Economists have always imagined the urban economy as the engine of the country. Rural economy was assigned the role of supplier of labour and agricultural inputs.
It may have been justified in the past given the lack of basic infrastructure in rural areas. But not anymore. Today’s rural areas are endowed with the same basic infrastructure as the urban centres. There is no reason to keep the rural economy as an appendix to urban economy. If right institutions are built and right policies are adopted, workers in rural areas can find livelihoods around their homes. Rural economy must be built as a parallel economy, an independent economy to open up opportunities for its own human and natural resources.
Not informal but micro entrepreneur sector
The coronavirus crisis revealed many weaknesses of the Indian economy — for example, the helplessness of the people in the so-called ‘informal sector’. They constitute the majority of the workforce of India. We saw how the income of the daily income earners suddenly disappeared, how millions of migrant workers had no options but to walk back home, hundreds of kilometres away.
Economic theory treats the informal sector as a waiting room before getting entry into the world of economic activities — the formal sector. Economists argue that the bigger the population in the waiting room the less is the capacity of the economy, because the informal sector doesn’t add any capacity on its own.
Economists feel their only obligation is to suggest ways to create jobs. Since jobs are in the urban centres, it justified their focus on the urban economy. That made the informal sector and rural economy largely forgotten as part of economics.
While working on creating Grameen Bank, I realised that the economic theory interpreted the situation completely wrong. I saw the informal sector as the powerhouse of the economy. I felt terribly unhappy that because of gross mis-conceptualisation by theoreticians, so much human creativity was going to waste. It appears funny to me that the economists refuse to make any effort to organise the ‘informal sector’, and then put the blame on it by calling it an ‘unorganised sector’.
We can divide the sector into two parts: a) one consisting of wage earners who sell their labour for a living, with traditional verbal contracts, and b) another consisting small traders, or people producing various products such as handicrafts, household products, and equipment, or those making a living by offering services.
The appropriate name for this sector should be ‘micro entrepreneur sector’. I see this sector as the creative hub of the economy. It thrives with the natural energy of human beings.
Covid crisis added to the woes
Since economists abandoned the informal sector, micro entrepreneurs remained deprived from the attention of the policy-makers, political leaders, legislators, and academics. Meanwhile, the labour in the formal sector continued to attract the attention of the governments around the world. In India, after many campaigns and struggles, some micro entrepreneurs got recognition as formal labour by claiming themselves to be ‘self-employed labour’. Unfortunately, it needed them to mis-categorise themselves as ‘labour’ to have access to some rights.
Covid-19 revealed in a massive way how vulnerable the micro entrepreneurs are in an economy like India’s. It made it very urgent that the entire theoretical framework be reviewed and corrected by recognising the ‘micro entrepreneur sector’ and bringing in legal, political, social and financial support for this sector.
Existing rules and procedures on registering a business, operating it within the limits of legal boundaries, interacting with government agencies and tax authorities, etc. were created with large or medium-size businesses in mind. If micro entrepreneurs are asked to comply with all these laws and regulations, they will be in a big crisis. They’ll have no other way but to go underground, or give up their businesses.
The Narendra Modi government can start by providing legal support. It can decide that no existing laws and regulations will apply to micro entrepreneurs, and create separate sets of laws and regulations specifically for them.
Ministry of micro entrepreneurs
Having a Ministry of Labour displays the political and economic importance given to labour. Under the same logic, a Ministry of Micro Entrepreneurs can be created to provide the legal, institutional, and political support to the sector. After all, they constitute more than half the population of India who remained neglected and abandoned for no fault of their own.
If a government is interested in building rural economy as a parallel economy, in stopping migration of youth to the urban centres, in industrialisation of rural areas by processing rural produce with rural labour, and in integrating women and neglected communities into the mainstream economy, creation of this ministry will be a powerful step and send a clear message to the rural areas.
Agency for assisting micro entrepreneurs
Besides creating new sets of laws and a regulatory system for micro entrepreneurs, the Ministry of Micro Entrepreneurs can create a separate government agency, which will help the micro entrepreneurs deal with all government offices and agencies — from communication to taking up the issues concerning the micro entrepreneurs.
This agency will also help micro entrepreneurs establish the ‘Chambers of Micro Entrepreneurs’ at various levels — local, district, state, and national — to interact with other similar bodies and the government.
No one should have to migrate for survival
The coronavirus pandemic has brought a new opportunity for the whole world, to abandon anything that stands in the way of building a new economy and a new society, and introducing new ideas and concepts. India must not miss this opportunity and take bold decisions to redesign its economy and society.
Creating a people-centric economy must be the core of this redesigning programme. One core goal must be to make sure that nobody has to leave his or her place of birth to find a livelihood. There should be enough opportunities for survival within walking distance of one’s home. A concomitant goal should be that nobody has to go to a loan shark to take the initiative to become a micro entrepreneur. Financial institutions will be standing by to support the entrepreneurship of all people. No young person has to leave his/ her village to go to urban centres to pursue quality higher education. Academic institutions of high standards must be made available in rural areas too, just as quality healthcare should be. It has to be done as a matter of rights of the rural people.
Freeing micro entrepreneurs from loan sharks
The moment we view people in the informal sector as micro entrepreneurs, scope for building new institutions emerges right away.
By building appropriate financial systems for rural areas, we can ignite life at the base of the entrepreneurship pyramid. Finance is the basic fuel of entrepreneurship. But fair financial services always remained a far cry for micro entrepreneurs. In the absence of any financial institution built exclusively for them, they continue to be ‘meat’ for loan sharks. Most of the micro entrepreneurs begin their entrepreneurial journey empty handed. Micro credit emerged as a big help for them, but it could reach only a small number of entrepreneurs.
