Reading the Tea Leaves on Financial Inclusion

Understanding the extent of financial inclusion of rural labour households is important since in the intercensal period 2001-11, the proportion of agricultural labourers in the workforce increased by 3.5

percentage points. One can examine the progress in financial inclusion using information on indebtedness of rural labourers.

In 2009-10, an estimated 22.3 million out of the nearly 66 million rural labour households report being in debt in 2009-10. The share of formal institutions in outstanding debt of rural labour households increased from 29 percent to 37 percent while the share of money lender decreased from 44 percent to 33 percent during this period. There has been a near doubling of loans sourced from cooperative societies and a 77 percent increase in loans sourced from banks. In contrast, outstanding debt on account of borrowing from money lender increased by a meagre 1.7 percent. One does not have a ready explanation for the miniscule growth in outstanding loans from money lenders. What is promising is that the reliance on institutional sources among rural labour households without cultivable land increased from 20.6 percent to 26 percent. The aggregate picture however masks large variations across the states of India and one does not observe any structural change in geographical distribution of flow of credit and share of outstanding advances to the landless.

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37 lakh migrated for education within India in a decade (Article that appeared in Times of India based on my study)

The flight to campus is not always beyond the seas. The comfort of being close to home is driving several young Indians to different Indian states to pursue an education.

In the last 10 years, a total of 37 lakh moved to get a degree, showing that a discouraging academic landscape near home is no longer keeping its youth from travelling to the brighter lights elsewhere.
Departure rate among young men wanting to pursue an education is higher, for 26 lakh shifted as compared to 11 lakh women. Of those, 6.2 lakh youths (or 17%) moved to a new state; 16.8 lakh shifted to another district within their home state in the last 10 years. Karnataka received the largest exodus — 1.8 lakh — from other states and Uttar Pradesh sent out most students — 1.1 lakh.

A January 2014 research paper, Internal Migration for Education and Employment among Youth in India, commissioned by UN-HABITAT's Global Urban Youth Research Network, begins a conversation on whether Indian states must worry about internal brain drain.

"Migration is an old story. But the most important phenomenon we are seeing today is people moving for education," said author S Chandrasekhar, professor at the Indira Gandhi Institute of Development Research. "With uneven distribution of educational facilities, there are clearly going to be winner states and loser states. My paper maps the trends of migration and also leaves you with a question: Should we worry of the brain drain at the sub-national level?"

However, the survey charts merely those who migrated for the motive of education. "For example, if a family moved to Delhi because the bread-earner got a new job and the child joined a Delhi college, he or she is not included in this survey," clarified Chandrasekhar.

Historically, as is the story even now, of the 11 crore individuals aged 15-32 years, over 70% moved on account of matrimony. While nearly 10% shifted in search of employment, over 3.5% did so on account of education.

"The share of educational migration has increased. As far as I can see, for education, more migration happens from AP to Karnataka, UP to Delhi and from UP to Maharashtra," said Anil Kumar, professor at the Tata Institute of Social Sciences. Looking back, Chandrasekhar said, most people in the 80s moved not for education, but for jobs and career opportunities.

"There wasn't a Noida then, nor were the large private universities. The new IITs and IIMs were not yet up. Only recently did so many new AICTE-approved technical colleges come up," he explained. So, expansion of higher education has only fuelled migration.

"The most important states from the perspective of migration for education are Delhi, Maharashtra, Karnataka, Uttar Pradesh, Bihar, Andhra Pradesh, Kerala, West Bengal and Rajasthan. Of these states, Delhi, Maharashtra, Karnataka are the main destinations (i.e. attracting migrants from other states), whereas Bihar, Uttar Pradesh, Kerala, Andhra Pradesh, West Bengal and Rajasthan are the main source states of migrants," the paper noted.

But the winds are changing. "In the next five years, we will see the Haryana effect where new universities are coming up; that will give migration a new meaning. Will states shall attract students also provide enough jobs?" asked Chandrasekhar.

