Strategic Context Background and Types of Indicators

Poverty and exclusion continue to dominate socio-economic and political discourse in India as they have done since the last six post-independence decades. Poverty reduction has been an important goal of development policy since the inception of planning in India. Various anti-poverty, employment generation and basic services programmes have been in operation for decades in India. The ongoing reforms attach greater importance to removal of poverty and address the specifically wide variations across states and the rural–urban divide. The anti-poverty strategy has three broad components. These are:

• The promotion of economic growth

• The promotion of human development, and

• Targetted programmes to address the multidimensional nature of poverty. The multitude of programmes has, in recent years, been strengthened through the National Rural Employment Guarantee Scheme (NREGS).

In a country with sharp regional inequalities in development and levels of living, the centre has a role in redistribution of financial resources to enable the poorer states to provide basic public services at a reasonably comparable level. In this chapter we discuss the poverty estimates, turn our attention to the methods of poverty analysis and analyse the impact of programmes initiated to combat poverty and exclusion and suggest a broader framework required to reduce, if not eliminate, these two major scourges.

In order to address the issues of financial inclusion, the Government of India constituted a ‘Committee on Financial Inclusion’ under the Chairmanship of Dr C. Rangarajan. The Committee submitted its final report to Union Finance Minister on 4 January 2008.

The terms of reference of the committee included:

1. (i) studying the pattern of exclusion from access to financial services disaggregated by region, gender and occupational structure

2. (ii) identifying the barriers confronted by vulnerable groups in accessing credit and financial services including supply, demand and institutional constraints

3. (iii) reviewing the international experience in implementing policies for financial inclusion and to examine their relevance applicability to India.

The committee further suggested:

1. (i) a strategy to extend financial services to small and marginal farmers and other vulnerable groups, including measures to streamline and simplify procedures, reduce transaction costs and make the operations transparent for growth

2. (ii) measures including institutional changes to be undertaken by the financial sector to implement the proposed strategy of financial inclusion

3. (iii) a monitoring mechanism to assess the quality and quantum of financial inclusion including indicators for assessing progress.

To suggest measures to extend the reach of the financial sector to such vulnerable groups by minimizing, if not eliminating the formal and informal barriers to access encountered by such groups.

In the report that Dr Rangarajan submitted, it was maintained that access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and social cohesion.

The Future

With decades of rapid growth behind us, and very positive prospects ahead, India is enjoying an unprecedented position of influence in the global economy. The years ahead should be years of growth and opportunity that will enable us, as important members of the global community of nations to make further progress in the struggle against poverty and move towards the attainment of the Millennium Development Goals.

Policy for All Inclusive Growth

The challenge of extending India's growing prosperity to the poorest sections of society remains pressing and immediate. Without a significant increase in investment, the region will fall short of achieving several millennium development goals, particularly with regard to health, water supply, and sanitation, primary education and the environment. Financial inclusion starts with the vision that the poor are bankable and experience has shown that poor people can be enabled to have access to credit and other financial services, the services when effectively used by them will enhance their contribution to the economy. These can be delivered in a financially sustainable way. Much has been done and much remains to be done. What is important is that by recognising this we seize the opportunity to take on the many arduous challenges that remain and forge ahead. This is critical. We have concluded that growth, per se, is not enough.

Growth with Equity

We have to broaden the base of growth and through the processes of financial inclusion, we have to address the problems of poverty by redirecting our investments and development efforts towards the poor to promote equity with efficiency.

