Worsening Economic conditions of Weaker Sections
Benefits of Economic Reforms bypassed them
ABSTRACT
Economic development does not necessarily result in equitable distribution of the fruits of development. It often results in sectoral disparities, rural urban disparities, regional disparities and disparities among social groups. While some divergence in income distribution can be explained rationally in economic terms, continued widening of disparities is a cause for concern. The extent and reasons for the disparities should be gone into meticulously before they assume intolerable proportions and result in social tensions, economic deprivations and political upheavals. Timely and appropriate remedial measures need to be initiated to bring the national income distribution system back to the justifiable levels, before it is too late. Wise Statesmen do it, ensure economic equity and govern for longer time; unwise rulers ignore the danger signals and bring ruination unto the economy as well as unto them selves. In this paper, economic disparities that have occurred in the course of economic development in India, among social groups, are analyzed, conclusions arrived at suggestions for correcting gaping disparities are made.
SUMMARY
*Ownership of wealth in the form of income generating assets and employable education are the twin engines, driving production and acquisition of needed skills leading to self employment or getting into wage employment, which largely determine income levels.
*In the survey of economic disparities in the social groups (SCs,STs,OBCs) wide variations are observed in incomes, expenditures, wealth, debt /bank credit and educational areas.
i) Incidence of poverty is found to be highest for ST/SC group, BCs rank next in incidence of poverty. Poverty Incidence-1987-88 to 2004-05, STs/STs together are most poor with poverty ratio of 41% in rural areas 46% in urban areas; 88 per cent of the Scheduled Castes and Scheduled Tribes and 80 per cent of the OBC population belong to the poor and vulnerable group. Growth process has bypassed overwhelming population of the SCs and STs and OBCs. Common People, constitute more than three-fourths of the population consisting of all those whom the growth process has, by and large, bypassed
ii) There is a rapid growth of middle class and the rich.
iii) In the rural as well as in the urban areas, average asset-holdings per household are substantially higher for the ‘Others’ group than for the SC/ST group. The average monthly expenditure of a farmer household at Rs.2770 is higher than the monthly income of Rs.2115 indicates that the expenditure
levels are higher than the income, especially for the small and marginal farmers. iv) Among the socially and economically backward groups such as SCs and OBCs, majority of the holdings are of less than a hectare. The SCs in particular have more than half of their holdings of less than half a hectare.
v) Scheduled Castes and Other Backward Classes are more dependent on informal sources and loans are used more for consumption purpose than the “other” group.
vi) The SC and OBC farmers are more likely to rely on informal sources of credit. vii) SCs have the highest share of loans for marriages, social functions etc; which are non-productive in nature, followed by the OBCs and the STs.
viii) Banks’ Finance for weaker sections up to March 2007 was only about Rs 1 lakh crore against a requirement of Rs1,40,000 crore. The deficit was Rs 40,000 crore. While public sector banks extended credit to an extent of 7.2%, private sector banks provided credit to a paltry extent of 1.5%. ONLY 7 OUT OF 28 PSBs HAVE ACHIEVED THE TARGET and NONE OF THE PRIVATE BANKS ARE ANY WHERE NEAR THE TARGET of 10%, even though the recoveries of loans given ,at 95%, is excellent.
ix) Even with education up to primary level, 83 per cent are in the poor and vulnerable group. Among SCs/STs, the ratio of graduates and diploma holders is very low compared to the overall average ratio, resulting probably in lower income ratio too.
x) Unemployment rate is higher among SC/STs, both in rural and urban areas compared to the overall average rate of unemployment.
