’ – Need of the Hour?
Financial inclusion is considered a welfare-oriented exercise that involves improving access and affordability of various financial products and services such as payment services, savings products, insurance products and inflation-protected pensions. This definition underlies several government interventions for improving financial access.
Problem of financial exclusion is no longer a market failure.
Financial exclusion is the barriers or limitations that prevent people from using financial services. It ranges from not having access to a bank account, to financial illiteracy. Several dimensions of barriers have been identified, including:
- physical exclusion, caused by the problems of travelling to avail services;
- access exclusion, caused by processes of risk assessment;
- condition exclusion, when the conditions attached to products are unsuitable or unacceptable to the consumers;
- price exclusion, when the price of products is unaffordable;
- marketing exclusion, where certain consumers are unaware of products due to marketing strategies that target others; and,
- self-exclusion, when people decide to exclude themselves voluntarily on the basis of past rejections or fear that they would be rejected.
Dimensions of Financial Inclusion:
The level of financial inclusion in India can be measured based on three tangible and critical dimensions. These dimensions can be broadly discussed under the following heads:
I. Branch Penetration: Penetration of a bank branch is measured as number of bank branches per one lakh population. This refers to the penetration of commercial bank branches and ATMs for the provision of maximum formal financial services to the rural population.
II. Credit Penetration: Credit Penetration takes the average of the three measures: number of loan accounts per one lakh population, number of small borrower loan accounts per one lakh population and number of agriculture advances per one lakh population.
III. Deposit Penetration: Deposit penetration can be measured as the number of saving deposit accounts per one lakh population. With the help of this measure, the extent of the usage of formal credit system can be analysed.
Among the three dimensions of financial inclusion, credit penetration is the key problem in the country as the all India average ranks the lowest for credit penetration compared to the other two dimensions. Such low penetration of credit is the result of lack of access to credit among the rural households. Therefore, the problem of low penetration needs to be understood more deeply. An attempt has been made to study the problem by examining the progress of financial inclusion over the years and efforts made by the government for reducing the low penetration of credit.
Various approaches to achieve financial inclusion: In India, various measures taken by banks, GOI and RBI for financial inclusion plan. Figure below highlights currently adopted financial inclusion approaches.
Mobile Phones— The Ultimate Leveller:
Arguably, the most impactful technological invention to expand financial inclusion has been the mobile phone. It is an efficient and cost-effective tool to reach far-flung semi-urban and rural populations.
High-speed connectivity, combined with increasing affordability is catalysing mobile payments. Rural India is lapping up mobile connectivity at a blitzkrieg pace too.
The JAM trinity (Jan Dhan–Aadhaar–Mobile) has created the building blocks for a digital financial infrastructure:
• Jan-Dhan Yojana, the largest financial inclusion drive in the world, has opened 25+ crore bank accounts, ensuring that almost all households in India have at least one member with a bank account.
• 109 crore Indians can now be digitally authenticated through Aadhaar, thus addressing the first but most cumbersome step to financial access—eKYC.
• India has 103 crore mobile users, out of which 25+ crore people own a smartphone, making India the world’s second-biggest smartphone market. The JAM trinity forms the pillars that will help streamline the G2P disbursal process for schemes such as MNREGA and PDS. It will also allow low-income individuals to come under the fold of the formal economy, thus enhancing the success of other Government schemes such as MUDRA.
India Stack, probably the largest set of APIs in the world, is being rolled out by the Government.
Implemented under the open-API policy of Digital India, it contains four distinct layers:
• Presence-less layer: Biometric digital identity for e-KYC (Aadhaar)
• Paperless layer: Digital records of an individual (e-Sign and DigiLocker)
• Cashless layer: Interoperability of payments across bank accounts/wallets (UPI, IMPS, AEPS)
• Consent layer: Security and control of user data based on OpenPDS developed by MIT.