Source: http://tinyurl.com/n5fothr

Limiting LPG subsidy may contain the government’s fiscal problem but it will increase the use of ‘dirty’ fuels (Appeared in Mint on Nov 12,2012)

In September, the Union government decided to slash the subsidy on liquefied petroleum gas (LPG) and capped the number of subsidized LPG cylinders at six cylinders per annum per household. Additional cylinders will be available to consumers at the market rate notified by oil marketing companies. The rationale behind this was to reduce the subsidy bill of the government and prevent diversion of cylinders from residential use to commercial use. This decision was followed by a further increase in the price of cylinders by Rs11.42 in October to compensate the dealers. Yet, in this debate two important issues have slipped under the radar.

First, will the increase in prices retard the considerable progress in reducing consumption of solid (dirty) fuel in urban India? Data from National Sample Survey Office’s (NSSO) survey of consumption expenditure documents considerable progress in the reduction of consumption of solid fuel in urban areas. The proportion of urban households using LPG increased in urban India from 29.5% in 1993-94 to 59% in 2004-05 and further to 66.2% in 2009-10. The per capita consumption of LPG increased from 0.88kg in 1993-94 to 1.6kg in 2004-05 and further to 1.9kg per month in 2009-10. Correspondingly, the per capita consumption of kerosene decreased from 1.42 litres per month to 0.62 litres and further to 0.47 litres over this period. It is reasonable to state that the increase in LPG consumption has been at the expense of kerosene and this is hailed as a welcome development.

Are there foreseeable adverse effects of moving to market-based pricing? Yes, since over 30% of urban households are not using clean fuel and are possibly heavily reliant on firewood and wood chips. It is an empirical fact that households use multiple fuels and they do indeed switch across various types of energy: electricity, LPG, firewood and chips and kerosene. In the event of a price rise, poorer households, in particular, could switch to unclean fuel or switch back to kerosene, which is also subsidized. It should be borne in mind that kerosene does rank below LPG and electricity in the energy ladder. Use of unclean fuels is sought to be decreased, under the Millennium Development Goals, since they cause indoor air pollution.

Second, is the cap of six cylinders per household justifiable? If not, can one arrive at a cap on number of subsidized cylinders in an objective manner? Some insights can be gleaned from NSSO’s survey of consumer expenditure conducted over the period July 2009-June 2010.

Given that the cap on subsidized LPG is at the household level, in the discussion that follows, the estimates presented are at the level of the household and not per person. The estimated number of households in urban India increased from 56.9 million to 68.1 million over 2004-05 and 2009-10. Despite this increase, the total number of households not reporting use of LPG declined only marginally from 23.4 million to 23 million. In every income or consumption decile the estimated number of households using LPG did increase. The average consumption of LPG per household increased from 7kg in 2004-05 to 7.7kg in 2009-10. If we exclude those not reporting any consumption of LPG then the average consumption per household is unchanged: it was 11.8kg in 2004-05 and 11.7kg in 2009-10. Given these numbers, can NSSO data inform the debate on where to set the cap on number of subsidized cylinders? In the media it has been reported that Congress-ruled state governments will offer nine subsidized cylinders every year. It is also reported that Trinamool Congress would like the cap set at 12. The average household uses 11.7kg of LPG, and annually, this works out to 140.4kg. Given that the net weight of a cylinder is 14.2kg, the average household uses 9.9, or approximately, 10 LPG cylinders in a year. So a reasonable number to set the cap would be at 10. Assuming that the government can get the targeting right, a differential pricing might be required even within this cap of 10 cylinders to encourage poorer households to use LPG.

There are two additional related issues. First, whether using a bank account to transfer subsidies in the form of cash is a feasible option given that nearly 42% of households do not have a bank account. Second, do poorer households have the ability to pay the full price of LPG upfront and then go to the bank for reimbursement? And specifically, in the context of availing LPG subsidy, the compelling reasons for introduction of the bank branch as an additional layer is not clear. Common sense suggests that the administrative cost incurred by getting individuals to claim their reimbursement via the banking system will be much larger than if the government transferred subsidy to the companies directly for the prescribed number of cylinders.