** (Please see Annexure for detailed data analysis)
Conclusions:
The analysis made brings out very vividly continuing widening of differentials in income levels among various social groups. Income is a function of possession of productive assets, education imparting needed skills either for self employment or wage employment. It is evident that the weaker sections’ asset levels and educational levels are woefully inadequate to generate better incomes. Lack of availability of adequate credit from institutional sources, over dependence on non-institutional sources at high rates of interest and high level of borrowings for consumption purposes, are resulting in further erosion in incomes and these vulnerable social groups are entering into debt trap. Rural incomes being lesser than urban incomes for similar work and efforts and economic activities is quite evident with no rational explanation other than studied neglect of people living in rural areas since Independence. These undesirable characteristics and trends are likely to continue unless corrective action is taken promptly and decisively and adequately. Any delay might lead to economic erosion of real incomes thereby leading to social tensions and political upheavals.
Suggestions to better the economic conditions of the weaker sections
Solutions to improve economic conditions are to be based on enhancing the capacity of weaker sections’ for self employment and wage employment. Capital and skills are needed to be self employed. And they don’t have both. We will discuss measures needed to provide capital for self employment first and then discuss enhancing skills acquisition & capabilities subsequently.
(A)Measures to provide capital for self employment
We are now confronted with the problem of finding capital and are reminded of the famous saying of the noted economist and Nobel Laureate Ragnar Nurkse that “Poor are poor, because they are poor”! According to Prof. Ragnar Nurkse “the vicious circle of poverty” that runs from low income to low savings to low investment to low productivity and then back to low real income can be broken by 4an increase in savings and investments”. The import of the statement is poor are poor because they lack savings and therefore can not infuse investments in income generating assets like land, production facilities and marketing arrangements*. So the solutions start with finding money for buying income generating assets and as they are poor they can not buy these from out of their own savings.
(i)What then is the solution? The money is to be borrowed and institutions have to loan them funds. This is exactly the objective in introducing a sub limit of 10% for loaning to weaker sections*, in 1985, which sub limit covers, inter-alia, social groups of SCs and STs as well as economic activities by small & marginal farmers and rural artisans where preponderant majority of disadvantaged social groups get self employed. The intention is to provide finance by banks direct to help the weaker sections to buy income generating assets enabling them to improve their earning levels.
(ii)But the expected intention did not materialize as Public sector banks loaning did not exceed 6% of net bank credit and private sector banks did not reach a level of more than 2%. The outstanding credit to weaker section showed an increase from Rs. 82,332 crore to Rs.98,970 crore only by March2007. Consequently there was a shortfall in lendings to weaker sections to the extent of a whopping Rs40,000 crore. If the trend continues the deficit would double to a huge sum of Rs80,000 crore by March 2009. The RBI also observed that” the performance of banking system in general and the private sector banks in particular, in meeting the sub-targets set for agriculture and weaker sections is far from satisfactory”. The internal working group of the RBI observed that “there is a need for a change in the mind set of all concerned. As banks have exhibited a sense of reluctance, even due to reasons beyond their control, there appears to be a need for putting in place a mechanism of incentives and disincentives to persuade banks to step up the flow of credit to this segment of borrowers. The IWG suggests that RBI may consider measures to penalize banks for failure to reach the sub target of 10.0 per cent set for weaker sections. This would probably act as an effective factor to prompt the hitherto unwilling bankers to step up their efforts to channel more credit to the unorganized sector rather than earmarking a particular target under the priority sector. Such a disincentive mechanism may be conceived by Reserve Bank, so that assured flow of credit may be provided by the banks to small and marginal farmers, micro enterprises and weaker sections”.
(iii) Advances to weaker sections of Scheduled Commercial Banks
(a)The small and marginal farm holdings account for 42.0 per cent of agricultural land; but the share of small and marginal farmer, who form part of weaker sections, was only 21.3 per cent in the total advances to agriculture at end March 2007. The credit to this sub-segment should have been double of what has been given.
(b)Size of Credit Limit-wise Classification of Outstanding Credit of SCBs (end-March)
The share of small loans of Rs 25,000 and below reduced to13.3% from 49.5% in 1996, where as the share of big loans has more than doubled, from 25% to 55% during the same period.
