What Connects the MSME Sector, Access to Credit, and Social Capital?
Capital formation in India has historically been lagging behind the demands of industrialisation. Most of us know that our parents and generations before them preferred to invest their savings in land and gold, resulting in low levels of financialisation in the Indian economy over the years. What explains this preference for land and gold as opposed to investing in financial instruments, which ensures that the money makes its way to productive economic activities through the forces of capital allocation in the country?
Nitin Pai, in his latest column for Mint, has an answer:
“We can blame the British Raj for not creating financial institutions that were necessary for Indian industrialization. But it does not answer why Indians didn’t (or couldn’t) take the initiative to do so. Part of the reason why 19th century India failed to develop financial institutions, and why Indians bought up gold and land, was inadequate social capital arising from hyper-diversity. Capital stayed within caste-community groups, which zealously guarded their business interests and saw themselves in competition with each other. When there was more capital than they could invest within their own community, they put it into gold and land. Physically owning assets meant that you didn’t have to depend on governments for contract enforcement. The colonial regime, in any case, had little interest in creating trust and social capital in India.”
This historical drawback is likely behind the poor levels of access to formal means of finance for India’s large but capital-starved MSME sector:
“This bit of economic history is important because the basic picture for capital allocation remains the same. Avendus Capital estimates the MSME credit gap at around $530 billion; only 14% of 64 million enterprises have access to formal credit. Over half of these are seen as un-addressable by formal financial institutions. Over 99% of the MSME sector comprises micro-enterprises, around 80% of which borrow from informal sources. A 2018 study by the International Finance Corporation found that “friends and family" constitute an important part of those informal sources. Every government of independent India has attempted to make financial capital available to entrepreneurs. Yet, almost eight decades on, its distribution remains constrained by social capital. People invest money with who they trust, and this generally means within one’s own community.”
Can technology help bridge this gap? Nitin writes that the Open Credit Enablement Network which seeks to democratise credit in India holds promise:
“Technology holds promise. I hope the Open Credit Enablement Network (OCEN) takes off the way UPI did. It can enable lending and borrowing that is agnostic to caste affiliations across the country. It’s success will be historic. For the first time ever, India will have a truly national market for business credit. It can unlock the economic potential that Ranade envisioned. However, for it to happen, OCEN will have to cross some chasms of trust: between citizen and technology, citizen and government, and ultimately citizen and citizen. Like Caesar’s proverbial wife, OCEN will have to be trustworthy and be seen as so. At least as trustworthy as a member of one’s own community.”
Read the full piece here.
Takshashila Alumni Meet-ups in Mumbai and Singapore
Takshashila has a growing network of 7000+ alumni who have completed our public policy courses. Last week, Sachin Kalbag and Sarthak Pradhan hosted a group of alums in Mumbai for an evening filled with public policy chatter, food, and drinks. Across the sea, Lt. Gen. Prakash Menon, along with Khyati Pathak met up with a few others based in Singapore.
If you are interested in becoming a part of our growing network, look no further than the Graduate Certificate in Public Policy programme. The applications for the January 2024 cohort are ongoing.
How to Quantify Welfare Gains from UPI?
Estimates are crucial in understanding policy problems and decision-making. At the recently concluded Takshashila IdeaShala, we conducted a unique exercise on estimating welfare gains. The participants attempted to quantify welfare gains from the Unified Payments Interface (UPI), an exercise designed to help understand the magnitude of the issue & facilitate comparisons.
With active government support, the UPI has become ubiquitous and has changed the way we transact. As a follow-up to the IdeaShala exercise, Rama, Shihas, and Krishna, being participants, spoke to Sarthak Pradhan and Suman Joshi about how they quantified UPI’s welfare gains as part of the Estimation Exercise.
Only on All Things Policy:
What are Economic Crimes and How to Fight Them?
The latest episode of Police Chowki features two distinguished officers, Dr. Pravin Tiwari (full-time member of the National Financial Reporting Authority and former Deputy Comptroller and Auditor General of India) and Mr. Javeed Ahmad (former IPS officer and DGP of Uttar Pradesh) in conversation with Shrikrishna Upadhyaya, where they discuss various aspects of economic crimes and the challenges in combating them.
Economic crimes such as money laundering and corporate fraud affect the country's socio-economic fabric and economic security. India has diverse legislative measures and state agencies in place to tackle such crimes. Learn more on this episode:
Takshashila Hosted the Bengaluru Science Policy Forum
We hosted the Bengaluru Science Policy Forum, a collaboration between Takshashila Institution and the National Centre for Biological Sciences (NCBS) on Friday, December 15th. The forum discussed the draft Karnataka Biotech Policy and the larger biotechnology policy landscape. The participants included scientists and policy analysts.
Are You on OpenTakshashila Yet?
An online community of policy analysts and budding changemakers. Events every Friday. Sign up using the link below.
That’s all from us this week. Take care.