Challenges Facing Indian Agriculture

India’s massive agricultural sector employs about 60% of the population, yet accounts for only about 17% of total GDP. Growth in agriculture has stagnated relative to other sectors: last year the agricultural sector grew at a rate of 2.7%, relative to 11% growth in both the service and industry sector. Agricultural incomes are lower and growing slower than incomes in other sectors. The government has a clear imperative to seriously examine whether existing policies are optimal.
There is a staggering amount of literature analyzing agricultural policy in India. From my admittedly cursory review I noticed several recurring themes, which I discuss in no particular order:

1. Increase farmer’s access to markets.

The World Bank cites an “almost universal lack of good extension services” to farmers as a major factor inhibiting growth. In addition to the miserable infrastructure in many rural areas, the inability of farmers to directly access markets has sustained the presence of a chain of middlemen through whom most agricultural commodities must circulate before finally reaching consumers. Many SHGs have, with great success, arranged cooperatives that bypass such middlemen and sell directly to wholesalers. The government should learn from the success of such initiatives and try to help streamline the agricultural commodity supply chain.

2. Improve agricultural productivity.

In spite of the gains of the Green Revolution, Indian agriculture lags behind in terms of technology take-up and production efficiency. Lack of access to credit, which we discussed earlier, may be one of the factors inhibiting farmers from investing in technology. However, the ground reality also suggests that poor education and lack of awareness of the benefits of new technology is also a factor. In addition, the epic and recurring issue of poor irrigation and infrastructure is widely recognized as a drain on productivity in many regions (Its estimated that about 10% of all agricultural production in India is wasted due to lack of storage, transport, etc). The government already proved itself capable of stimulating advances in agricultural productivity with the Green Revolution. Future policies should focus on providing incentives to farmers to adopt better production technology, bridging the information gap that currently exists in the agricultural sector, and remedying severe underdevelopment of irrigation and infrastructure facilities.

3. Reconsider distortionary subsidies and other policies.

Currently, the Indian government sets a minimum support price for almost all agricultural commodities. Farmers who produce various goods are guaranteed the option of selling directly to the government at a price fixed in the beginning of the season. The stated goal of this policy is to “ensuring remunerative prices to the growers for their produce with a view to (sic) encouraging higher investment and production.” The inherent endogeneity of MSP policy makes a rigorous impact assessment difficult, but the persistently low productivity growth in agriculture suggests that the MSP policies have failed to stimulate sufficient capital investments by farmers. Its conceivable the virtual subsidy provided by MSPs might actually dampen incentives for technology take-up by guaranteeing a basic level of income security. Furthermore, the existence of MSPs may encourage agricultural production for which there is actually limited demand in private markets, leading to unbalanced and suboptimal production choices by individual farmers. The process by which which MSPs are set is also somewhat dubious, and many have suggested that the current price-setting system is vulnerable to political manipulation and lack of parity across goods. Although scrapping MSPs would obviously expose a large number of farmers to the risk of price shocks, it seems to me that improving farmers access to insurance products and commodity futures markets is more sustainable and optimal way to manage such risks.

4. Improve public education.

Even if agricultural productivity does increase, it is still likely to lag behind the explosive IT and service sectors. However, the public education system is clearly failing to provide rural children with the skills necessary to enter these labor markets. This is perhaps the single biggest factor inhibiting the transition from agriculture to service sector employment. The demand for skilled workers in India has exploded, particularly in the service sector, demand which many firms are finding difficult to meet domestically due to extremely skewed distribution of human capital (something Doug discussed in the previous post).

5. Promote non-farm entrepreneurship among farmers.

Although India’s rural poor are by and large uneducated, many of them are capable of operating small businesses that have higher returns than traditional agriculture. However, their ability to start such business is often hampered by lack of access to credit and capital. In spite of the microfinance “revolution” and government policies designed to stimulate capital flow to the rural population (such as priority sector lending), there is still a massive failure of credit markets to meet the demands of the rural population. Empirical research has demonstrated that returns to capital are extremely high in microenterprises (roughly 80% in Sri Lanka), which of course suggests that there is tremendous potential for farmers who start operating small businesses to supplement or replace their primary line of work.