Financial inclusion is one of the biggest challenges in the world of economics. It is enabling the delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. Unrestrained access to public goods and services is the sin qua non of an open and efficient society. Banking services are essentially for welfare of the public. It is imperative that the availability of banking and payment services to the entire populace without discrimination should be the prime objective of public policy. Thus, banking is perceived as a public good. Financial inclusion has positive externalities: it leads to increase in savings, investment and thereby spurs the processes of economic growth. When 69 per cent of the people are beyond the pale of the formal financial system, their savings remain untapped and their credit needs remain unfulfilled. In the specific Indian context, financial savings of the household sector have been declining from 48.2 per cent in 2000–01 to 46.7 per cent in 2004–05 commensurably. There has been an increase in physical savings from 51.2 per cent to 53.3 per cent during the same period. One plausible reason could be the lack of banking/financial services which would encourage savings in many places. The extent of bank branch expansion reflects the extent of availability of financial services through mainstream providers. Interestingly, there has been a decline in the number of rural branches of banks; as per available data, there were 32,562 branches in rural areas during 2001, i.e. 49.4 per cent.

In developed countries, there is a greater awareness of the positive role financial inclusion can play in empowering the low income groups. Official policies in these countries actively promote inclusive practices, going as far as to give them statutory sanction. In UK, a dedicated fund has been set up to encourage inclusion, and banks and credit unions have been assigned definite responsibilities. In the US, the Community Reinvestment Act prohibits discrimination by banks against low- and moderate-income groups, while in France, it is a legal right for anyone to have a bank account. Clearly, there is much to learn both from international developments and from the experience gained within the country during the first two decades after bank nationalisation.

A Goal Relevant to All Economies

Building inclusive financial systems and allowing access to them is a goal that is relevant to economies at all levels of development. The primary objective lies in making financial systems available to all and ensuring that as many people as possible enjoy access to the financial system, thereby tapping the full potential of the economy. Attention needs to be devoted to enhancing the quality, reach and range of financial services and products credit, savings, insurance payment systems for sustained growth and productivity. It is axiomatic that well-functioning financial systems boost economic growth which reduces poverty. Financial market imperfections as high transaction costs flowing from asymmetry of information are addressed by wellfunctioning financial systems. All countries need to improve financial access.

This book is concerned with the increasingly important and problematic area of financial inclusion. Financial inclusion is defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at affordable cost. There is a growing concern even in the developed economies that while liberalisation improves financial products and services for the few, it simultaneously accentuates denial of services for others. There is a huge unmet demand for financial services. The poor are left with no alternative but to rely on informal credit providers and access finance at higher rates. Even when banking services are available, the high cost of accessing these services makes them prohibitive for the poor. Also, non-price barriers such as proof of identity are very difficult to surmount for shifting or migratory population.

This book shows how financial inclusion is viewed as a policy priority even in developed countries. The author provides interesting illustrations of international experience among others about the Financial Inclusion Task Force of the United Kingdom and the Community Reinvestment Act of the United States. In France, there is a law on exclusion of 1998 which emphasises the mandatory right to a bank account. In South Africa a low cost bank account “Msanzi” has been launched for the financially excluded. In India, initiatives for financial inclusion have come from the government and the RBI at the level of macro policy and have been translated into initiatives by banks.

Development is a value-laden issue demanding explicit ethical analysis. Debates on development have for long been viewed in reductionist economic terms. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community. This is achieved by creating and retaining jobs and supporting or growing incomes and the tax base. There are significant differences between ‘economic growth’ and ‘economic development’. The term ‘economic growth’ refers to the increase (or growth) of a specific measure such as real national income, gross domestic product, or per capita income. National income or product is commonly expressed in terms of a measure of the aggregate value-added output of the domestic economy termed gross domestic product (GDP). When the GDP of a nation rises, economists refer to it as ‘economic growth’.

The term ‘economic development’ on the other hand, implies much more. It typically refers to improvements in a variety of indicators such as literacy rates, life expectancy and poverty rates. GDP is a specific measure of economic welfare that does not take into account important aspects such as leisure time, environmental quality, freedom, or social justice. Economic growth of any particular measure is not a sufficient indicator of economic development.

The contemporary social scientific study of economic development encompasses, inter alia, broad theories of the causes of industrial economic modernisation plus organisational and related aspects of enterprise development in modern societies.

