81. Inclusive Growth Economic Times Article Part I: Comprehenson Test

In a Eight part series Economic Times has initiated a discussion on Making Markets work for the poor. I have adopted the first Part: The Case for an Equal market for a comprehension Test so that you may understand all the issues involved. Blog your responses carefully.
A former investment banker who gave up a high-profile job at Citibank to return to India and work in the social sector, Mr. Ramesh Ramanathan has intimate knowledge of how markets can make a real difference for the poor.
Janalakshmi Financial Services, an urban microfinance company he set up in 2006, disbursed over Rs 250 crore in the year ending March 2011 in small loans to the urban poor. Last year he started Janaadhar, a housing venture that is among the country’s first to sell homes at about Rs 5 lakh to low-income consumers.
Ramanathan, who is curating this series on making markets work for the poor, speaks to ET about the need for a sustained debate on whether markets can promote inclusive growth.

35 thoughts on “81. Inclusive Growth Economic Times Article Part I: Comprehenson Test

  1. What does ‘making markets work for the poor’ mean?
    I think we are at interesting cross-roads in India. Liberalisation in 1991 brought in a more market-friendly approach to economic growth, reducing the burden of regulations, bureaucracy and red tape, and unleashing the entrepreneurial spirit of the average Indian.
    Today there is a clamour for the second wave of reforms. But if you look at the content of this new wave of reforms, it is still about the formal economy. It is about foreign investment in retail, financial sector reforms, and insurance reforms and so on. Nothing wrong with it. Clearly the formal sector of India’s economy does need lots of reforms to ensure that it is competitive.
    But we need to also keep in mind another India. The framework that we seem to be working with is that the formal economy needs reforms but for the poor we will give entitlements. Instead we need to actually think if markets can work for everyone.

  2. Which one of the following statements does not follow from the above discussion?
    A. We completed the reform of our economy in 1991.
    B. The 1991 reforms unleashed the eregy of gthe nation and put an end to the Hindu rate of growth
    C. It is clear that Market economy has emerged but markets have not been working for every one,
    D. The forces of competition have been unleashed

  3. You need a set of reforms for the formal economy and similar reforms to make the markets work for the poor. If we take that approach, we will think about reforms and markets differently, unleashing the power of millions of Indians. This is the idea of making markets work for the poor.
    If we don’t do this, what is the danger?
    There are multiple dangers. Many people, including economists, have spoken of two potential scenarios for India. In one, we truly embrace our economic possibilities and emerge as the second-largest economy in the world in the next 30 years or 40 years.
    Another possibility is that we get trapped in a middle equilibrium, like many countries have in Latin America, and we don’t realise our potential.

  4. What can be concluded from the above?
    A. Reforms have been helpful to a select few
    B. We have still to emerge as the second largest economy in the world
    C. We resemble many countries of Latin America trapped in poverty
    D. All the above

  5. What is the key risk? The central risk is that not every Indian is participating in the economic growth in the same trajectory. The danger is that if we don’t think about markets working for everyone, we will be actually compromising the trajectory of India’s long term growth.
    The second danger is political. If we don’t take a path where markets work for the poor we will end up creating a self-reinforcing argument that markets are only for the rich and the poor will have to rely on entitlements

  6. What can be implied from the above passage?
    A.As the demographic dividend works out putting a large number of people above 20 in the job market, there is bound to be frustration leading to political turmoil.
    B. India is hamstrung by her politics in making markets work for the poor
    C. Anna Hazare’s movement is just a straw in the wind
    D. All the above

  7. What needs to be done now?
    The poor can be the beneficiaries of market forces either as customers of goods and services or producers of goods and services. These two are intertwined. Let’s take financial services as an example. The poor as beneficiaries of financial services can clearly do better in life.
    But if you look at different sectors, the question is, ‘Are markets working?’ and “If not, why not”? Take CK Prahalad’s Bottom of the Pyramid argument. The essential argument is if we bring a sharp focus on innovation at the bottom of the pyramid, companies can generate enormous amount of wealth by servicing the poorest customers.
    I think that argument needs to be extended a little bit. It is not just about companies becoming wealthy, because then you are thinking about poor as only customers, but it is also about making markets work for the poor as the producers of these goods and services, as microentrepreneurs themselves. This is important as very often regulatory constraints prevent the market growing for the poor.

  8. Which of the following would be incorrect inferences from the above?
    A. What is really important is that consumers get goods at cheap prices
    B. We should concentrate on the large industries for it is they who create wealth
    C. No economic growth can be achieved through micro entrepreneurs
    D. None of the above

  9. Can you elaborate with an example?
    There are many examples. For instance, take rickshaw-pullers in Delhi, something that social activist Madhu Kishwar, has written about extensively. They can only be owner- operators, riding a rickshaw they own. This is very different from someone who can own a fleet of taxis.
    So why don’t we have the same rule for someone who owns 100 rickshaws? The context to this is India’s growing urbanisation where the 300 million people in our cities and towns will double in the next 20 years. It is not going to be organic growth; they will come to the cities with some skills and often with no skills.
    So if entry barriers for livelihood are low, they will be able to make the transition. The rickshaw puller is a classic example. Affordable housing is another example. It is very hard to get sanctions for land to build good quality affordable housing in most Indian cities in India.
    If we get policy-makers to remove those regulatory hurdles, you will unleash market forces and you will have price points which are available for affordable housing that low-income people and the poor can afford.