(iv) In the Report on “Conditions of work and promotion of livelihoods in Un Organised Sector” Submitted to the Prime Minister in August 2007,by the National Commission for Enterprises in the Un Organised Sectors, (Chairman,Arjun Sengupta), the Commission’s observation on changes in credit policies adversely affecting availability of credit to small people is worth mentioning here: ‘A close look at RBI guide lines/directives to banks, reveal that apathy either deliberately or by mistake also exists at the top and policy planning level…as the credit system operating under the existing guidelines of RBI. It emerges that small borrowers are competing with large and strong borrowers. The coverage under priority sector lending (which includes lendings to weaker sections) has increasingly been diluted, enabling big borrower loans at the direct expense of small borrower loans.
As part of the so-called process of” aligning bank credit to the changing needs of the society”, the scope and definition of the priority sector, once dominated by small farm related loans ,were fine-tuned by including new items and enhancing credit limits of constituent sub-sectors to more than Rs.40 lakh. Over the years particularly after the mid-nineties, relatively high credit worthy activities like housing, education, transportation and loans to professionals have been included in the priority sector.
This has affected unfavourably the credit flow to the needy sector.
(v) In order to increase credit flow to weaker sections, the ‘Report on Conditions of Work and Promotion of Livelihoods in the Un-organised Sector’ (Chairman: Dr. Arjun K. Sengupta), has made some definite recommendations. The Internal Working Group of the RBI to Review the Recommendations of the NCEUS Report on Conditions of Work and Promotion of Livelihoods in the Un-organised Sector made,in May 2008, certain recommendations on the recommendations of the Arjun Sengupta commission.
A summary of the recommendations and action points emerging out of the Internal Working Group is presented below along with our suggestions.
1) Revision in the weaker sections Targets:
(a) NCEUS has stated that, of the18.0 per cent credit earmarked for agricultural sector, 10.0 per cent may be exclusively set aside for small and marginal farmers. It has also suggested shifting the small and marginal farmers from the present weaker sections category to agriculture sector. Currently, small and marginal farmers are covered under the weaker sections. The weaker section quota for small and marginal farmers may then be released for other socio economically weaker segments. It advocates allocation of 12.0 per cent to socio-economically weaker sections for purposes of housing, education, etc., with a loan ceiling of Rs. 0.5 million. This would amount to an increase of 2.0 per cent additional quota in priority sector lending for weaker sections from current level of 10.0 per cent.
(b) The IWG suggests that RBI may consider measures to evolve a system of disincentive to banks for failure to reach the sub target of 10.0 per cent for weaker sections.
Policy change
(c) In the Annual Policy for the year 2008-09, it has been announced that the shortfall in lending to weaker sections also to be reckoned for the purpose of allocating amounts for contribution to RIDF, with effect from April 2009.
(d)ADVERSE IMPACT: This allowance enables banks to avoid lending to weaker sections by conveniently transferring the required amount to RIDF which will not directly benefit weaker sections by any stretch of imagination. This leads to avoiding purposive duty to finance weaker sections and this easy facility of transfer to RIDF should not be allowed.
This will reduce total finance to weaker sections and still facilitate showing that the target of lending is achieved.The concession in no way increase production and investment finance to weaker sections. Therefore this is incorrect and weaker section’s unfriendly. Only direct finance extended to weaker sections for production purpose should be reckoned for the purpose of achieving the target. On the other hand, If the target credit to weaker sections is increased from 10% to 12%, additional credit availability will increase by Rs 1 lakh crore more, ie, from outstanding level of Rs1 lakh crore as on March 2007, to Rs 2 lakh crore, by March 2009.
2. Explicit Target for Small and Micro Enterprises:
(a)The Commission recommends that an explicit target of 10 per cent be set for lending to small and micro Enterprises. Furthermore, within the 10.0 per cent quota set for the small and micro enterprises, the Commission has recommended the following.
