MUDRA bank a step towards 10 per cent economic growth

The mandate that the Narendra Modi government was emphatically given in May 2014 by the people of India, was a mandate for change and a break from the status quo. Change in our governance and politics - but also to change in the economic architecture, growth and inclusion.

While the Modi government's first Budget was a status-quoist place-holder Budget, it is obvious that Budget 2015 - the governments first full year Budget is surely redrawing the economic architecture of the country.

The Indian economy is structured as a pyramid with the rich and middle class as the top two layers of this pyramid and the bottom being the poor, which has been the political focus and the "intended" recipient for several thousands crores of spending by successive governments. The spending on "programmes" has continued with little or no change, despite evidence of rampant corruption and leakage and an increasing culture of entitlement rather than enterprise that has taken root in our country. This Budget has started the process of restructuring and developing a more effective way of targeting these spends through its JAM platform (Jandhan-Aadhar-Mobile).

A review of post-liberalisation (the Manmohanomics era) shows that the economic strategy of most Congress governments was based on the premise that increased private capital participation would catalyse the economy and create headroom for the government's welfare programs. This trickle-down economics of the classic kind hasn't worked, because very little of the prosperity at the top has had a direct quick relevance on segments of society that at best have a very tangential relationship with the top of this economic pyramid.

In Manmohanomics, the definition of private capital was blurred and that vagueness lead to private capital automatically implying private corporates. While at one level, it has surely created entrepreneurship and unleashed energies of the many thousands of Indians (including me) into business and economic activity, it also had the consequence that the big became bigger as they monopolised both the opportunities as well as access to capital - especially opportunities and capital linked to government . Raghuram Rajan said, "India has second largest number of billionaires per trillion Dollars of GDP. If you look at the areas where we have so many billionaires, it's things like land, real estate, natural resources - areas that require government licenses, and proximity to government helps."

The Credit Suisse Report 2012 that I have quoted many times highlights the stranglehold of these few corporate on bank credit - where 10 groups account for almost 97 per cent percent of the banking sectors net worth.

For all these years a big part of this economic pyramid has remain ignored by this kind of spend and forget strategy. This slice of our country's population amounting to several hundred million jobs rooted in enterprise and hard work is referred to as the non-corporate or informal sector. For the purposes of this article, I will refer to it as informal sector.

The Economic Census Survey of 2012 revealed the scale and magnitude of what we have been ignoring for several decades. There are 5.77 crore enterprises in India, and it generates employment for 460 million people of which 262 million people are self-employed. That this long ignored informal sector is significant part of our economy is obvious from the following statistics. It accounts for 90 per cent of our non-agricultural work force, 50 per cent of the GDP, 40 per cent of non-farm GDP. This informal GDP is almost completely out of the direct tax net and lacks any formal form of access to credit or risk capital to allow it to grow and join the mainstream economy. A recent Credit Suisse report stated, "Unlike in developed economies, where informality is a deliberate choice to avoid taxation or regulations, in India it is more structural, a reflection of the lack of development and limited government reach."

Reports have concluded that Indian GDP can be raised by almost 15 per cent if the informal sector data is incorporated in the GDP series. Yet, only 4 per cent of have access to institutional credit, with loans between Rs. 50,000 and Rs 10 lakh almost impossible, forcing them to go to moneylenders. The non-corporate sector faces stiff competition from larger firms, and are further impeded by the lack of infrastructure and access to easy credit. They are often unable to procure adequate financial resources for the purchase of machinery, equipment or raw materials.

Bringing in the informal sector into the formal has many advantages to both the business and the economy. It is precisely to address this large population of Indians that have been kept out of the economic radar for the last 6 decades, that the Budget has proposed the Micro Units Development Refinance Agency (MUDRA) bank which will be set up with a corpus of Rs 20,000 crore and a credit guarantee corpus of Rs 3,000 crore to help microfinance firms to lend more.

The MUDRA bank will boost loans and cut borrowing costs for the cash-starved domestic small businesses. It will create a framework that regulates and provides refinancing capital flows to Micro-Finance Institutions (MFI) which are in turn in the business of lending to micro/small business entities engaged in manufacturing, trading and services activities. This will create and expand the financial eco-system that is source of capital and finance to the unbanked; also reducing cost of capital from the last mile financers to the micro/small enterprises, most of which are in the informal sector.

Even in China when the conventional economic wisdom tends to credit its dramatic growth story as a result of export oriented manufacturing, the truth is that more employment was created by township and village enterprises - also a form of informal sector.  While export manufacturers at its peak created 18 million jobs, these small township and village rural enterprises created over 30 million jobs. While foreign funded companies were 660,000, in contrast township and village enterprises were 69.8 million and 92.7 million respectively. As author Yasheng Huang wrote in 2012, "in contrast to conventional view that these small enterprises were state controlled, they were in effect privately owned".

The "change" to our economic architecture could be deep and transformational. It involves funding the unfunded, and unlocking the potential of a new pool of entrepreneurs and future taxpayers in this country. It is encouraging for Entrepreneurship across the economic strata. It is using Micro Finance an economic development tool whose objective is to assist the lower income groups to develop and grow their small businesses - many of whose owners are traditionally excluded communities like Scheduled Caste, Scheduled Tribe or other Backward Classes, who own almost 60 per cent of all enterprises in this sector. It represents a real way to make the dreams of millions in the informal sector, long neglected and ignored, a reality. This formalisation of the informal sector would expand the tax-GDP ratio and expand the number of taxpayers and in turn government revenues.

This government is right to see the potential of this sector to drive up jobs and taxes. It has realised the force multiplier impact on the economy and tax revenues by successful formalising the informal sector. It has realised the failure of both the RBI and the banking system in credit supporting this sector. This also is core to this new economic philosophy of supporting enterprise wherever there is a desire for that in our economy, whilst continuing with better targeted and well-conceived social security framework for the poor and needy. This also marks an end to the Manmohanomics corporate sector driven growth era and marks a beginning of a deeper and broader enterprise and entrepreneurship driven economic model. This is clearly fitting the expectations of "change" from this government.