Protecting them from loan sharks will be a crucial factor in their growth.
India expands credit horizon
India has worked on the goal of expanding the credit horizon in the last three decades by bringing access to credit to the poorer segments of population, particularly rural women, through micro-finance programmes. While the access to formal credit has improved significantly, micro-entrepreneurs still have a long way to go before they are free of loan sharks.
NABARD promoted the self-help group (SHG) model and provided refinance to banks who lent to such groups, which came to be known as the bank linkage model. The number of borrowers under SHG lending and the micro-finance institutions (MFIs) put together is estimated to be about 85 million. Commercial banks also work with the MFIs as their channels for distributing priority sector loans and other government schemes such as MUDRA (Micro-Units Development and Refinance Agency) loans for micro-entrepreneurs.
Micro-finance has to depend on loans from banks, large non-banking financial companies (NBFCs) and equity from commercial venture capital firms. The result is the high cost of lending to small ticket borrowers and short duration of loans for their borrowers. Faced with the high cost of funds, the return-seeking MFIs focus on the low-middle income segment of the population. They added consumption loans in their portfolio to enhance profitability, deviating from the objective of micro-finance to concentrate on income-generating loans. Being deprived from the permission to take deposit, the MFIs remained as agents of the financing institutions without having any chance of ever becoming self-reliant institutions.
True micro-finance is a social business
Some MFIs were given a license to turn themselves into small finance banks. Amid high capital requirements, it went to the hands of profit-seeking investors. I always draw attention to the fundamental features of micro-finance institutions that we developed.
Basic elements in this financial institution are: a) it must be a social business bank, b) dedicated to poorest rural citizens — with special focus on women — to support their entrepreneurship, c) based on banking without collateral, d) and with deposit taking power to make sure it remains a financially self-reliant institution.
Social business part of micro-finance is not only completely forgotten, many micro-finance institutions were created by enthusiastically promoting themselves as highly profitable businesses. We created micro-finance institutions to fight loan sharks, but never thought a day may come when micro-finance institutions themselves may become a tool in the hands of loan sharks. This abuse became quite widespread. We keep on drawing attention to the difference between good and bad ones by insisting that a true micro-finance institution must be designed and operated as a social business.
Micro-finance originated with Grameen Bank in Bangladesh by challenging the traditional banking system. Grameen Bank developed a daring concept of banking without collateral, defying the existing banking norms. This became known as microcredit or micro-finance. India adopted it but two basic features continue to be missing: a) running it as a social business without profit-making as the goal, and b) taking deposits. Now is a good time to integrate these two features in the Indian micro-finance system.
Micro entrepreneur bank for micro entrepreneur sector
Micro entrepreneur sector as a whole deserves a new class of dedicated financial institution — a social business Micro Entrepreneur Bank (MEB). The ‘informal’ sector will dramatically change if MEB is created by passing a new law. MFIs and small finance banks can take up leadership roles in creating social business MEBs. It will be made legally mandatory to make all MEBs social businesses.
Existing commercial banks, small finance banks, cooperative banks, any other financial organisations, NGOs, companies, individuals, MFIs may apply for MEB license as a subsidiary or as a new entity. MEBs may create Social Business Venture Capital Funds as their subsidiaries to provide equity to unemployed young people to become entrepreneurs. The goal of MEBs would be to free all micro entrepreneurs from loan sharks — formal and informal.
Another important aspect to ensure success of MEBs is to create a dedicated regulatory authority with the RBI governor as the chair. Unsympathetic regulators can destroy the entire possibility of financial institutions for micro entrepreneurs. Bangladesh created a Microcredit Regulatory Authority in 2006 and it contributed significantly to the success of the micro-credit system in the country.
MEB should be created as a rural institution
In order to make rural economies independent, one fundamental requirement would be to create institutions dedicated to rural areas. Historically, urban institutions were extended to the rural areas to fill the need for institutional services, ignoring the fact that they were not a good fit. They were not enthusiastic about doing this job either. As a result, rural areas never had the opportunity to grow in their own way.
MEBs could be the first step to create a rural financial institution exclusively dedicated to the needs of the rural areas. The headquarters of MEBs should be located in rural areas. MEBs should mobilise rural and urban deposits to benefit the rural micro entrepreneurs, in contrast to urban-centric banks, which mobilise rural deposits to transfer it to urban areas.
The government may encourage all commercial banks and financial institutions through incentives to create social business MEBs as rural subsidiaries.
Time is right
Creation of social business Micro Entrepreneur Bank is the key to unleashing the entrepreneurial power of masses and creating the rural economy as a parallel economy to the traditional urban-centric economy.
With the right conceptual framework and appropriate institutions and policies, rural economies can be strong economies that contribute to the nation’s growth while not being relegated to the second-tier. With information and communication technology covering all rural areas in India, if we can add good political leadership, presence of quality educational institutions and healthcare facilities, rural areas will enjoy many advantages over urban centres as a choice of location for many businesses. Transporting unprocessed agricultural inputs and sending daily wage labourers to the cities can become a thing of the past. It is the new vision of the rural economy that can make this happen. The time is right for it.
The author is a Nobel Laureate, economist and founder of the Grameen Bank, pioneering the concept and launch of several social businesses. He is fuelled by the belief that credit and social business is a fundamental human right. Views are personal.
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