A 4 per cent target be set with respect to micro enterprises with capital investment (other than land and building) up to Rs.0.5 million, which is to be gradually enhanced to 8 per cent of the net bank Credit-to be achieved in a phased manner in 5Years.
(b)The IWG is broadly in agreement with the intent of this recommendation. Within the aggregate loans to small and micro enterprises sector, banks are required to allocate 40.0 per cent to micro enterprises with investments in plant and machinery up to Rs 5 lakh under the present policy.
3. Monitoring of Credit Flow:
(a)The NCEUS recommends that: the Reserve Bank should separately monitor the credit flow to marginal and small farmers and to the micro-enterprise sector, with capital investment up to Rs.0.5 million and between Rs.0.5 to 2.5 million. .
(b) The IWG agrees with the NCEUS and recommends that RBI should make available in timely fashion detailed information on the flow of credit to weaker sections.
4.Setting up of Credit Guarantee Fund in NABARD:
(a)In order to reduce the perceived risk of default of the larger segment of marginal and small farmers, due to which the banks do not approach them actively, the Commission has recommended that the Government may set up a Credit Guarantee Fund in NABARD, on the lines of the CGF set up by the Ministry of Micro, Small and Medium Enterprises, which provides guarantee cover on loans to small units.
(b) An alternative proposal has been mooted by RBI to offer a credit guarantee scheme through the DICGC to distressed farmers.
(vi)CIFA proposals
It is unfortunates that the RBI continues to dilute the norms for achieving direct finance to weaker sections even after Sengupta commission pointed out such dilutions in the past and cautioned against moves to water down the spirit of extending credit to disadvantaged and unorganized groups. CIFA strongly demands that policy dilutions made by the RBI as detailed above in paragraph 1 should be withdrawn and only direct credit to weaker sections for the purposes of generating incomes should be reckoned toward weaker sections finance target. The target should be increased to 12% as recommended by the commission. CIFA further urges the RBI and the Government to implement the recommendations of the Arjun Sengupta Committee (detailed in paragraphs 2 to 4) and also recommended by the IWG of the RBI, to accelerate credit flow to weaker sections. The IWG suggestion that RBI may consider measures to penalize banks for failure to reach the sub target set for weaker sections should be made operative forthwith.
Loans to weaker sections should be given on composite basis covering credit needs for purchase of machinery, equipment etc, working capital and consumption needs for one year repayable from out of net income generated over period of 10 years. D.I.R scheme of interest rate at 4% should be charged for loans given to weaker sections up to Rs 2 lakhs.
(B)Enhancing skills acquisition & capabilities
(i) Provision of credit for a small/micro enterprise, is a necessary condition but not a sufficient condition for the enterprise to generate income. The person should be equipped with the necessary skills and capabilities. By equipping a person with the skills and capabilities, he can chose either to start an enterprise on his own by availing bank loans and government assistance or chose to be gainfully wage employed. Many studies have shown that net income derived from small land holdings is not sufficient for family expenses. One study (2003) puts the monthly income of a small farmer at Rs1578 which is woefully inadequate It is therefore essential that their income is augmented by their simultaneously engaging in activities allied to agriculture like dairying, mini poultry, bee keeping vegetable, fruits and flower growing etc; In order to ease pressure on land and to prevent further fragmentation it should be the objective of Rural Planning that at least one member from each small land holder family comes out and engages in non-farming rural activities. Composite loans covering all these activities should be provided by banks repayable from net income, over a period of 10 years at DIR interest rate of 4%.
(ii) Establishing mini rural agro processing and rural service centres for selected clusters of villages, with provision of infrastructural facilities like, roads, water, power sheds and godowns and marketing linkages is the ideal solution for providing non farm employment in rural areas. Big industrial units, banks, insurance agencies and philanthropic institutions can adopt these rural processing and service centres and provide man power, material and monetary resources. A system of reservation of items manufactured in rural centres should be evolved to ensure assured market for the products. Mega agro processing centres are capital intensive and can provide employment for only a few hundreds, where as for the same investment, rural mini agro processing and rural service enterprises with simple machines can engage many thousands of semi skilled people.