I’d be interested in hearing peoples opinions on any of these issues, and think this discussion would particularly benefit from the observations of people working in rural ares.

And I Thought Friends Were Distracting . . .

In the last couple weeks, several entries have discussed how borrowers in low-income households use loans, and whether they use them wisely. A related question comes to mind; if borrowers are possibly not making the most prudent use of capital, would training help? Moreover, what about those women who run small businesses (a target population of microfinance); would they more effectively run their businesses and manage their finances after business training support?

An ongoing CMF study (here), in collaboration with SEWA Bank in Ahmedabad, explores the impact of business training on client savings and credit behavior. 423 randomly sampled SEWA clients were invited to the training, and the women in the sample were between 18 and 65. Another third (211 women) were included in the sample, but were not invited to the training, and were the study's control group. These women needed to be either business owners, piece-rate workers, or self-employed to be included in the sample. The course, which SEWA developed to supplement its financial literacy training, teaches business skills such as marketing cost reduction, investment, and customer service. For each session, 12 women were invited from the random sample, among which:

• Half were invited with a friend; and
• Half were invited alone

Through analysis of SEWA Bank’s transactions database, we find that, compared to the control group, those trained with a peer increased their monthly savings per by 217 Rs. Interestingly, those trained individually actually decreased monthly savings. See the table below for a visual representation of the findings.

Why does training with a peer influence the savings behavior of clients? At this point, we are not sure. It may be positive peer pressure (and a commitment device); the trainees learn about the importance of savings during their course, friends commit to saving a certain amount, and then friends remind one another of the lessons learned. Or, the real reason may be very different from the proposed one above; it’s hard to know without studies that further isolate peer impact.

But, if training with a friend can help improve financial outcomes, finding out the real reason behind this success is worth exploring. Hopefully, CMF will have more to share on the topic after the completion of this study.

Ghate on Branchless Banking

My colleagues Minakshi Ramji and Justin Oliver recently informed me that Prabhu Gate, the author of “Indian Microfinance: The Challenges of Rapid Growth” and an eminent figure in microfinance research, is now writing a weekly column in The Economic Times.

His August 21st column, “Branchless Banking in India,” is an excellent summation of the challenges and huge potential impact of the business correspondents (BC) model towards financial inclusion. His argument shows that the challenges are primarily self-inflicted. The result of the damming conservatism Indian government shows in not allowing anyone but large banks to offer a variety of financial services and a deep misunderstanding of politicians about the consequences of capping interest rates for loans to the poor.

India's Education Gap

Ever wonder how some in the media can deplore the abject quality of India's school system while others, seemingly simultaneously, laud the brilliance of India's engineering graduates?

Using data from the TIMSS test conducted in Orissa, Rajasthan, and nationwide in several other countries throughout the world, Tristan Zajonc and Jishnu Das show that both claims are true. From their paper:

The test-score distribution is also highly unequal—the difference between the top 5 and bottom 5 percent in both states is among the highest in the world, next only to South Africa. Students at the bottom of the distribution in both states score similarly or worse than the bottom students in the three worst performing countries. At the same time, students at the top of the distribution score higher than the top students in other low performing countries, and higher than the median student in all but the best countries. The top 5 percent of students in Orissa, for example, score higher than the median student in more than 42 of 46 countries tested
in 2003.

The Best Evidence I’ve Seen Yet that NREGA is Working, part Deux

Apparently, I spoke too soon. This is undoubtedly the best evidence yet: His Holiness Jeff Sachs himself is now writing about the program.

Sach’s take:

Moreover, India's new rural employment guarantee scheme, just two years old, is not only employing millions of the poorest through public financing, but also is bringing tens of millions of them into the formal banking system, building on India's digital networks.