Development and Disparity Conflict

The history of economic development has witnessed many inevitable and irreversible processes. These have emerged in various development theories. In the simplest term, one can perceive development as a paradigm of change and transition that takes place along a continuum of the ever changing historical and sociopolitical-economic ethos in the life of a nation or a society. Chasing better living in a better world compared to the past, in which the quality of life is transformed en masse is a way to define development. Development, therefore, is expected to transform material well-being and accelerate economic growth thereby creating space and opportunities for people. A modern identity is acquired through professional attainments and avenues. If one looks at the major ideas that have evolved around ‘development’ in the last fifty years or so, one finds that these ideas mostly evolved within the western framework. The emphasis of this framework of development was on capital formation, industrialization and the growth of national income. Thus ‘neoclassical production function’, a celebrated work of Robert Solow, was used during this period as a popular growth model. This model generalized the relationship among labour, capital, technology and output. Western ideas of development like income growth and capital formation were keys to the success of economic modernization and progress in the world for decades. Thinkers have realized that such growth alone led to concentration of wealth and ignored equity.

Strategy for Northeast India: Post Independence Scenario

With the adoption of Five Year planning in post-Independence India, a new era set in to develop the ‘weaker sections’ of the people of the country by emphasizing education, community development and tribal upliftment. This became forceful in 1957 with Nehru's ground-breaking idea of panchsheel, where he spoke about tribal protection encompassing ethno-cultural preservation, land rights, equality and freedom. Ever since, the Indian government has been trying to bring the marginalized sections of society into the mainstream by initiating various tribal development plans and programmes, and also through its ‘reservations’ policy, which marks steps towards ‘positive discriminations’. Through such positive discrimination, certain number of places are reserved for scheduled tribes in public services and in higher education. Governments at both the state and the central levels in India have special Tribal Sub Plan programmes which inject substantial financial resources into tribal upliftment. In this regard, in Northeast India, Government policies were oriented towards the preservation of its rich ethno-cultural identity while introducing modern economic mechanisms for development.

Growth and Government: Relationship in Northeast India

Perpetual growth retardation as seen in Chapter 2 has kept Northeast India outside the mainstream economy of India. Disparity across Indian States has widened and this cluster of states remains at the periphery of the country's economy. To understand the reasons for this, one needs to probe into the role of those sectors whose effective functioning has been crucial to the economy of these states. One such is the government sector. This chapter attempts to examine the role of the government and its financial arrangements, and its relationship with economic activities in Northeast India since Independence. Barro and Sala-i-Martin feel that the government can affect the economic growth rates in a number of ways. The volume of consumption, spending, level of taxation, distortion of international trade and political instability, are the negative influences of governmental intervention. Positive influences include maintaining and enhancing existing institutions, developing financial institutions and spending on public infrastructure. Government policy and economic growth are inextricably linked, and government functioning and policy do affect the growth of an economic entity. Therefore, the relationship between government policies and growth becomes a priority area for economic research, and the present chapter is a case study on the role of government finances in the Northeast region's economic development.

It is time to find out the reasons why the economic performance of the region has remained so poor.

Critical Consequences of Unresolved Puzzles in Northeast India

The government's role and its policies have not been very successful in Northeast India. An extensive misutilization of development funds has led to other critical social issues and conflicts in this region. Security thus has gained equal importance as development, and both are undermining each other in this region. The issues of conflict and violence arose from an extremely complex scenario, rooted in the economic, political, social, ethnic, religious and many other ramifications in Northeast India. The issues in the region have been over simplified by attributing all threats to the political aspirations of some groups of people that have been repressed by economic neglect. But as events have proved, the root cause probably lies far deeper and is much more complex and trans-historical. Northeast India's unresolved issues and grievances have caused proliferation of insurgency and underground militancy for the last several decades. Insurgency in Northeast India is explained by many as a long and legitimate struggle of the people for securing their right to self-determination. Such proliferations are bound to have a direct bearing on its already strained economy. Development needs an environment of stability, peace and security, which Northeast India has not had. The region, for several decades, has been synonymous with terrorism, drugs and arms trafficking, corruption, money laundering, cross border migration and ethnic conflicts. These have devastated its political, economic and social fabric.