(iii) Young rural people should be provided vocational training in various manufacturing processes and crafts for which there are raw materials available locally and this vocational training can start immediately after a person completes VII standard. At the end of vocational training, they should also be imparted training in entrepreneurial capabilities the absence of which is resulting in failure of many self employed enterprises in the un-organized sector. After these kinds of trainings, they should be encouraged to be taken as apprentices in established processing and service units. Meritorious students should be provided opportunities for higher learning. There can be a system of reservations up to say, 25% for these rural meritorious candidates in higher learning centres. Thus trained and equipped, they are ready either to start their own unit or be gainfully employed. The need of the hour is to train lakhs of rural people by enhancing and equipping thousands of rural ITIs than pour thousands of crores of rupees in establishing a few IITs/ IIMs which train only a few thousands. The priority should be changed towards training rural youth for employment than pour thousand of crores of money to benefit already highly qualified people who go abroad anyway and get employed and the investment in IITs/IIMs is a loss to the nation. Training rural youth is a gain to the nation.
(iv)Providing grading facilities and godowns for storage as well as marketing arrangements and linkages with retail chains are the neglected areas so far and to make any rural employment to be successful, these arrangements are essential and the government and Producers’ organizations have an important role to play in making these arrangements.
(v)Rural youth have the same potential as urban youth. If necessary facilities and opportunities are provided they will prove equal to their urban bred and urban educated cousins. What is required is change in the mind set of the Governments, Planning Bodies with focus on employment and income generation than on mere Macro GDP numbers. So our Planning Mandarins should change their mind set and have as objective, providing opportunities for employment and income generation, and not macro level increase in GDP which benefits only a few who already have wealth and higher education anyway. Top down planning should be replaced by bottom up planning.
If focus is changed from mere GDP growth to employment growth and growth in incomes of the lower half of the populace, then we can see a SHINING INDIA where most of the people are smiling, than the present India where 25% are smiling and 75% are weeping.
(vi) We conclude this paper with the heart felt and soulful observations of Prof. M.S. Swaminathan in his Report of National Commission on Farmers-2006.
“Economic growth which bypasses a large population is joyless growth and not sustainable in the long run. What then is the future for India’s rural population numbering over 700 million? We cannot be silent onlookers to a situation where 30% of India is shining and 70% is weeping. Equity considerations can not be ignored for too long. Faster growth in agriculture with improvement in welfare of the rural population is important. The need is not only to register increase in agriculture (rural) production in million tons but actual improvement in rural incomes” (which will benefit millions of weaker sections)
REAL INDIA LIVES IN VILLAGES - OUR AIM IS GRAM SWARAJ
*A note on Advances to priority Sectors and Weaker Sections: Genesis and subsequent changes
At a meeting of the National Credit Council held in July 1968, it was emphasised that commercial banks should increase their involvement in financing the priority sectors, viz., agriculture and SSIs. The
description of the priority sectors was later formalised in 1972 on the basis of the report submitted by the Informal Study Group on Statistics relating to advances to the priority sectors constituted by the Reserve Bank in May 1971. Although initially, there was no specific target fixed in respect of priority sector lending, in November 1974 the banks were advised to raise the share of these sectors in their aggregate advances to the level of 33 1/3 per cent by March 1979. Subsequently, on the basis of the recommendations of the Group on the Modalities of Implementation of Priority Sector Lending Policy and the Twenty Point Economic Programme, all commercial banks were advised to achieve the target of priority sector lending of 40.0 per cent of aggregate bank advances by 1985. Broad sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several reviews and changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups. that priority sector advances constitute 40.0 per cent of Adjusted Net Bank Credit8 (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.
Advances to weaker sections: 10.0 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.
