Modi's development model for india

From banking the unbanked, and

funding the unfunded….…..to securing

the unsecured

Sen’s and Bhagwati’s models in

Modi’s Development Plan for India

Socio-economic empowerment initiatives of Modi’s Government

Dr. Kamakhya Nr. Singh,

UNDP(AMSCO)

Present day Government of India, led by Narendra Modi is doing remarkable work on economic front. What is more remarkable is the fundamental change that he is trying to bring to the way development is seen, talked about and undertaken in a developing economy like India. Even when the world is realizing that India, through its large consumer base and enormous economic strength, could be the engine of global growth, the Indian Government is trying to take the development to the roots. Within just one year of governance, Modi’s Government has undertaken a series of initiatives for socio-economic empowerment of those sections of Indians, who have largely remained untouched by the macro-economic development. Such section of Indian population is too large to wait for the development to trickle down to them. This paper evaluates the recent schemes of financial inclusion and social security. The paper recommends that concerted efforts at tackling the economic and social malaise faced by the excluded section of society will not only help ensure more equitable development but also help the economy itself grow faster. A sound economy, growing at robust rate, will offer larger pie for distribution of gains of economic growth.

From banking the unbanked, and funding the unfunded to securing the

unsecured - Sen’s and Bhagwati’s model in Modi’s Development plan

Dr. Kamakhya Nr. Singh [http://ng.linkedin.com/in/kamakhyasingh/] Page 1 of 9

Introduction: Contrary to the apparent mutually exclusive models of Economic Development propounded by Amartya Sen and Jagdish Bahgwati, Modi Government seems to have found a way to charter development along a new path. Modi’s vision of Indian Economic Development builds upon the best advices offered by Amartya Sen and Jagdish Bahgwati, whose views were, interestingly, hotly debated before the 2014 general election in India. Modi Government is not only trying to boost the growth of Indian Economy (as per UN Report, growth is estimated to be more than 8% for FY 2015 and FY 2016) but also trying to make the development more inclusive. One year is not a long period for the macro-economic policies and government initiatives to show grand impact. However, over the last one year, apart from the brand building of India at international stage, what Indian Government seems to have achieved is put the focus of development on those “who are at the margin of the mainstream economy.” Those people have been made an important stakeholder of development. Concerted efforts are being made to ensure that the Indian Economy grows sustainably at significant rate. At the same time, government is also trying to ensure that standard of living and quality of life of vast majority of Indians, who seemed to get left out of the broad economic growth of India, get improved. The social empowerment initiatives of Modi Government have the tools of economic betterment for the masses of India at their root. On May 9th, speaking at the launch of three social security schemes: Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, and Atal Pension Yojana, Modi said that the fruits of development must reach the poorest of the poor. He said Jan Dhan Yojana helped bank the unbanked, Mudra Bank would help fund the unfunded, and these schemes would help secure the unsecured. These interlinked schemes of empowerment, launched by Modi government to improve the socio-economic conditions of large segment of Indians, can be presented schematically as under: Fig 1: Linkages amongst schemes of socio-economic empowerment

Fig 1: Linkages amongst Modi’s schemes of socio-economic empowerment

Schemes of Socio-Economic empowerment:

Jan Dhan Scheme Date of launch: Aug 28, 2014

MUDRA Scheme Date of launch: April 08, 2015

Social Security Schemes Date of launch: 9th May, 2015




A quick review of the three socio-economic initiatives, as shown in Fig 1 above, demonstrates the visionary thinking behind those initiatives. The review of the salient features of those schemes and potential challenges that could be thrown up by those schemes are as under:

A) Jan Dhan Scheme or Pradhan Mantri Jan-Dhan Yojana (PMJDY):

On August 28, 2014, while launching the PMJDY, PM Modi, declared the beginning of the end of financial untouchability in India. Opening of an estimated 15 million bank accounts across the country was an exercise unprecedented in scale in economic history. Client acquisition of 15 million in single day has never been heard anywhere in the world. PMJDY is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension, etc. in an affordable manner. Account can be opened in any bank branch or Business Correspondent (Bank Mitr) outlet. PMJDY accounts are being opened with Zero balance. However, if the account-holder wishes to get cheque book, he/she will have to fulfill minimum balance criteria.

Special Benefits under PMJDY Scheme

a. Account holders will be provided zero-balance bank account with RuPay debit card. In addition, accidental insurance cover of ₹1 lakh (to be given by 'HDFC Ergo') would be offered, provided that the RuPay Debit Card is used at least once within first 45 days of opening of the account. b. An additional life insurance cover of ₹30,000 (to be given by LIC) was to be given to those who had opened accounts by January 26, 2015 over. c. With the introduction of new technology by National Payments Corporation of India (NPCI), a person could transfer funds and check balance through a normal phone d. Beneficiaries of Government Schemes will get Direct Benefit Transfer in these accounts. e. After satisfactory operation of the account for 6 months, an overdraft facility of ₹5000 will be permitted f. Mobile banking for the poor would be made available through National Unified USSD Platform (NUUP) g. Bank accounts opened under PMJDY, will have access to Pension and insurance products.