Economic growth transforms the sociocultural landscape. Villages turn into towns, towns turn into cities, cities into metropolises, metropolises into megapolises and megapolises into global villages. An agricultural society transforms into a pre-industrial and then industrial society, and finally into an information and knowledge society. The lower middle classes increase their purchasing power to be reckoned among the middle classes, the middle classes among the upper middle, and the upper middle with the upper classes. A process of upward social mobility and transformation seems to be set off. Income from agricultural and manufacturing sectors gradually yields to income from the services sector, and a computer-based urban centred knowledge economy gradually seeks to replace the traditional community centred village economy. Going by these indicators of prosperity and growth, India has indeed prospered. It has changed from an impoverished fledgling democracy hardly expected to survive a few years, into a mature, vibrant republic that has withstood adversities, passed many tests and eventually achieved global recognition in its own right. An Indian is now proud just to be an Indian.

But what indeed is this ‘India’? A landmass with certain geographical boundaries, a heterogeneous cultural identity signifying a ‘unity in the midst of diversity’, a multicultural, multiethnic, multiracial, multireligious and multilingual entity identifiable by a single name ‘India that is Bharat’, that unlike Pakistan didn't become Hindustan? An India that lives in its five hundred thousand villages which remained unchanged as dynasty after dynasty slipped by, silent revolutions succeeded each other and various races assumed mastery over the land?

Assam in India's Energy Sector

Despite huge reserves of natural resources, economic development in Northeast India has been arrested due to many complex issues including the illegal economy of insurgency, which has captured the region (Chapter 4). As argued by Bhaumik, resources by themselves have not resulted in a buoyant economy in the region. He shows that it has proven exploitable reserves of 846 million tons of coal, recoverable reserve of 421 million tons of hydrocarbons and a hydroelectric power potential of nearly 60,000 MW. Assam and Arunachal Pradesh are gifted with rich oil bearing shale formation that could yield 15 billion tons of oil. Despite being so rich in natural resources the region suffers from power shortage, water crises, and high gas and petroleum prices, which add misery to the lives of the Northeasterners. This chapter assesses another important dynamic of this region – its resources potential – which has remained underutilized for achieving development. The study takes up only the energy scenario and attempts to find reasons for why such huge reserves of energy could not bring economic prosperity in Northeast India. Energy has become the propelling factor in economic growth, more so since globalization. Globalization has reshaped energy markets along with an expansion of oil and natural gas markets. But this industry is actually facing an enormous growth challenge to keep ahead of the astounding demand. India's energy sector has made a long journey; its capacity has increased from a mere 0.25 million tons per annum from one field in Digboi in Assam in 1947, to 34 million tons of crude oil along with 32 billion cubic meters of natural gas per annum in 2005–06.

Inquiry into Inequality: Where is Northeast India?

As seen in the first chapter, nature's hostility and the rulers' apathy in the geopolitical discourse of the Northeast's history, has made contemporary Northeast an isolated problem arena. In its journey of transition and development, the experiments in the Northeast have consistently failed. This has been the case in the political, social, ethnic, economic, infrastructural and strategic domains. Most of these perspectives have identified development as the key issue that needs to be addressed. However, opinions vary as to how the dream of development in Northeast India is to be realized. Those areas of development that need the utmost attention have to be identified and prioritized. While locating individual foci remains an important technique in dealing with multiple problems, a more integrated understanding of development might be required. This integrationist perspective prioritizes a panoptic analytic vision of the various problems instead of any single or delinked emphasis on either economic underdevelopment, the insurgency threat or the ethnicity issue. This involves looking at the Northeast in a new way, not simply as a single problem unit but as a sensitive, internally differentiated terrain, where intra-regional specificities need to be given attention. The methodological thrust should be to achieve integration through a new assessment of the unique political, economic and social settings of the Northeast as a region, and also to understand the intricacies of intra-regional variations of problems, their manifestations, causes and consequences.