I'm a big fan of NREGA and I think the move by the Ministry of Rural Development to require all NREGA to be routed via bank accounts is a good one from the perspective of transparency and, but, as I've argued elsewhere, I'm a bit skeptical that the workers themselves will use the bank accounts for anything other than to withdraw their wages and I'm a bit worried about the capacity of banks to handle this massive influx of new customers.

The Best Evidence I've Heard Yet that NREGA is Working

My colleague Adinarayana Raju reports from the field that large scale farmers are putting pressure on local governments to shut down NREGA worksites during peak harvest season because of the program’s upward pressure on local wages. After a recent trip of my own to NREGA worksites in Karimnagar, AP I don't find this that surprising. In Karimnagar, workers told us that the going daily wage rate for farm labour has more than doubled (from around 35-40 rs a day to 80 rs a day) since the implementation of the program.

In AP, the farmers’ tactics appear to have worked. Eenadu reports (in Telugu) that the AP ministry of rural development has announced that it plans to come up with a NREGA “calendar” (read scheduled work stoppage periods) in the near future.

The political maneuvering of the large farmers seems leaves me slightly uneasy and it 's a bit of a bummer that AP is subtly rolling back NREGA just as it appears to be making an impact yet at the end of the day this might not be such a bad thing. Too much distortion in the local labour markets would do no one any good in the long run.

What Does Productive Loan Use Look Like (part 2)

This entry is intended to expand on Michael Chasnow’s entry “What Does Productive Loan Use Look Like,” which you can find by scrolling down or clicking on the link.

Michael uses data from a household survey conducted in the slums of Hyderabad to demonstrate that borrowers in that context generally do not take out loans with the intention to use the money for starting a new business or business expansion. In the study Michael cites only a very small percentage of loans come from MFI or other formal finance providers. I thought it might be interesting to look at loan usage in another setting with greater access to formal finance penetration. Don Johnston Jr. and Jonathan Morduch’s paper “The Unbanked: Evidence from Indonesia” which examines survey data collected by Bank Rakya Indonesia (BRI) does just this.

For a little quick background, BRI is a massive state bank focused on microfinance that has penetrated into virtually all of Indonesia. The Bank has over 30 million savers and over 3 million borrowers. Highly profitable and publicly traded, it is one of microfinance’s greatest commercial success stories. BRI distributes loans of similar size and length to what is currently offered by most Indian JLG based MFIs, but there is no group liability mechanism.

In 2002, BRI administered a survey to 1,432 respondents across 6 provinces of Indonesia to “map the financial landscape and gauge potential markets.”* Respondents were randomly chosen from the nation census and both current BRI customers and non-customers were interviewed. Loan usage data was collected and BRI found the following:

- For respondents who were below the poverty line (BPL), 49% of all loans were used for business; the other 50% was used for household and “other” purposes. For respondents whose households lived above the poverty line the number rises to 56%.

- When given a loan from BRI or another formal bank (not including MFIs), around 60% of BPL households used their loan for business purposes. The percentage drops to 33% when considering only loans from informal sources and MFIs (in this case 55% of loans are used for household purposes). Notably, the number rises to around 47% for non-BPL households.

If you read Michael’s post on the Hyderabad data you may have noticed that the percentage of loans used for business is much higher in the BRI survey. There are a variety of possible reasons for this, including the fact that the Indonesia survey was targeted at a cross section of the population including those with access to credit, while the Hyderabad survey was conducted in slums with very little credit access. The numbers become much closer when looking at only informal and MFI loans to BPL families, and if MFI loans were removed from BRI survey perhaps the numbers would converge even more.

It seems to me clearly established that although important, loans for financing business expansion or start ups are not the only kinds of loans that poor consumers are demanding and when they do receive MF loans, that those are not the only purposes for which they are using them. We also know that the far majority of microfinance loans are given specifically with the stipulation that they be used for “productive”/business purposes. The question then becomes whether this is a problem?