It is expected that opening of bank accounts will provide efficient and safe means of keeping their savings. The Prime Minister illustrated his point through the example of a mother saving money and being forced to hide it somewhere within the house. He said the bank officials who had opened an account for such a mother, had been blessed by those mothers.

The Prime Minister said that a breakthrough was required to overcome the vicious cycle of poverty and debt, and that breakthrough had been achieved with the launching of PMJDY. He further added that there were similarities between the poor getting access to mobile telephones, and getting access to debit cards. They both had the effect of instilling confidence and pride among the poor, he added.




Fig 2:

Prime Minister, Modi, launching PMJDY

Achievements under PMJDY:

1) On the inauguration day, 15 million bank accounts were opened under PMJDY. By 28

January 2015, 125.8 million accounts had been opened, with around ₹106 billion (US$1.75 billion) deposited under the scheme. As on 31st March, 2015 total number of accounts opened were 147.2 million and had ₹156 billion in deposits; about 85 million

had zero balance. Number of Rupay Debit cards issued by 31st March, 2015 was 132 million.

2) On January 31, 2015, Shri Narendra Modi, while reviewing PaHaL (Pratyaksha Hastaantarit Laabh - the Direct Benefit Transfer Scheme for LPG Subsidy), noted that PaHaL, had covered more than. 97.5 million LPG consumers, and was perhaps the world’s largest cash transfer program as compared to similar programs in other countries, such as China, Mexico and Brazil.

Challenges thrown by PMJDY:

1) Management of so many accounts has put immense pressure on the over-burdened banking infrastructure, especially on the infrastructure of public-sector banks. 2) The overdraft facility has become discretionary in view of the government notice that only those people would get the overdraft facility whose transaction record is satisfactory as per the banks. 3) Keeping the account live and operational could be a huge task for account holders. A simple trip to the bank branch may not be economically viable for those people who have opened the zero balance account. 4) Technology for branchless banking, which would eventually drive the PMJDY, would require continuous upgradation and at the same time reduction in the cost of usage 5) For the use of banking correspondent to be effective, the incentive structure would require to be made more attractive




B) MUDRA Bank Scheme:

Launching Pradhan Mantri MUDRA (Micro Units Development and Refinance Agency) Scheme on April 08, 2015 PM Modi tweeted that the biggest capital of the poor is their integrity and combination of integrity with MUDRA – capital - will be the key to success for small entrepreneurs. He also observed that supporting the small entrepreneurs of India was the biggest way to help the Indian economy grow and prosper.

Earlier, on 28th Feb, 2015, Finance Minister, Arun Jaitley, had indicated in his budget speech that there are some 57.7 million small business units, mostly individual proprietorship/own account enterprises (OAEs), which run small manufacturing, trading or service businesses. These hard-working entrepreneurs, who operate at the bottom-of-the-pyramid, find it difficult, if not impossible, to access institutional finance. To help such entrepreneurs, Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of ₹200 million, and credit guarantee corpus of ₹30 million was created. MUDRA Bank would refinance Micro-Finance Institutions through Pradhan Mantri Mudra Yojana.

Fig 3: Prime Minister, Modi, launching MUDRA Scheme It is hoped that MUDRA scheme could be a boon for small business units/enterprises, which have only limited access to formal finance. Numbering about 57.7 million, these small enterprises use a debt fund of just ₹11 trillion (about US$ 180 billion) and provide employment to 120 million Indians. Government statistics show that only 4% of these SBUs get finance from regular banks and Micro, Small and Medium Enterprises (MSMEs) as a whole get less than 15% of the total bank credit. It is in this backdrop that Government of India (GoI) has envisioned to set up a Micro Units Development & Refinance Agency (MUDRA) Bank through a statutory enactment. This Agency would be responsible for developing and refinancing all Micro-finance Institutions (MFIs) which are in the business of lending to micro/small business entities engaged in manufacturing, trading and service activities. The Bank would partner with state level/regional level co-ordinators to provide finance to Last Mile Financiers of small/micro business enterprises. MUDRA Bank would be primarily responsible for: 1) Laying down policy guidelines for micro enterprise financing business