Some notable financial inclusion schemes:
Direct Benefit Transfer (DBT): This scheme ensures that money under various developmental schemes reaches beneficiaries directly and without any delay. Banks play a key role in its implementation. The Direct Benefit Transfer (DBT) scheme, started on January 1, 2013, has truly been a game changer with respect to financial inclusion. It has re-engineered the government delivery mechanism, facilitated simpler and faster flow of information/ funds, ensured accurate targeting of beneficiaries, and helped in avoiding duplication/fraud. The first phase of DBT was initiated in 43 districts, and later on 78 more districts were added in 27 schemes pertaining to scholarships, women, child and labour welfare.
In 2014, its reach was further expanded and seven new scholarship schemes and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) were brought under DBT, in 300 identified districts with high Aadhaar (biometric-based unique identification number) enrolment. The major enablers of DBT so far have been Jan-Dhan, Aadhaar, and Mobile (JAM). DBT now has 84 schemes, and in FY 2016-17, total direct benefit transfer amounted to more than Rs.44,382.03 crore, and total number of transactions stood at more than Rs.91.67 crore.
RuPay card: It is a new card payment scheme offering a domestic, open-loop, multilateral card payment system which will allow all Indian banks and financial institutions in the country to participate in electronic payments. RuPay symbolises the capabilities of the banking industry to build a card payment network at much lower and affordable costs to the Indian banks so that dependency on international card schemes is minimised. The RuPay Card works on ATM, point of sale terminals, and online purchases and is therefore not only at par with any other card scheme in the world but also provides customers with the flexibility of payment options.
USSD-based mobile banking: This offers the facility of mobile banking using Unstructured Supplementary Service Data (USSD). Basic banking facilities including money transfer, bill payments, balance enquiries, merchant payments, etc., can be availed of on a simple GSM based-mobile phone, without the need to download any application as in the IMPS-based mobile banking.
Unified Payment Interface (UPI): The recently launched Unified Payment Interface (UPI) will make micropayments and P2P transfers as convenient as sending a text message, without the ‘Add as Beneficiary’ hassles. The expected onboarding of payments banks and mobile wallets into the platform will drastically boost interoperability (W2W, B2B, W2B, B2W) and reduce commission structures, breaking the cost barrier of digital transactions for the low-income consumers.
Bharat Bill Payment System (BBPS): Bharat Bill Payment System (BBPS) is a Reserve Bank of India (RBI) conceptualised system which offers integrated, accessible and interoperable bill payment services to consumers across geographies with certainty, reliability and safety of transactions. It offers bill payment services to consumers through network of agents/retail shops/bank-branches and digital channels like Internet banking of banks, Mobile app of banks etc. allowing multiple payment modes like Card, UPI, AePS, Wallet, Cash and provides instant confirmation. It will facilitate a less cash society through migration of bill payments from cash to electronic channel.
Measuring financial inclusion progress:
Quantifying financial inclusion progress is usually undertaken across the three dimensions of access, usage and quality.
Access Indicators show the details pertaining to access points in the form of Banking Outlets (Bank Branches, Business Correspondent outlets), Automated Teller Machines (ATMs) and Point of Sale (PoS) terminals. The access parameters can be represented both in terms of geography (e.g number of banking outlets per 1000 sq km) as well as demography (e.g number of banking outlets per 100000 adult population).
Typically, data for access indicator is obtained from the data available with the Government/ Regulators. Quantifying key parameters to assess progress made under financial inclusion is essential for designing suitable policy interventions from time to time.
Usage Indicators show how the products are being used by the target customers. Data for usage can be collected through primary and secondary sources. While data on number of accounts, products, etc. can be collected from financial service providers, insights into the usage of different financial products and services may be obtained through surveys/ feedback from customers.
These indicators tell us how the bouquet of financial services are being used by target customers Percentage of adults with a savings account at a formal financial institution Percentage of adults having access to credit Percentage of MSMEs having access to formal credit Percentage of SMF having access to formal credit Percentage of adults having pension policy Percentage of adults having insurance product Measurement of
The Quality indicators describe the supporting pillars that ensure that the customers can use the financial services to their satisfaction. For example, financial literacy and capability is an important enabler to help customers make right choices. However, lack of proper service by the provider may result in dissatisfaction to the customer which may result in financial exclusion.