In Amy Mowl’s 2006 interview with Malcolm Harper, former chairman of the Indian MFI BASIX, for the CMF’s newsletter, they had the following exchange:

Mowl: Even in the South when client incomes may be relatively higher, many of us have seen "productive" loans being used for consumption. Is there value in MFIs holding clients to the discipline of borrowing only for productive purposes?

Harper: I think its nonsense. And it does matter because it induces falsehood at an early stage of the relationship, which can easily lead to falsehood in more important things. If the client is forced to lie and say she's going to use it for a productive purpose and she's not, then that's the beginning of a slippery track to saying she's going to repay and she won't. It's nonsense. Luckily it's not nonsense that makes much of a difference as clients ignore it.Moreover, it's overambitious in the sense that it assumes that it gives the impression that if someone is a client of an MFI she's automatically got a livelihood, which of course she hasn't. It also exaggerates the importance of loans as opposed to other services, because if you need to start a little business you need something to invest and therefore you need a loan before you need anything else which is rubbish. So it both exaggerates what microfinance can do and distorts the emphasis of the products that are offered. And at the same time it understates what it can do in that microfinance can provide a full range of services—insurance, all these things—that goes far beyond running your own business. So it's very damaging in every respect.And it's part of a broader illusion and rhetoric that I still see coming out of some high-level meetings where they're still talking about micro-entrepreneurs... about microfinance being about creating this world of millions of self-employed women, which is totally unrealistic in terms of any long term goal. I've never seen what we would call a rich, developed economy which consists of millions of women sitting around selling bananas.There is anther aspect of this consumption and production division which continues to infuriate me, in which education and health are regarded as "consumption", somehow as a bad thing to spend money on. So it's sad to see the same silly rhetoric still being pumped around.

In contrast, I recently had a discussion with the director of a small MFI in Eastern India, who will remain unnamed, about the insistence on using loans for livelihood activities. In so many words, he told me that he knew people were going to use their loans for non-business activities but that he still thought forcing them to pledge to use the funds for business was constructive. He believes that for a portion of clients the pledge helps them stick to their original intention and maintain their discipline towards using the loan in a way that might make them better of in the long run, rather than spending the money on a short term need. His attitude was basically, “it can’t hurt, and it might do a little good.” Harper’s attitude is “it can’t help, and it might do a little harm.” I honestly find both viewpoints compelling.

At CMF, several of our research projects look into loan usage and the way that loan products can be created so as to stimulate productivity. Most apropos is a project in Kolkata which CMF is currently with the Village Welfare Society (VWS). The goal of this project is to see whether a moratorium on repayment for several months, instead of the status quo in which repayment begins the week after loan disbursement, will increase the use of loans for larger investments. The idea being that MFIs might be better off spending their time creating products that are actually catered to investment than collecting hollow pledges. So for lack of a better term, stay tuned…

* The main finding that Johnston and Morduch present in their paper is that there were a surprisingly large number of respondents that BRI deemed creditworthy who choose not to borrow. (the survey was administered by loan officers who assessed the creditworthiness of all respondents)

Judging For-Profit Microfinance

One of the most controversial discussions that emerged from the recent Microcredit Summit Campaign conference in Bali was Mohammed Yunus’s scathing condemnation of for-profit microfinance company Banco Compartamos, which to much fanfare recently held an IPO that raised almost $500 million. Compartamos started as a typical nonprofit MFI, but switched over to a for-profit model in 2000, and has now become one of the world’s first publicly traded for-profit microfinance companies.

Most criticisms of Compartamos revolve around the relatively high interest rates that they charge clients – typically 70-100% APR. Although rates have been decreasing steadily over the past seven years, they are still much higher than rates offered by traditional non-profit MFIs, which typically range from 20-40% APR. The disparity was apparently severe enough to draw considerable ire from more socially-minded microfinance practicioners when Compartamos announced their IPO. The notion of wealthy executives becoming rich at what is generally (but not necessarily accurately) presumed to be the expense of the poor clients is obviously a difficult notion for many to stomach. Yunus himself stated "Microcredit was created to fight the money lender, not to become the money lender."