2) Registration and Supervision of MFI entities 3) Accreditation /rating of MFI entities 4) Laying down responsible financing practices to ward off over-indebtedness and ensure compliance with the proper client protection principles and methods of recovery 6) Development of standardised set of covenants governing last mile lending to micro enterprises 7) Promoting right technology solutions for the last mile 8) Formulating and running a Credit Guarantee scheme for providing guarantees to the loans/portfolios which are being extended to micro enterprises 9) Supporting development and promotional activities in the sector 10) Creating a good architecture of Last Mile Credit Delivery to micro businesses under the scheme of Pradhan Mantri MUDRA Yojana MUDRA bank will be offering: 1) Refinance to Commercial Banks, NBFCs, RRBs, Cooperative Banks and MFIs for lending to micro units. The loans to micro units will be in 3 categories:

a. Shishu : covering loans upto ₹50,000/- b. Kishor : covering loans above ₹50,000/- and upto ₹5 lakh c. Tarun : covering loans above ₹5 lakh and upto ₹10 lakh

2) Development and Financial Literacy Support - MUDRA will adopt a credit- plus approach and offer Developmental and Support services to the target audience to help overcome constraints such as:

• Skill Development Gaps • Knowledge Gaps • Information Asymmetry • Financial Literacy gap • Lack of growth orientation

MUDRA Bank will act as a market maker and build-up an ecosystem with capacities to deliver value in an efficient and sustainable manner. MUDRA Bank will also support Financial Literacy on demand as well as on supply side by 'providing familiarity with and understanding of financial market products, especially rewards and risks, in order to make informed choices.' In India, Micro Finance sector players can be broadly grouped under 3 categories:

a) Those who follow the SHG-Bank linkage model through Commercial Banks and Regional Rural Banking channels, b) The Non-Banking Finance Company and c) Others including Section 8 (formerly Section 25) Companies, Trusts, Societies, etc.

MUDRA Bank will arrange to meet the requirements of institutions in all the 3 categories. Challenges:

a. There seems to be a sense of uncertainty, as MUDRA Bank is yet to be set up as a separate/independent statutory body. As the Bank will function as an NBFC and a subsidiary of SIDBI in the initial phases, it will have problems setting up a new path of its own

b. Given the complex nature of microfinance sector, MUDRA Bank may find it difficult to serve as a regulator for widely diversified set of Microfinance operators and, at the same time, provide them refinancing services as well.




C) Social Security Schemes:

While launching the Social Security Schemes on May 09, 2015, PM stated that poor do not need support (Sahaara), but require strength (Shakti). Government was determined to providing strength to the marginalized and poor people by using three social security schemes: Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, and Atal Pension Yojana. He noted that it was indeed a matter of great pain that 80 to 90 percent of the people in India do not have access to insurance and pension.

Fig 4: Prime Minister, Modi, launching Social Security Schemes Building on the foundation of Jan Dhan Yojana, new social security schemes have been launched. These social security schemes are: a) Prime Minister Accident Insurance Scheme-Pradhan Mantri Suraksha Beem

Yojana (PMSBY) –

This is an Accident Insurance Scheme offering accidental death and disability arising from an accident. The scheme will be have one year coverage, and be renewable from year to year. All savings bank account holders with participating banks, within the age bracket of 18 to 70 years, will be entitled to join. Aadhar would be the primary KYC for the bank account. An amount of ₹12/- per annum needs to be paid as premium by each beneficiary. The premium will be deducted from the account holder’s savings bank account through ‘auto debit’ facility in one installment on or before 1st June of each annual coverage period under the scheme. Resultant potential benefits accruing to those opting for this insurance would be as per the following table:

Benefits Sum Insured

a. Death ₹ 2 Lakh

b. Total and irrecoverable loss of both eyes or loss of use of both hands or feet or loss of sight of one eye and loss of use of hand or foot

₹ 2 Lakh

c. Total and irrecoverable loss of sight of one eye or loss of use of one hand or foot

₹ 1 Lakh

Table 1: PMSBY - Table of benefits




b) Prime Minister Life Insurance Scheme-Pradhan Mantri Jeevan Jyoti Yojana

(PMJJY)