Since quality also involves the dimension of subjectivity, it is essential to have a well-defined metric that allows for certain flexibility while capturing data. Measuring quality under financial inclusion can include financial literacy and capability, clarity and transparency in the communication of the service provider, customer satisfaction, availability of grievance redressal process and timely redressal mechanisms.
Universal Access to Financial Services:
The digital infrastructure in the country needs to be expanded through better networking of bank branches, BC outlets, Micro ATM, PoS terminals and stable connectivity etc. coupled with electricity. Efforts are needed to be undertaken through co-ordination with various stakeholders to ensure creation of the requisite infrastructure for moving towards completely digital on-boarding of customers.
Encourage adoption and acceptance for digital payments and bringing people into the fold of formal financial system. In addition to the traditional banking outlets, efforts may also be taken to involve co-operative banks, Payments Banks, Small Finance Banks and other non-bank entities such as fertilizer shops, fair price shops, Office of the Local Government Bodies, Panchayat, Common Service Centres, educational institutions, etc., to promote efficiency and transparency through digital transactions.
Some of the issues such as remuneration to the BCs, need for furnishing cash-based collaterals, cash management issues and lack of insurance for cash in transit which act as deterrents in smooth functioning of the BC network, need to be redressed by banks in a timely manner.
Providing Basic Bouquet of Financial Services: The banks may undertake periodic review of their existing products and adopt a customer centric approach while designing and developing financial products.
Ensure efficient delivery by leveraging on Fin-tech and BC network.
Initiate measures for capacity building of the BCs by encouraging and incentivizing them to acquire requisite certifications and enabling them to deliver a wide range of financial products.
Livelihood and Skill Development: There should be convergence of objectives of the National Rural Livelihood and Urban Livelihood Missions to deepen Financial inclusion through an integrated approach.
Inter-linkages may be developed between banks and other financial service providers with ongoing skill development, and livelihood generation programmes through RSETIs, NRLM, SRLM, Pradhan Mantri Kaushal Vikas Yojana etc.
Financial Literacy and Education: Customers need to be explained in simple language the nature of the product, its suitability to their requirements and the cost vis-à-vis return.
Concerted efforts are needed to ensure coordination among the ground level functionaries viz. Lead District Manager (LDM), District Development Manager (DDM) of NABARD, Lead District Officer (LDO) of RBI, District and Local administration, Block level officials, NGOs, SHGs, BCs, Farmers’ Clubs, Panchayats, PACS, village level functionaries etc. while conducting financial literacy programmes.
Customer Protection and Grievance Redressal: A robust customer grievance redressal mechanism at different levels helps banks in timely redressal of grievances. Develop a portal to facilitate inter-regulatory co-ordination for redressal of customer grievance.
Effective Co-ordination: Leverage on the emerging developments in technology to promote effective stakeholder co-ordination by having in place a digital dashboard/ MIS monitoring.
Encourage decentralized approach to planning and development by creating a forum to actively involve Gram Panchayats/ Civil Society/ NGOs to accelerate financial inclusion using various tools like social audit.
India’s agrarian crisis has deepened in the past several years, contributing to the slowdown of the economy. Amongst the most crucial factors affecting the country’s agricultural sector is financial inclusion. Over the years, India has attempted various measures to narrow the gap in financial inclusion for its farmers, yet the goal continues to elude the country.
The primary causes of this chronic agrarian crisis include the following:
(1) heavy dependence on monsoons and the inability to mitigate uncertainty associated with the vagaries of nature due to, amongst others, poor irrigation facilities;
(2) lack of access to suitable technology;
(3) anomalies and inefficiencies in agricultural markets and the marketing ecosystems; and
(4) lack of institutional credit at affordable rates.
The last of these causes must be emphasised more than the others given its ability to contribute in tackling the remaining causes.