But how does one distinguish microfinanciers from moneylenders? Making any such distinction is an more of an art than a science, and therefore involves drawing a line in the sand. Interest rates alone are an insufficient gauge as they provide almost no information on actual outcomes of loan recipients. It is distinctly possible for high-interest microloans to ultimately benefit poor clients when initial returns to capital are high (research indicates that they often are), which suggests that attempting to distinguish “good” and “bad” microcredit on the basis of interest rates alone is rather misguided. A recent paper by McKenzie and Woodruff estimated real returns to capital in microenterprises to be approximately 95% annually, which suggests that accepting seemingly exorbitant interest rates may still be in the best interests of the poor, especially the entrepreneurial poor. Taking high-interest loans may well be the first step small entrepreneurs need to take to accumulate enough capital to operate at an optimal scale.

The strange confluence of high initial returns to capital, extremely low default rates, and high market interest rates suggests severe credit market failure among the poor in Mexico. Conventional economic wisdom suggests that competition for clients between for-profit MFIs should lower interest rates, so one would expect increased investment to drive interest rates down. The inherent endogeneity of MFI density makes it rather difficult to rigorously evaluate the impact of increased MFI competition on interest rates (and outcomes among the poor), so it is quite difficult to offer any rigorous empirical support for this notion. However, the fact that Compartamos’ average interest rate has decreased from 115% to 79% over the past seven years, which was paralleled by the emergence of several competing MFI, might suggest that the markets are slowly starting to adjust.

So how does one distinguish between the microfinancier and the moneylender? Also relevant is the issue of information. For lending to be considered “fair” a basic presumption is that clients actually understand the products they are signing up for. As long as the clients make an informed and conscious choice to take a loan, and the MFI issues loans with the genuine presumption that the client will be capable of repayment, I would be hesitant to condemn any MFI as “predatory.” Of course, these terms grow even more hazy in light of varying levels of financial literacy among poor clients. High interest rates, although a matter of concern, appear to me to be more of an indictment of inefficient and underdeveloped credit markets than of the MFIs themselves that profit from them. There are also very well-documented cases of non-profit MFIs collecting relatively high interest rates in order to finance expansion, and in some cases compensate for inefficient operating practices. In light of all this, it seems that profit motive alone is also not a particularly useful criteria for distinguishing between “good” and “bad” microfinance practitioners. MFIs should be judged in terms of overall impact on client outcomes rather than hazy notions of intent.

To their credit, Compartamos has been more than willing to admit that they are not a socially conscious organization. Danel, the CEO stated "A lot of people have suggested that financial inclusion can be a poverty alleviation tool," he says. "We're not out to prove that. We're out to provide financial services as opportunities to these clients, realizing that some people might make better use of them than others." In light of the remarkable successes of more socially-minded MFIs such as Grameen, Bandhan, etc, it is hard to deny that Compartamos could probably be doing more to benefit their client base than they are in their current mode of existence. But at the same time, what they are doing is still probably better than doing nothing. And there is no denying that their IPO has increased interest in microfinance among “mainstream” financial service providers, which may trigger increased investment and drive interest rates towards their (presumably lower) equilibrium levels. For all of these reasons, I think that outright condemnation of for-profit MFIs might be somewhat misplaced. A more useful debate might focus on understanding the factors that have led to such pervasive failure of credit markets to meet demand among the world’s poor, and what corrective measures offer the best remedy.

What Does Productive Loan Use Look Like?

In a January 2008 conference organized by CMF and the College of Agriculture Banking (CAB), Professors Esther Duflo and Abhijit Banerjee presented a baseline dataset, developed during an ongoing CMF study on Spandana’s micro-lending program, which provides insight into how households use loans (which this entry focuses on), and the make-up of tiny family-run enterprises. The dataset derives from a survey of about 2400 randomly selected households from 120 “small” slums located in or near Hyderabad city, and results are summarized here.