This is an Insurance Scheme offering life insurance cover for death due to any reason. The scheme offers a renewable one-year life cover of ₹ 2 lakh for a premium of ₹ 330 a year. Thus the scheme provides risk coverage of life at a premium of less than 1₹ per day and can be renewed on a yearly basis. All savings bank account holders with participating banks, within the age bracket of 18 to 50 years, will be entitled to join. In case of multiple saving bank accounts held by an individual, the person would be eligible to join the scheme through one savings bank account only. Aadhar would be the primary KYC for the bank account. c) Atal Pension Scheme - Atal Pension Yojana (APY) This pension scheme addresses the longevity risks among the workers in unorganised sector. It encourages those workers in the unorganised sector, who constitute 88% of the total labour force but do not have any formal pension provision, to voluntarily save for their retirement. Atal Pension Yojana (APY) is open to all bank account holders. Bank accounts must have auto-debit facility and subscribers need to keep the required balance in their savings bank accounts on the stipulated due dates to avoid any late payment penalty. The minimum age of joining APY is 18 years and maximum age is 40 years. Therefore, minimum period of contribution by any subscriber under APY would be 20 years or more. Pension would be paid on monthly basis after completion of 60 years of age. The benefit of fixed minimum pension would be guaranteed by the Government. To all those subscribers of APY who join this scheme during the period of 1st June, 2015 to 31st December, 2015, who are not members of any statutory social security scheme and who are not income tax payers, Government will contribute 50% of the total contribution (or ₹1000 per annum, whichever is lower) for a period of 5 years, i.e., from Financial Year 2015-16 to 2019-20. All the details of APY are illustrated in the table of computation below: Age of Joining (Years)

Years of Contribution

Indicative Monthly Contribution (in ₹)

Monthly Pension to the subscribers and his spouse (in ₹)

Indicative Return of Corpus to the nominee of the subscribers (in ₹)

18 42 42 1,000 170,000

20 40 50 1,000 170,000

25 35 76 1,000 170,000

30 30 116 1,000 170,000

35 25 181 1,000 170,000

40 20 291 1,000 170,000

Age of maturity: 60 years

Table 2: APY - Table of contribution and pension payments Subscribers need to be regular in payment of their contribution to the scheme as discontinuation of payments of monthly contribution shall lead to following: After 6 months, account will be frozen. After 12 months, account will be deactivated.




After 24 months, account will be closed. It is not clear as to what happens to the fund after the account is closed. More clarification would be required on how the contributor gets his contribution (in part, at least) back. A serious concern about the pension plan relates to the longevity of Indians, the amount of contribution that (s)he makes, which is to be made upto 60 years and the amount of pension that that (s)he would get under APY, which would be received only after the completion of 60 years.

Conclusion:

There is no gainsaying that the recent actions taken by the Indian Government have been long overdue in India. These schemes are especially remarkable as they are targeted to benefit that section of the Indian society, which has lower financial resources at its disposal and which has largely remained excluded from mainstream financial sector for long. What is also remarkable is the use of economies of scale and use of large number of potential users to make these social schemes so affordable in terms of cost (premium) to the beneficiary. With all these positive points there are a few points of caution as well. As normally happens with most of the government schemes, these schemes of socio-economic empowerment also have a few grey areas and uncertainties. As the operational process starts at full scale, it is expected that those uncertainties would get clarified and pending issues resolved. Time and again, it has been noticed that many a schemes, launched with all the noble intentions, flounder at the stage of implementation. For these recently launched schemes as well, there could be potential hurdle of implementation from vested interests. However, if proper positive incentives are put in place at the stage of implementation and all the stakeholders are positively sensitized to rise to the occasion, then these schemes will not only improve the living conditions of large segment of Indians but also lead to quantum jump in the economic output. Removal of deficiencies related with the initiatives would go a long way in ensuring their acceptability by all the stakeholders. It would be good for the Indian Economy and Indian Public that these initiatives are taken as good foundation to start with, and further work is done on those initiatives to bring in larger benefits.




Sources/References:

1. Speeches of Prime Minister of India, Shri Narendra Modi

c. http://pmindia.gov.in/ d. http://www.narendramodi.in e. http://www.narendramodi.in/pm-launches-pradhan-mantri-jan-dhan-yojana f. http://www.narendramodi.in/pm-launches-pradhan-mantri-mudra-yojana g. http://pmindia.gov.in/en/news_updates/pms-remarks-at-launch-of-social-security-schemes/ h. http://www.narendramodi.in/the-pm-reviews-pahal-scheme-for-direct-benefit-transfer-for-

lpg-subsidy

2. Website for schemes:

a. http://jandhanyojana.net/ b. www.pmjdy.gov.in/ c. www.mudra.org.in/ d. http://financialservices.gov.in/PMSBY.asp e. http://financialservices.gov.in/hindi/PMJJY.asp f. http://financialservices.gov.in/jansuraksha/APY_Brochure.pdf

3. UN ESCAP Report

http://www.unescap.org/resources/economic-and-social-survey-asia-and-pacific-2015

4. Sen-Bhagwati Debate on the model of Economic Development for India: a. http://www.nytimes.com/2013/08/22/world/asia/rival-economists-in-public-battle-over-cure-for-indias-poverty.html?_r=0 b. http://www.quora.com/What-do-economists-think-of-Amartya-Sen-versus-Jagdish-Bhagwati

5. Budget speech - http://indiabudget.nic.in/bspeecha.asp

Economy & Finance

Modi's development model for india