  10. Which of the following generates bribes for the Police?
    A. Every rickshaw puller must have a license to pull the rickshaw
    B. Every rickshaw puller must own the rickshaw that he pulls
    C. The system is devised to prevent people renting out the rickshaw
    D. Any rickshaw puller who pulls the rickshaw must show two licenses, otherwise he will be deemed an illegal rickshaw puller

  11. Do we have to start from scratch, or can existing regulations be tweaked?
    It depends on the sector. For example, in a lot of consumer goods where there were no barriers for entry, no regulatory constraints, a lot of innovation has gone into products such as shampoo sachets and detergent powders, opening a new segment for the poor at a reasonable price point.
    But in some other sectors such as affordable housing or micro-enterprise, specific regulatory changes are needed to unleash those markets. At the heart of it is this question that we need to grapple with–can markets work for the poor?
    The prevailing wisdom is the poor need entitlements; they are constrained by many challenges, whether it is education, or healthcare. Let those entitlements or subsidies continue while we also think about the market as a way by which the poor can bootstrap themselves out of poverty.

  12. Which of the following is wrong?
    A. Unless you abolish subsidies, development will not take place.
    B. If we remove licensing restrictions, innovations take place
    C. In Micro finance development can come about only through regulations
    D. Unless one enters the Banking system he will not get enough funds to become a wealth creator

  13. What about the risks that the poor face in a market-led environment as it happened in the microfinance sector?
    The microfinance crisis played out so openly so let’s see what were the risks that the poor faced that are attributed to the MFIs ? Over-indebtedness, high rates of interest, usurious collection, there were three primary criticisms levelled at MFIs.
    One can have a debate, whether all those criticism were only of MFIs or were the MFIs participating in a set of activities others were already doing. Money lenders were already doing this. State government subsidies also contributed to over indebtedness, but certainly MFIs contributed to the vulnerability that the poor has faced.

  14. Which of the following is correct?
    A. Micro Finance is plagued by high rates of interest and extortionate debt collectors
    B. Micro Finance provided for consumption loans which did not lead to wealth creation
    C. Micro Finance did what other agencies were already doing
    D. all the above

  15. How can the poor be protected against such risks?
    So when we are talking about the poor and specifically in microfinance, we cannot have a laissez faire attitude of markets equilibrating. Because for markets to equilibrate you have to assume symmetry of information as in a normal market where some one charges 30%, a second guy will charge 28% and the next guy will charge 26% thereby getting the market to equilibrate.
    You don’t see that happen when it comes to the poor for three reasons. Firstly information asymmetry is a structural issue for the poor, because of their lack of literacy, access to information, knowledge and decision making. Second, it is morally wrong to argue that it is okay to earn higher margins as long as I can, and some other players will come and equilibrate the market.
    The third is a patron client relationship between the politician and the poor that comes in the way of markets equilibrating. When we say we want to harness the forces of market for the poor, we must learn how to protect against these three risks.

  16. Which one of the following is correct?
    A. Let competition prevail in Micro Finance and rates of interest will become normal
    B. So far as Micro Finance is concerned leave things alone
    C. The poor have no access to information to become wealth creators
    D. Let there be fair competition

  17. Are there uniquely Indian solutions to this?
    I believe so. If we can take the challenges that we are confronted with, take the inherent entrepreneurial capabilities of Indians, not just middle class or rich Indians, but poor Indians, and harness that, the solutions that we will come up with will certainly be Indian.
    I think the applicability of that won’t be just in India, but can but can certainly go to other parts of the world.

  18. Madhu Purnima Kishwar, Founder, Manushi Sangathan writes
    Poverty is concentrated in the informal sectors of the Indian economy, with people in these occupations amongst the worst affected from the pernicious Licence Quota Raid Raj. This is illustrated by the sarkari controls that trap the livelihoods of some of our nano entrepreneurs – cycle-rickshaw owners and pullers – in a web of illegality. Cycle-rickshaws are an inexpensive mode of commute in many cities, and do not cause any air or sound pollution.
    It is time for second generation reforms: By Sushil Muhnot, Chairman & MD, SIDBI
    Markets are at the heart of successful economic growth and matter for the poor in the same way as everyone else. The poor participate in the markets as producers, employees and as consumers of goods and services. Providing access to capital and markets to the entrepreneurial poor accelerates reduction of poverty.
    It also reduces the price of goods and services delivered to the poor while increasing the price of goods and services produced by them. The increased employment and income leads to higher standard of living.

  19. Micro finance: Time to move towards financial inclusion: By Tara Thiagarajan, Chairperson, Madura Microfinance
    The numbers that describe India’s economy are mindboggling. Just one-tenth of the population participates in the formal economy. Of these, only about 35 million pay taxes. That’s less than 3%.
    No wonder then that our economy produced a GDP of only $1.42 trillion at last count, about the same as that of the city of Tokyo which has a population of 35 million. There are simply too few producing value and wealth in India and so there is not enough to go around.

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