Before jumping into the numbers, it could be good to provide a little background on the loans received by households in slums around Hyderabad. 60% of surveyed households have at least one outstanding loan, and 46% of the households have more than one outstanding loan. The average loan size was Rs 20,000 (median was Rs. 10,000) and the average interest rate was about 80% a year. Loans received in these slums rarely came from commercial banks or MFIs, and instead mainly came from the following sources:

• Moneylenders (49%)
• Friends or neighbors (28%)
• Family members (13%)

Taking a Closer Look at How Borrowers Use Loans
When people were asked why they took out the loans, business creation or expansion were both not near the top of the list. People took out loans for other pressing needs, as the numbers below indicate:

• Health expenses (17%)
  
• Marriage (13%)
• Temporary difficulty (10%)
• Home construction (10%)
• Consumption (10%)
• Start a new business (7%)
• Business expansion (1.33%)

As Banerjee and Duflo point out in the last two slides (pages 12 and 13) of this presentation of the baseline data here, credit is acting partly as a substitute for insurance. Virtually none of the households have health insurance, and 40% needed to spend Rs 500 or more on health in the last year. Moreover, the average health expense was Rs 7,500 (median Rs 3,000), and about 60% of households with a sick member needed to borrow money to pay for related health expenses.

Additionally, many of the other top reasons for taking out loans, such as home construction or temporary difficulty, could be viewed as productive loan use. Which raises the question, what is productive consumption, and how much of a role should MFIs play in compelling loan recipients to use loans for business creation/expansion or other specific uses?

Overall, I think this data indicates low-income households often use loans for core needs such as health and home construction. When they do not use loans in a productive manner, they are often used for critical social events (e.g., marriage), which is unlikely to change anytime soon. Therefore, as MFIs develop credit products, this reality should be kept in mind; not everyone can start their own business. But, the majority of borrowers use loans in a productive manner because people do want a roof over their heads and ways to help sick loved ones. Creating specialised credit products (e.g., for business assets in urban areas, livestock in rural areas) or excessive monitoring of loan use may not be worth the trouble.

I would love to hear thoughts on this topic – should MFIs provide/create loans targeted for business creation or expansion (or other targeted purposes), or do general loans work more efficiently?

Sustainability and Challenging the “Ideologically Attractive”

Whereas orthodox public finance analysis suggests that governments or donors should indefinitely fund activities that generate positive externalities, advocates of sustainability emphasize the importance of local project “ownership”, and promote public goods projects that only require start-up funding and can then continue without external support. These efforts typically rely on voluntary activities by community members rather than on the granting of coercive fundraising powers to local governments.

The idea that development projects should aim at financial sustainability through voluntary local action has had tremendous influence in development thinking, in areas from microfinance to the environment. In public health and water supply, sustainability advocates concentrate on cost-recovery from beneficiaries, community mobilization, and health education rather than simply building wells or subsidizing medical treatments that generate externalities. The idea of replacing dependency on aid with a one-time investment that leads to long-run sustainability is certainly ideologically attractive.

Yet anecdotal evidence suggests that financial sustainability has often been an illusion, and sometimes a costly one. Morduch [1999] argues that the pursuit of sustainability by microfinance organizations has led them to move away from serving the poor. Meuwissen [2002] argues that a health cost-recovery program in Niger led to unexpectedly large drops in health care utilization, and that the local health committees set up by the program failed in most of their responsibilities. In a large water project in the Kenyan area we study, 43% of borehole wells were useless ten years after the shift from external donor support for water-well maintenance to the training of local maintenance committees [Miguel and Gugerty, 2005].

The above quote comes from the introduction to professors Michael Kremer and Edward Miguel’s powerful paper entitled “The Illusion of Sustainability.” I have quoted the authors at great length because I believe this is such a provocative and important challenge to the current conventional wisdom in the development field (though this may already be changing). In the rest of the paper, the authors set out their counter intuitive argument that in some cases the most cost-effective and efficient way of distributing public goods is to give them away for free. They make their case primarily through statistics obtained from a randomized evaluation on the impact of introducing cost-sharing and education programs for distributing de-worming drugs in Kenya. An earlier related study had already demonstrated that within this setting de-worming drugs greatly reduce “moderate-heavy worm infections” and increase school participation.

