In his second term in office, Prime Minister Modi has talked about making
India a US$ 5 trillion economy by 2024-20251. This has not only generated a lot of
debate in India and but also has focused world attention on the Indian economy.
Many may think that
this might be a tall order for a country that till recently was home to the largest
number of utterly poor in the world. But the truth is that India may be closer
to this target than we may realize.
While
all sectors of the economy have to grow rapidly, the financial services sector
has a key role to play to reach the mark. By stepping up its inclusive program
that provides equal access to loans and other financial services to all sections
of society, it can create a multiplier effect.
The
obvious link here is that when a larger number of people borrow, especially the
poor, increased economic activity follows leading to growth in sustainable
means of income for broader sections of society. This, then helps rupture the
“vicious cycle” of poverty.
Public policy planners, to their
credit, have long been aware of the direct relationship between financial
inclusion and swift economic growth. In fact, in 2005, Dr. YV Reddy, the then Governor
of the Reserve Bank of India (RBI) had talked about financial inclusion in his
annual policy statement2. In 2008, the Dr. Rangarajan
Committee on financial inclusion3 recommended
a national mission to facilitate required policy changes.
Despite
all this, India’s progress had obviously been slow in the past. But the economic
fortunes of the poor have changed for the better – quickly and noticeably – only
in the last decade. A report published in the Times of India (TOI) in January
2019 quoting World Data Lab showed the steep fall in poverty in India and
estimated the current ‘extreme poor’ to be around 50 million.4 [According
to the World Bank, ‘extreme poor’ are those who make less than $1.9 per
day.]
It is important to see
the declining poverty levels in the context of the massive digital revolution that
is taking place in India in parallel. Contrary to what the electronic and print
media in India may have you believe, the digital revolution on multiple fronts
has aided and catalyzed the financial inclusion programs of the government.
As of December 2018, 1.23 billion people had Aadhar digital biometric
identity cards5 and over 1.21 billion
had mobile phones.6 Also, as of 2017, 80% of adults had a
bank account .7 Bulk of the new accounts were opened
with the aid of Aadhar identity cards.
Further, the country has also seen steep rise
in mobile payment transactions. According to the data released by
the National Payments Corporation of India (NPCI)
8 transactions via the Unified Payments Interface
(UPI), the country’s flagship payments platform, grew 25% and crossed Rs.1
trillion in value in December 2018.
However, millions
continue to live in poverty. India has a low credit access with only 154 loans
per 1000 adults7. This may be attributed to the
reluctance of lenders to lend to people whose credit worthiness cannot be
reasonably assessed. Unlike the US, India does not have robust credit reporting
agencies with depth of data that can help lenders in approving loans. This remains
a major challenge for credit expansion.
The good news, however,
is that the confluence of mobile penetration, establishment of a biometric
identity and the emergence of disruptive credit risk solutions that facilitate
the identification and assessment of borrower risk may set the scene for
massive credit inclusion process. Consequently, India’s efforts to eliminate
poverty may have reached a tipping point.
Many fintechs around
the world and in India are now using a consumer’s digital identity to predict
loan repayment behavior. In a report published in September 2018, the Federal
Deposit Insurance Corporation (FDIC) of the US has reported9 that
a predictive “model that uses only the digital footprint variables equals or exceeds
the information content of the credit bureau score”.
In other words, lenders
in India will now be able to assess credit risk of borrowers by using their
digital identity. This also simultaneously obviates the need to build credit
bureaus using traditional data – an expensive and time consuming effort in any
case.
The purpose of this
piece is not to speculate if India will reach the US$ 5 trillion mark by
2024-25, but to rather assess its preparedness in setting in motion a host of
services and programs that will benefit the largest number of poor. As is obvious, lifting millions of people out
of poverty is a multi-pronged, multi-mission driven exercise where the happy
meeting of cutting-edge technology and robust political will to execute the
mission are necessary and imperative conditions.
India has adequately
demonstrated its capability to execute complex projects on time and within
budget. This augers well for the extreme poor. If they rise up above poverty, so
will India, economically speaking, and crossing the US$ 5 trillion mark may
just be one of the milestones.
Modi’s achievements in
this regard, as substantiated by data from multiple sources, are substantial
and suggest that it is broad-based and truly inclusive. This is in stark
contrast to the efforts of the earlier government led by Dr Manmohan Singh who
claimed at the National Development Council that “the first claim on the
country’s resources for development”10were reserved exclusively for a particular religious
community.
It is indeed debatable if India, in its tryst with destiny, ever
managed to redeem its pledge, as Pandit Jawaharlal Nehru dreamt at that
midnight hour in 1947. Definitely data suggests that even after almost
six decades, the redemption of the pledge in terms of poverty
eradication, was not even substantial. But given the track record of
the last five years, Modi’s tryst with India is taking it places and the
poorest of poor are joining the bandwagon in their millions. And Modi
has the backing of the state-of-art technology. Of course, the claim on
the country’s resources for development will be inclusive and for all,
not the exclusive right of a select few.
