Sanjay Sinha: It's not about money, honey

Participation of the poor in India's century needs institutional reforms

Pro-poor reforms lie at the core of the Common Minimum Programme (CMP) "" the glue that holds the United Progressive Alliance together. Not surprisingly, since the installation of the new government we have heard a lot about the need to address issues such as primary education, health and employment for low-income families.

The prime minister, in his first address to the nation, focused on these issues and economic and political commentators in all the major news media have been discussing them ad nauseam.

So, with the Union Budget round the corner, the discussion has focused on the need to increase expenditure on providing better facilities for health and education and there is renewed interest in employment guarantee programmes.

The debate has focused entirely on spending. But the reality is not that of a shortage of funds but that of waste. Social services are poorly delivered by the public sector and expenditure on employment guarantee programmes is wasted because of many leakages in the system. The national debate is right in the topics it covers but quite spectacularly wrong in emphasis. While no one can deny that social programmes need more funds, merely pouring more funds into the system without greatly reforming it would be a prime case of pouring good money after bad.

If the new government is serious about the CMP, therefore, the debate needs to shift from the availability of funds and even from the specific allocation of those funds to the institutional arrangements for using the available resources to achieve the best results.

Prime Minister Manmohan Singh gave the lead while addressing the nation. He talked of public-private partnerships for delivering results in social sector programmes.

Such partnerships and the institutional changes they imply could represent the core of a new paradigm that could revolutionise the delivery of programmes for the poor and, indeed, become the core of pro-poor reforms.

First, look at health. It is well known that vast leakages in the government's machinery (rather than a shortage of funds) results in poorly maintained infrastructure, sub-standard equipment and absentee staff at primary health centres (PHC) "" particularly in the poorly governed states like Bihar, Orissa and UP.

On paper, the state guarantees the poor basic health facilities at little or no charge but then denies them access to the benefits of those facilities through their malfunction. The government's infrastructure lies unused and ill-maintained while the poor have to pay for more expensive facilities in the local market town.

Would it not be better to lease government facilities to one of the many social service NGOs and/or medical entrepreneurs who would be charged with the responsibility for maintaining them and would be required to provide a service to all the poor families within the service area besides?

With appropriate information and the will to make the programme work, determining details of the number of staff each centre would need to employ and the mix of poor and non-poor patients they would need to serve to earn a reasonable return would not be too difficult.

Second, education. A short trip out of Muzaffarpur (in Bihar), shows that the private education infrastructure is both thriving and growing. Not only small towns but also places beyond show evidence of the people's belief in the need for education.

There are not just private schools serving the needs of every level of the community, there are even English medium schools thriving in areas where you would have thought people would prefer the native tongue. Why not, in this situation, abandon the effort to provide education through absentee teachers in dingy, leaking buildings?

Why not promote competition in education through the liberal licensing of low-cost primary schools established by well-known educational societies that run secondary schools? Again, the ratio of low-yielding primary schools to higher-yielding secondary facilities could be worked out to facilitate the delivery of quality at each level.

Third, employment. Why put more money into employment guarantee schemes that merely promote more corruption? Why not privatise employment generation? What is needed to employ large numbers of people in a country with a burgeoning population are more opportunities in both farm and off-farm employment in rural areas.

From time to time the odd voice in government is heard talking of a shift to more commercial agriculture. This is, indeed, needed. However, substantial investment is required to enable the shift and, thereby, generate employment both on and off the land. Where is this investment to come from? Investment needs credit and credit needs banks that are willing to lend.

The public sector banking infrastructure continues to be crippled by political interference and the public perception of their operations as an extension of the government's subsidy dispersal mechanism. The only widespread infrastructure that exists for the disbursal of credit from the formal sector to farmers is that of the district cooperative banks and the regional rural banks (RRBs).

While reform of the cooperative system is gradually happening, it is a long slow process. As extensions of the public sector banks the RRBs, in the meantime, have been forced to become largely deposit collectors moving the deposits of rural people to urban money markets in Mumbai and elsewhere.

Yet, it is possible for RRBs to lend dynamically in rural areas and still be profitable. The privatisation of the RRBs under the present rules, where they can operate only rural and semi-urban branches would, therefore, help to stimulate investment in agriculture.

Finally, vulnerability. Research has shown that micro-finance not only enables self-employment and income increases for low-income families, it has an even more significant role, potentially, in building the assets of the poor, smoothening income across lean seasons and reducing their vulnerability to risk.

Micro-finance currently has outreach to no more than 10 per cent of poor families in the country. How can this be increased? Paradoxically, increasing the flow of micro-finance is not about pumping more money into government schemes. Actually, it is not about government money at all.

In recent years, Indian micro-finance institutions (MFIs) have started to emerge as leaders and innovators in international micro-finance. But, MFIs operate in an institutional grey area where their activities are officially frowned upon since these are technically in violation of official rules.

This means that while many MFIs could grow significantly using funds raised from their depositors together with the support of lenders "" as do most banking institutions "" the institutional conditions dictated by the government and the RBI do not allow them to do so. Repeated requests to create a separate category of for-profit micro-finance NBFC (titled Vikas Nidhi) have fallen on deaf ears.

This, because the RBI would not like to be seen to be responsible if the occasional "fly by night" operator runs away with the people's money. Despite, CRB and many other NBFC and urban cooperative bank (UCB) scams the NBFCs and UCBs have not been shut down.

Why should the micro-finance sector, which serves the needs of the poor and which has not suffered any scam, not even be allowed to start up?

Pro-poor reforms are not about money, honey! They are about innovation, hard work and experimentation in the development of institutional systems. Budgetary calculations are relatively easy in comparison. It is time to focus on institutional reform if the poor are to accompany the rest in the march to "India's century".

(The writer is executive director, EDA Rural Systems, Gurgaon)