De-worming drugs are a perfect product for the authors to exhibit the often futile and expensive efforts of NGOs and governments to create sustainable distribution of products for which people have a “low private valuation,” but for which there are great public benefits. The study found that neither an “intensive” education program nor a mobilization campaign where people were asked to commit to using the product had any significant effect on the take-up of the drugs. The authors highlight the absurd lengths NGOs and governments go to promote sustainability through education:

Our best estimate is that teacher training, teacher lessons at school, the lectures delivered by the NGO field team, and the classroom wall-charts and other educational materials taken together cost at least US$0.44 per pupil per year in the assisted schools – which is comparable to the total cost of deworming drug purchase and delivery in a nearby Tanzanian program, at US$0.49 [PCD, 1999].

The majority of the paper is dedicated to discussing the peer effects of introducing a large scale de-worming program for children into schools. The authors unexpectedly found that social contacts of those whose children were treated with the drug were less likely than non-social contacts to purchase subsidized de-worming drugs. They conclude that this is likely because the parents of children who took the drugs were disappointed in the drugs effectiveness because they were expecting a greater immediate impact to their children’s welfare.

Kremer and Miguel also tackle the argument made by some policy makers and economists that cost-sharing (partially, but not fully subsidizing goods) often promotes “more efficient use of scarce public resources if those in greater need of health services are willing to pay the most for them.” The de-worming study found that “sicker pupils were no more likely to pay for deworming drug” (though this finding is not statistically significant). In a similar study on the impact of cost-sharing on take-up of insecticide treated bed nets, also conducted in Kenya, Jessica Cohen and Pascaline Dupas find that those who are most likely to get malaria are no more likely to purchase bednets (controlling for other factors).

This same bednet study also contested another argument used by cost-sharing advocates. It is often argued that people who purchase a product are more likely to use that product intensively and over a longer period than those who are given the same product for free. Cohen and Dupas found that in at least the context of pregnant women in Kenya being offered bednets for free or a range of prices, there was “no clear relationship between the price paid and probability of usage.”
Of course, I am trying to make an argument in a blog post and cannot go over all the counter points to the case made here, so I strongly encourage those interested to read the cited papers so they can consider the external validity of these conclusions. Also, contradictory evidence can be found in a study conducted in Zambia on the effects on usage of different offer prices for a water purification solution (all subsidized). The researchers found "strong evidence that higher prices selectively attract buyers with a greater propensity to use [the solution]."


The greater point is that not all products and services are the same, and in some cases creating sustainable markets may be all but impossible. Though it is certainly not “ideologically attractive,” I strongly believe Kremer and Miguel are correct in reminding us that for at last some essential public goods and services “There may simply be no alternative to ongoing subsidies financed by tax revenue raised either from local or national governments, or international donors.”


* In a future blog post, I will address what this may mean for microfinance and economic development in India. Happy Indian Independence Day!

Fixing the Dormancy Problem of No Frills Accounts

Nachiket pointed out in his last comment to one of the posts below that the tendency on this blog has been to focus on failures rather than policy successes and I am afraid to some extent this post is also going to be focusing on what I see as a partial failure. In my defense, I do think that constructive criticism and action research can be important ways to improve public policy.

Given that Financial Inclusion is the new zeitgeist, to borrow a phrase from my fellow blogger Dan, I wanted to write about ‘No Frills Accounts’ and their much touted contribution to ‘Financial Inclusion.’ The idea is essentially that every family without a bank account will be given a zero minimum balance account with a limited number of transactions allowed on that account per month/year. Using this strategy several districts across the country have declared themselves to be 100% financial included.