Percentage of Households that Faced Various Forms of Distress Events
|Distress Event||Percentage of households that faced the event|
|Crop failure due to excessive, very low or untimely rainfall||53.8|
|Sudden decline in productivity of crops due to pest infestation, etc.||27.6|
|Sudden fall in market price of crops||18.2|
|Loss of livestock due to flood, diseases, etc.||9.8|
Source: NABARD All India Rural Financial Inclusion Survey (NAFIS) 2016–17
For a farmer, access to affordable institutional credit becomes crucial to start and sustain a good crop cycle based on quality inputs such as seeds, fertilisers, machinery and equipment, and sufficient supply of water and power.
In an indirect manner, credit facilitates other important agricultural functions such as marketing, warehousing, storage and transportation, all of which are crucial to productivity. Agricultural credit plays an important role in providing essentials during adversity. To be able to absorb the shock of crop failure due to reasons such as drought and pest infestation or loss incurred due to price crash, the farmers must be financially equipped.
Table above highlights the need of such preparedness and shows how often agricultural households have had to face various forms of crop or livestock related distress events. It is widely recognised that there is a positive relationship between agricultural credit and agricultural growth.
Has the Government done enough? – A historical perspective:
Agricultural credit initiatives in India can be traced back to the early 20th century, with measures that sought to establish and strengthen the credit co-operative movement. The objective of this movement was to provide affordable credit to farmers, especially the small and marginal ones.
The Agricultural Credit Department was set up in the Reserve Bank of India, through the RBI Act, 1934, to provide refinancing to the co-operative credit structure. The co-operative movement failed to sustain its momentum in the following years as it was burdened by delays in repayment of credit.
Until 1966, the disbursement of agricultural credit was primarily the mandate of the co-operative credit societies. On the recommendation of the All India Rural Credit Committee (1969), the commercial banks were also enrolled in doing the same in a proactive manner. This new mandate gained further prominence following the nationalisation of commercial banks in 1969.
Priority sector lending was launched in 1974 so as to statutorily earmark a fraction of credit to areas deemed as priority sectors. Within these sectors, agriculture and weaker sections were demarcated as two distinct categories in 1980. Small farmers were explicitly identified as beneficiaries under the category of ‘weaker sections’ while implicitly so under the category of ‘agriculture.’
The targets under priority sector lending are subject to stringent enforcement. Failing to achieve them incurs penalties for the banks, the severity of which varies directly with the size of the shortfall. As such, this endeavour has yielded positive results in increasing access to agricultural credit.
The introduction of concessional interest rates and priority sector lending emphasised the need of commercial banks to further expand their agricultural credit disbursement following the dismal performance of agricultural output in 1966 and 1967.
The recommendations of the Narasimhan Committee on rural credit (1975) were a setback in the appraisal of the performance of commercial banks and the co-operative credit structure in extending agricultural credit. The committee recommended the setting up of Regional Rural Banks (RRBs) to compensate for the shortfall in meeting agricultural credit needs. The establishment of the National Bank for Agriculture and Rural Development (NABARD) in 1982 was expected to provide further impetus to adequately meeting agricultural credit needs.
The increase in rural bank branches received a major boost from the nationalisation of commercial banks in 1969, especially through the launch of the Lead Bank Scheme. In this scheme, a lead bank was assigned to different areas with the primary responsibility of mapping the credit needs within its jurisdiction and to meet them through adequate banking and credit facilities. These banks were also charged with the responsibility of overseeing that rural and semi-urban branches under them maintain credit–deposit ratio of 60 percent.
During the period 1976–2014, the commercial banks became the primary lending institutions, and their branches in rural areas increased exponentially. As a result of a large number of rural bank branches and a reduced population per branch rate, the credit disbursement to farmers improved significantly.
An important intervention for expanding the coverage of agricultural credit, especially to small and marginal farmers, involved the establishment of the Regional Rural Banks.
Under the aegis of the Self-Help Groups (SHG)–Bank linkage programme initiated by NABARD to connect the informal workforce to the formal banking sector, the SHGs employ their pooled resources to disburse loans to their members through the agency of the banks.
The banks issue credit against the groups’ guarantee and the size of loans could be multiple times that of the resources deposited with the banks. NABARD is responsible for refinancing such credit, and the progress made by this initiative is reflected in 73.18 lakh savings-linked SHGs and 44.51 lakh credit-linked SHGs covering about 9.5 crore households in India in 2014.