Finally, in the context of setting the urban poverty line it should be noted that successive expert groups on poverty have never examined the implications of slashing of subsidies and the move to market-based pricing. This is despite the fact that the share of fuel bill in monthly consumption expenditure has steadily increased in the last two decades.

 

Source: http://tinyurl.com/kphtlyh

Financial inclusion has many rocky miles to go (Appeared in Economic Times on Jun 6, 2013)

The low-hanging fruits from measures announced to promote financial inclusion in the last ten years have been reaped. This is evident from numbers released as part of Census of India 2011 and National Sample Survey Organisation's 2009-10 survey of employment and unemployment. Data from Census of India 2011 reveal significant progress at the all-India level. However, incremental gains are going to be difficult. Less than 40% of households availed banking services in large parts of Madhya Pradesh, Chhattisgarh, Odisha, West Bengal, Jharkhand, Bihar, and the North East. These states have a large number of households whose members work primarily as labourers. They are landless and poor. Progress in financial inclusion has been tardy in regions with a large concentration of India's nearly 66 million rural labour households.

Apart from the proportion of households with a bank account, another aggregate measure of progress in financial inclusion is whether the share of funds borrowed by rural labour households from formal institutions increased and if the share of borrowings from moneylenders declined. In terms of the size, in 2009-10 the total outstanding borrowing by rural labour households stood at Rs 36,372 crore. The quantum of borrowings by rural labour households from different sources is as follows: Rs 13,311 crore from formal institutions, Rs 12,026 crore from money lenders and Rs 11,035 crores from other non-formal sources. Based on our calculations, we find that over the period 2004-05 and 2009-10, the share of formal institutions (government, banks, and cooperatives) increased to 37% from 29% while the share of moneylenders decreased to 33% from 44%.

However, if we use 1999-2000 as the reference year, the share of funds borrowed by rural labour households from moneylenders has not declined since 1999-2000, when the share of the moneylender in lendings was 31.7%. Another concern is that the share of other non-institutional sources (other than moneylenders) increased 3 percentage points from 27% to 30% between 2004-05 and 2009-10. The share of non-institutional sources in outstanding debt either did not exhibit a decline or was sticky in Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan and UP.

The NSSO data also reveal that the share of households without cultivable land in outstanding debt from banks remains unchanged at 39%.

This suggests that banks are hesitant to lend to those without cultivable land. From the all-India average two facts are apparent. First, the average loan per indebted household with cultivated land is similar whether the household borrows from a moneylender or a bank. Second, banks and cooperative societies lend lower amounts to those without cultivable land compared to moneylenders. These clearly bring out the importance of possession of cultivable land, an asset that rural labour households do not possess.

In the context of non-institutional borrowings, much attention has focussed on the southern states and Andhra Pradesh in particular. In 2009-10, the four southern states accounted for 65.5% of the outstanding debt of rural labour households from the money lender, against 67.1% in 2004-05. Data from Census of India 2011 also indicates that rural AP has a large number of contiguous tehsils where less than 50% of households avail banking services. It is an irony that the southern states which have a good penetration of banks and micro finance institutions account for such a large proportion of borrowing from the money lenders. It was assumed that the growth of micro finance institutions will reduce the reliance on money lenders.

On the contrary, the share of rural labour households from AP in outstanding debt from moneylenders increased from 31.3% to 33.5%. In addition, Andhra Pradesh has been the epicentre of the micro finance crisis. There are two hypotheses that can be advanced on why financial inclusion will become increasingly difficult.

First, the AP experience does not support the conjecture that the introduction of a new player (for example MFIs) leads to financial inclusion. Hence, policy should not be formulated on the assumption that growth of MFIs will lead to financial inclusion.

Second, if lack of access to land constrains progress in financial inclusion then it is a cause for concern since land is scarce and hence not all rural households will be able to offer the comfort of having an asset to the lender.

 

Source: http://tinyurl.com/kszl9u4