Our founding fathers wanted political freedom for the people of India. They wanted justice and equality, of status and opportunity. And they wanted us to be free from poverty. We have made substantial progress in achieving political freedom. Our democracy has matured, with people confidently choosing to vote out governments that lose touch with their needs.
Even as our democracy and our economy have become more vibrant, an important issue in the recent election was whether we had substituted the crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians.
A hypothesis on the persistence of crony capitalism
One widely held hypothesis is that our country suffers from want of a "few good men" in politics. This view is unfair to the many upstanding people in politics. But even assuming it is true, every so often we see the emergence of a group, usually upper middle class professionals, who want to clean up politics. But when these "good" people stand for election, they tend to lose their deposits. Does the electorate really not want squeaky clean government?
In a speech I made before the Bombay Chamber of Commerce in 2008, I argued that the tolerance for the venal politician is because he is the crutch that helps the poor and underprivileged navigate a system that gives them so little access. This may be why he survives. The poor and the under-privileged need the politician to help them get jobs and public services. The crooked politician needs the businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the crooked politician to get public resources and contracts cheaply. And the politician needs the votes of the poor and the underprivileged. Every constituency is tied to the other in a cycle of dependence, which ensures that the status quo prevails.
How do we get more politicians to move from "fixing" the system to reforming the system? The obvious answer is to either improve the quality of public services or reduce the public's dependence on them. But then how does one improve the quality of public services? The typical answer has been to increase the resources devoted to the service, and to change how it is managed. But if resources leak or public servants are not motivated, which is likely in the worst governed states, these interventions are not very effective. Some have argued that making a public service a right can change delivery. But the public delivery system is usually most apathetic where the public is poorly educated, of low social status, and disorganised, so monitoring by the poor is also unlikely to be effective.
So if more resources or better management are inadequate answers, what might work? The answer may partly lie in reducing the public's dependence on government-provided jobs or public services. But how does a poor man get a good job if he has not benefited from good healthcare and education in the first place? In this modern world where good skills are critical to a good job, the unskilled have little recourse but to take a poorly-paying job or to look for the patronage that will get them a good job. So do we not arrive at a contradiction: the good delivery of public services is essential to escape the dependence on bad public services?
Money liberates and empowers...
We need to go back to the drawing board. There is a way out of this contradiction, developing the idea that money liberates. Could we not give poor households cash instead of promising them public services? A poor household with cash can patronise whomsoever it wants, and not just the monopolistic government provider. Because the poor can pay for their medicines or their food, they will command respect from the private provider. Not only will a corrupt fair price shop owner not be able to divert the grain he gets since he has to sell at market price, but because he has to compete with the shop across the street, he cannot afford to be surly or lazy.
The government intends to announce a scheme for full financial inclusion on Independence Day. It includes identifying the poor, creating unique biometric identifiers for them, opening linked bank accounts, and making government transfers into those accounts. The broader takeaway is that financial inclusion and direct benefits transfer can be a way of liberating the poor from dependency on indifferently delivered public services, and thus indirectly from the venal but effective politician. This is why financial inclusion is so important.
Five Ps of financial inclusion
Financial inclusion is about getting five things right: product, place, price, protection, and profit.
If we are to draw in the poor, we need products that address their needs; a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the moneylender, easy-to-understand accident, life and health insurance, and an avenue to engage in saving for old age. Simplicity and reliability are key - what one thinks one is paying for is what one should get, without hidden clauses or opt-outs to trip one up.
The transactions costs of obtaining the product, including the price and the intermediary charges, should be low. Furthermore, any regulatory burden should be minimal.
New and inexperienced customers will require protection. The RBI is beefing up the consumer protection code, emphasising the need for suitable products that are simple and easy to understand. Financial inclusion cannot be achieved without it being profitable. So the last 'P' is that there should be profits at the bottom of the pyramid.
Edited excerpts of 'Finance and Opportunity in India, address by Reserve Bank of India Governor Raghuram Rajan at the 20th Lalit Doshi Memorial Lecture on August 11, 2014 at Mumbai (speech sourced from rbi.org.in)