The Kisan Credit Card (KCC) is a mechanism instituted to assist the farmers in accessing timely and adequate credit from the banking sector for crop cultivation, post-harvest and marketing needs, maintenance of farm assets and investment credit for purchasing high-value agricultural assets. The conventional method of credit disbursement has been replaced by KCC, ATM-enabled debit card, which allows disbursement of credit. The use of KCC has a wide coverage, catering to the customers of commercial banks, RRBs and co-operatives.
Indian banks introduced the Basic Savings Bank Deposit Account (BSBDA) to decrease the costs involved in operating bank accounts. As such, these accounts are characterised by minimal account balance, minimal charges and simplified Know Your Customer (KYC) norms. The launch of the ATM machine and the widening of its coverage is a significant strategy among financial inclusion measures.
The Business Correspondent (BC) model of financial inclusion has been brought into force, wherein agents replace and function instead of brick and mortar branches, to provide basic banking services in locations where establishing bank branches is difficult.
In 2014, the Government of India introduced the Pradhan Mantri Jan Dhan Yojana to enhance access and affordability of financial services (such as a basic savings bank account, credit, insurance, pension and remittance facilities) to the weaker sections of society.
An examination of the history of institutional credit to farmers in India shows that since Independence, there has been a significant emphasis on prioritising lending to small farmers by increasing the quantum of credit to be disbursed to them at affordable rates.
During the period after 2005, the mandate of the banking sector continued to remain anchored in profitability and commercial concerns but with a renewal of the commitment towards universal financial inclusion. This transition of the nation’s banking policy has not done much to improve access and affordability of formal credit to small and marginal farmers.
Trends observed in Access to agricultural credit?
CRISIL Inclusix, India’s first financial inclusion index, launched in 2013, increased from 50.1 in the fiscal year 2013 to 58 in 2016. This improvement in the index captures progress across the four dimensions of financial inclusion:
- branch penetration;
- deposit penetration;
- credit penetration; and
- insurance penetration.
Number of bank-account holders in India has risen from 53 percent in 2014 to 80 percent in 2017. However, as many as 48 percent of these accounts are inactive, i.e., no deposit and withdrawal happened using these accounts in 2017.
The failure of the BC model can be attributed to the following reasons: an inappropriate commission structure for the BC agents entail low recovery of costs and reduced profitability; too much work adversely affecting the quality of service provision; very little commission despite a lot of work breeding indifference towards the quality of work among BCs; and the low usage of BSBDA accounts.
Access to institutional credit demands the ownership of assets and income that evaluates the creditworthiness of a potential borrower. Lack of such creditworthiness implies access exclusion. The data suggest that, on average, small and marginal farmers either belong to the Economically Weaker Sections (EWS) or Low-Income Groups (LIG). Small and marginal farmers who are deprived of land resources also end up being deprived of income. This takes away from their credentials the access to an institutional loan.
According to NAFIS 2016–17, only 10.5 percent of the agricultural households surveyed own a Kisan Credit Card. NAFIS 2016–17 also finds that 66 percent of KCC owners have utilised the credit limit sanctioned to them. This is a positive finding.
Agricultural households rely on informal sources such as borrowing money from friends or relatives as much as on personal savings and loans to cope up with agricultural distress events. Given the fact that a large percentage of loans are from institutional sources, the balance of advantage seems to tilt towards formal sources of coping with distress events.
Of the total credit disbursed in rural areas by institutional agencies, as much as 42.6 percent was charged at an interest rate in the range of 12–15 percent. As far as non-institutional credit is concerned, about 68.6 percent was extended at rates of interest greater than 20 percent. In fact, around 34.1 percent of the loans were provided at a rate greater than 30 percent.
Furthermore, the pattern of credit disbursement suggests lower loan issues in months of maximum agricultural activity, i.e., the time of sowing in the Rabi season than in other months. Therefore, it can be inferred that instead of increasing demand for short-term agricultural credit, the interest subvention scheme might have been exploited as an arbitrage opportunity.