What is great about these accounts is that their design is very much in keeping with what research shows low-income communities desire and need from such a product, as Sanjay Sinha points out. The account requires no minimum balance; it is secure, simple to understand. However, the usage of these accounts to indicate a less than inclusive story altogether. CMF is conducting a study on the usage of No Frills Accounts, led by Jayaram Venkatesan to look at usage statistics, but prior studies by CMF in Gulbarga and other reports indicate that the accounts are not being used optimally or in many cases at all. What are some of the probable reasons?

Firstly, the problem of physical access to banks remains acute. As an example, one research study showed that in a certain block of Gulbarga district in Karnataka, the average cost of going traveling to a bank was approximately Rs. 20. Given that Self-Help Group in rural areas save anywhere between Rs. 10 to Rs. 50 per week, the expense incurred in traveling to a bank branch actually represents a prohibitively large share of their weekly savings or potential deposits. Secondly, many low-income households suffer from the misapprehension that banks are meant for richer and more educated people than themselves. Informal conversations with rural households reveal the common belief that bank accounts are meant for amounts as large as Rs. 300, over ten times what they are used to saving in any given week. Thirdly, the problems described above are compounded by a lack of information and knowledge of the target clientele. For instance, the No Frills Account is typically advertised through the print media even though the target audience is largely illiterate. Finally, banks are not always thrilled to open these bank accounts which typically show very little activity and do not seem to merit the expense. All these barriers mean that even when banks open No Frills Accounts for excluded households, they may never visit a bank because they simply do not have a proper appreciation of what it means to have a formal banking relationship. Consequently, as a visit to a rural bank branch in Karnataka revealed, No Frills Accounts show very little financial activity.

What needs to be done in order to ensure that this laudable effort does not go to naught? We need to come up with a surefire to make sure that No Frills Accounts that are opened will be used. If No Frills Accounts are used to deliver government assistance, accountholders would be more incentivised to use their accounts. In this context, the Government’s recent announcement to disburse NREGA payments through bank accounts may be the ticket to increasing financial inclusion in this country, as Nachiket points out in his comment here.

Further, the experience with microfinance both in this country and abroad suggests that, especially for low-income communities, doorstep banking may be the most suitable mode of delivery of financial services. The RBI, has made provisions for a Business Correspondent model whereby banks can hire outside agents such as NGOs to offer the banks’ products and services at the doorstep of the client, rather than forcing the client to come to the bank. While this model is mired by various regulatory and operational challenges currently, its speedy launch on the ground holds the key to improving access to finance. I would be interested to hear from readers about successful BC models in India.

SKS's passbook is now colorful and brings money

here, future of rural advertising.... micro-advertising!!

Government's Development Failure!

Read "NREGA and the Death of Tapas Soren" in Vol 43 No. 30 July 26 - August 01, 2008 issue of EPW. There has been continuous criticism of government's blanket schemes, target games and in-house corruption with out any effect.
Last year the Comptroller and Auditor General of India report brought out various discrepancies in the NREGA flagship scheme of central government, (read more about it in EPW, India development blog). Instead of working on those, this year the Union Government extended the scheme to almost all the districts in the country with huge fund (some 6000 crores).
Let us see a very different issue, Financial Inclusion. Last year RBI asked SLBC convener banks of every state to make at least one district 100% financially included. Read this to find out the results of one such drive. I was involved in one of the studies on Financial inclusion in northern states of India. Bankers running around for numbers was sight to sigh.
Well I am trying to enlist few issues which are often over-looked by the government while deciding on a program -

1. Is this program equitably scalable in all parts of country? sub question - how it differs?
2. What is the basis of this program (has there been enough brainstorming over the rationale)? Is this solving a problem or just addressing a symptom?
3. How effective implementation will be insured? Are we putting extra burden on resources? Is the program affecting other ongoing scheme? (SGSY vs SHG Bank Linkage dilemma)
4. Is the program creating a rift in community? (reservation schemes intoxicating society without much benefit)
   
5. How can we ensure that awareness of benefits reaches the targets?

There are more to this list, I am sure. Will be happy if we can get a exhaustive list of such questions!!