There is greater preference for physical assets rather than financial assets across all size classes of land. Financial assets are “investments in bank deposits including fixed and recurring deposits, in shares/ bonds, or investments made in Post Office deposits like Kisan Vikas Patra, etc.” and physical assets are “purchase or construction of house, investment in livestock, buying equipment for non-farm business, buying farm machines/ irrigation equipment, or investment in major repairs which increases the life of the asset/ building”
MAKING FINANCIAL INCLUSION A REALITY
Focus on the ability to repay rather than collateral – Improving the farmer’s income so as to increase the probability of repayment should be the objective. Measures suggested below can be implemented in truer spirit for making financial inclusion a reality.
Dependence of access to credit on the level of income and landholdings defeats the purpose of financial inclusion. There is a dire need to replace existing collateral requirements and assessments of creditworthiness with systems that measure repayment capacity on the basis of optimum utilisation of disbursed credit; an agricultural credit system based on the productive capacity of the borrower and not on securities as collateral.
Banks have demonstrated risk-averse behaviour in their lending under the crop loan scheme. Some important drawbacks of the crop loan system are as follows: The implementation of the crop loan scheme exhibited a significant departure from the primary principle underlying the scheme, i.e., loans should be issued on the basis of productive capacity and not on existing property titles. Mortgage of land has continued to remain important for crop loans. The loans in kind have been disappointingly sparse.
Without putting in place transmission mechanisms between credit and productivity, risk-averse bank lenders will continue to be a problem for the successful implementation of the crop loan scheme
Leverage the ‘ruralisation’ of the manufacturing sector
The strong reliance of agricultural households’ incomes on casual wage labour needs to be replaced by formal earnings. This will help tackle the problems of irregularity of income and lack of reliable income documentation which adversely affect access to credit. Most of the disguised unemployed that form part of the 50 percent that relies on agricultural income can now be absorbed into the formal manufacturing sector located in rural areas.
This trend of a ruralising manufacturing sector can be capitalised upon to generate greater formal employment in the rural areas so that the share of casual wage labour is reduced and that of formal income increases.
Tap impact investments for sustainable access to credit in India
Partly, this failure can be attributed to the mechanisms of assessing creditworthiness. In this scenario, RBI along with the rural banking ecosystem including NABARD, the RRBs, the scheduled commercial banks and the co-operatives need to consider moving towards a creditworthiness assessment system similar to FarmDrive in Kenya. The enterprise has developed a farm management application which helps maintain appropriate records of farming activities. Along with this data, FarmDrive collects social, economic, agronomic, satellite and environmental data pertaining to the farmer and aggregates them by employing some machine learning algorithm which, in turn, generates a credit score. The enterprise has also developed decision-making tools which assist financial institutions to design better agricultural credit instruments for small and marginal farmers.
There is a significant role for start-ups in this context which can collaborate with the formal banking system to deliver the much-required credit lending system for small and marginal farmers.
The achievements of farMart, a fintech player in the agricultural lending sector in India, must be mentioned here. This firm was launched in 2018 with its headquarters located in Delhi-NCR. The firm has internalised well the peculiarities of the Indian agricultural credit system and curated innovative solutions to tackle them. Farmers usually confront difficulties in fulfilling the Know Your Customer (KYC) norms on the basis of the Aadhar Card, Pan Card, etc. farMart has evolved a mechanism which evaluates 50 data points to assess the creditworthiness of the farmer.
Tax concessions, investment flows and infrastructural requirements which form a part of such enabling ecosystem must be strengthened by policy intervention or even public private partnership (PPP) models. Here, the gains from collaboration between the government, impact investors and fintech players need to be emphasised.
According to the Periodic Labour Force Survey (PLFS) 2017-18 only 13.53 per cent of the workforce in the productive age group of 15-59 years has received training (2.26 per cent formal vocational/technical training and 11.27 per cent informal training).
As per PLFS estimates, the share of regular wage/salaried employees has increased by 5 percentage points from 18 per cent in 2011-12 to 23 per cent in 2017- 18 as per usual status3 (Figure 5). In absolute terms, there was a significant jump of around 2.62 crore new jobs in this category with 1.21 crore in rural areas and 1.39 crore in urban areas. Remarkably, the proportion of women workers in regular wage/salaried employees’ category have increased by 8 percentage points (from 13 per cent in 2011-12 to 21 per cent in 2017- 18) with addition of 0.71 crore new jobs for female workers in this category.
Nodal bodies for Skill Development in India:
Ministry of Skill Development and Entrepreneurship: The creation of the first-ever separate Ministry of Skill Development and Entrepreneurship was announced by Prime Minister Narendra Modi in June 2014. It is conceived to encompass all other ministries to work in a unified way, set common standards, as well as coordinate and streamline the functioning of different organisations working for skill development.
The Ministry of Skill Development and Entrepreneurship is entrusted to make broad policies for all other ministries’ skill development initiatives and National Skill Development Corporation (NSDC). Mapping and certifying skills, market research and designing curriculum, encouraging education in entrepreneurship, make policies for boosting soft skills and computer education to bridge the demand and supply gaps are among the other goals.
MHRD: The Ministry of Human Resource and Development (MHRD) governs the polytechnic institutions offering diploma level courses under various disciplines such as engineering and technology, pharmacy, architecture, applied arts and crafts and hotel management. MHRD is also involved in the scheme of Apprenticeship Training. Apart from this, MHRD has also introduced vocational education from class IX onwards, and provides financial assistance for engaging with industry/SSCs for assessment, certification and training.
There are 21 Ministries under the central government who are also working for the purpose of skill development. There are two approaches that these Ministries have: one approach is setting up training centres of their own for specific sectors like (adopted by Ministry of Labour & Employment, Ministry of Agriculture, Ministry of Health & Family Welfare, etc.). The second approach is in the form of Public Private Partnership (as adopted by Ministry of Rural Development, Ministry of Women and Child Development, etc.).
The National Skill Development Corporation India (NSDC) is a public private partnership organisation (now under the Ministry of Skill Development and Entrepreneurship) that was incorporated in 2009 under the National Skill Policy. Its main aim is to provide viability gap funding to private sector in order to scale up training capacity. It also undertakes research initiatives, pilot projects, and skill gap studies to create a knowledge base for the sector. They have supported and incubated SSCs intended to facilitate the participation of the industry to ensure needs-based training programmes.
The National Skills Development Agency (NSDA) is working with the State governments to rejuvenate and synergise skilling efforts in the State. The NSDC’s mandate also involves capacity building by working with different stakeholders and identifying best practices to create an excellence model. The NSDC has also been working to create awareness about the skill ecosystem and has rolled out electronic and print campaigns.
Sector Skill Councils: The National Skill Development Policy of 2009 mandated the NSDC to setup SSCs to bring together key stakeholders i.e. industry, work force and academia. They are funded by NSDC for the initial few years and are expected to become financially self-sustaining as they grow. With availability of trainers being a major challenge in scaling up the capacity, SSCs are also expected to play a crucial role in getting right industry support to facilitate training of trainers for their respective sectors.
NCVT, SCVT and Quality Council of India: Established under Ministry of Labour and Employment with a view to ensure and maintain uniformity in the standards of training all over the country, the National Council for Vocational Training (NCVT) was set up in 1956. This certifying body conducts All India Trade Tests for those who complete training in ITIs and awards National Trade Certificates to successful candidates.
The State Council for Vocational Training (SCVT) at the state levels and the sub committees have been established to assist the National Council.
The Quality Council of India (QCI) was set up jointly by Government of India and the Indian industry as an autonomous body to establish a national accreditation structure in the field of education, healthcare, environment protection, governance, social sectors, infrastructure, vocational training and other areas that have significant bearing in improving the quality of life. All institutions (Government and private ITIs) seeking formal affiliation from NCVT have to first get accreditation from the Quality Council of India.
Alongside the daunting challenge of skilling millions of youth entering workforce each month, India also faces a huge challenge of evolving a skill development system that can equip the workforce adequately to meet the requirements of the industry. The workforce needs to be trained across four levels, from the high-end specialised skills for ‘White Collar’ jobs to the low-level skills of the ‘Rust Collar’ jobs. Moreover, these skills have to be adequately linked to the available job opportunities.
Several factors have inhibited the skill development eco-system in India to scale up to the desired levels. The skill development system in India is plagued with multiple issues related to awareness, perception, cost, quality and scale.
Inadequate scale, limited capacity: The existing infrastructure, both physical and human, is grossly inadequate considering the projected demand for skilled labour. While there is a need to create additional capacity in existing institutes, at the same time there is a need to create an adequate infrastructure even in small towns and villages. In terms of faculty, too, the training infrastructure is inadequate. For instance, corresponding to the current seating capacity of about 1.7 million trainees at ITIs, there is a need of almost 85,000 trainers (considering 20:1 student/faculty ratio).
Awareness, mindset and perception issues: Skill development in India is way below the requirements due to a lack of awareness on the type of courses as well as information on the ensuing career prospects. More importantly, there is limited acceptance of skill development courses as a viable alternative to formal education. Skilling is often viewed as the last resort meant for those who have not been able to progress in the formal academic system.
Moreover, skill development is often associated with blue collar jobs, which is largely perceived to be of low dignity and provides low wages/salaries. The perceived ‘stigma’ associated with skill development has resulted in low enrolments in vocational education courses. The aspirational mismatch that exists in India can be gauged from the example of the construction sector, which has a huge requirement of workforce with low level skills. For instance, the construction sector in Punjab faces a shortage of workers locally, and depends on the migrant workforce from Uttar Pradesh, Bihar and Jharkhand.
Cost concerns: Skill development initiatives in India continue to be largely dependent upon the government funds or public-private ventures. Owing to high capital requirements and low return on investments, skill development is often looked at as a non-scalable model and remains underinvested. Additionally, a fee-based model also faces challenges as prospective students are often unwilling or unable to pay high fees for training. Even the bank’s willingness to lend for skill development activities is low as educational loans are perceived as high-risk products due to uncertainty with respect to future employment.
Quality concerns: There is a serious mismatch between the industry’s requirements and the skills imparted in educational and training institutes, especially for the mid-level skills requiring some expertise on handling of machinery. To tackle this problem, considerable improvement of the quality of training is needed. The issue relates to the quality of infrastructure, trainers, as well as curricula and pedagogy. In terms of infrastructure, the institutes often lack appropriate machinery to give students hands-on training. Even the course curricula often are outdated, redundant and not standardised. Additionally, the lack of industry-faculty interaction on course curricula leads to irrelevant training modules.
The availability of good quality trainers is also a key concern. The quality of trainers is affected due to limited efforts towards re-training and skill improvement of trainers. There is a lack of focus on development of trainers with a clear career path which can make this an aspirational career choice and can ensure regular adequate supply of good-quality trainers in every sector. While there is a need to constantly upgrade the training infrastructure and pedagogy, it is very expensive. This restricts the pace of modernisation and upgradation.
Likewise, the process of standardisation is challenging in India. A significant portion of total employment falls under the unorganised segment, where it is extremely difficult to sensitise the employers on the importance of occupational standards, job roles and qualification packs.
Mobility concerns In India: Educational qualification is generally preferred over vocational training as former is associated with better employment opportunities, in terms of pay as well as quality of work. Additionally, there is limited mobility between formal education and vocational training in India due to lack of equivalent recognition for the latter; a student enrolled in vocational training often cannot migrate to institutes of higher education due to eligibility restrictions.
However, under the on-going National Skills Qualification Framework (NSQF), attempts are being made to address the mobility issue by recognition of prior learning and establishing a credit system for skills, knowledge and experience gained by an individual either formally or informally. NSQF is expected to enable multiple-entry and exit between vocational education, skills training, general education, technical education and job markets.
- Rural Credit in India: Issues and Concerns by Y.S.P. Thorat
- Agricultural Credit in India: Status, Issues and Future Agenda by RAKESH MOHAN