Dr. Syama Prasad Mookerjee Research Foundation

Modi’s Trinity of Schemes that will Growth-Boost India

By Hindol Sengupta

A couple of months ago, I was at the Harvard Club in Manhattan. There was something happening in India that the West did not quite understanding. Something I had tried to explain in my new book “Recasting India: How Entrepreneurship is Revolutionizing the World’s Largest Democracy.” Something about an India the West was blind to. Like the American Dream, I tried to explain, there was an Indian dream. But that dream had been long stifled by the bad politics, and even more intellectual rhetoric. Could it be, now at last, that moment when after 1,000 years India seeks, and even finds, its renaissance moment?

But I was asked – even if that were true – what does that mean in real policy terms on the ground. For the last one year, then, I have travelled extensively on the ground. From villages in Uttar Pradesh to Karnataka, from tiny hamlets in Chhattisgarh and Jharkhand to tribal parts of Odisha, I have tried to find out if something is intrinsically changing.

On the basis of this, I want to focus this piece on three interconnected policy initiatives that I believe are not enough understood or highlighted. The first is the creation of the Mudra Bank to focus on getting ample finance to the informal sector. Why is this critical? This is because the informal sector and its contribution to the Indian economy are very scantily understood. Indian economic punditry focused for most of the years after independence on mammoth (often hemorrhaging or heavily propped up through false monopolies or subsidies) state-run enterprises. Then, in the last two decades, the entire focus has been large incorporated companies and their movements on the stock exchange. More recently, the spotlight has been on start-ups – mostly those that use technology.

In spite of all this, half of the Indian GDP comes from what we often, derisorily, call the informal sector. Credit Suisse says 90% of the Indian workforce is engaged in informal work, especially in rural areas. The Organisation for Economic Cooperation and Development notes that 65% of manufacturing work is done by firms that have less than 10 employees. Between 1999 and 2009, 75% of all new factories were built in rural India and 70% of the new manufacturing jobs were created there.

The so-called small scale industries deliver 40% of Indian exports and 45% of industrial output. The informal sector has consistently grown faster than the formal sector for the last two decades and creates one million new jobs every year.

Who are the beneficiaries of this sector? Let us look at the handloom sector, for instance. As the Oxford economist Devaki Jain has pointed out, 75% of four million handloom workers are women. In handicrafts, where even in the middle of the global economic downturn in 2010-11, exports grew, of 7 million workers, 48% are women. With growing demand even in urban India for natural products, khadi now gives jobs to 14 million people – a rise from 12.5 million between 2012-13 and 2013-14.

That’s not all. Do you know that according to National Sample Survey data 75% of informal sector firms are owned by scheduled castes, schedules tribes and other backward castes? These companies also deliver 71% of the manufacturing and 60% of trading in the informal sector. Two-thirds of the handloom sector workers come from the underprivileged castes and most of them work in the rural areas. More than half of the workers in handicrafts are from minority or underprivileged groups.

All of this is done on the back of precious little policy support. The biggest problem is availability of finance, of credit. The informal sector regularly gets less than 10% of the bank credit available. Imagine a sector, and a set of entrepreneurs, who deliver 50% of the GDP and 90% of employment with less than 10% of available credit. What could they achieve if made more mainstream, if more finance, for instance, is made available to them?

This is where the Mudra (Micro Units Development and Refinance Agency) Bank comes in. It will, hopefully, take the right steps towards providing an economic ecosystem that takes into India’s realities – not what Western punditry believes India’s priority ought to be. Access to more, and better, finance, would transform the informal sector, enabling greater investment in design, research and development, logistics, quality control and marketing. The Governor of the Reserve Bank of India Raghuram Rajan has spoken about how “Make in India” needs to also have a very strong component of “Make for India.” Devaki Jain says India needs to move from considering only a capital-led growth model to a wage-led growth model. All of this can happen only when there is greater depth and support to the informal sector. But curiously when we talk about manufacturing, we think of SEZs to lure away iPhone making from China, not a boost to Indian handicrafts.

The fundamental point here is that if there is one thing that helps alleviate poverty, it is… having money. Now you would think that much is basic but not quite in Indian punditry which still believes Rs. 100 a day is great poverty alleviation even when most of the funds are being stolen. Narendra Modi is right when he says that MNREGA is the best example of the lack of imagination in social schemes in India in the last 67 years. It is also a prime example of how tepid and indeed timid our horizon of relief for the poor is. At best, MNREGA could be step one in the journey (and therefore it still exists) but the step two is the validation of citizens as financial or economic individuals. The Jan Dhan Yojana, in the Guinness Book of Records now, converts citizens into economically valid individuals who have an extra layer of financial identity now with bank accounts. Bank accounts are the first step towards institutionalized savings, interest earnings and credit off-take. It is the difference between knowing about democracy and experiencing it, between voting and being able to question your local MLA.

The last – and perhaps most vital – part of this process is the transfer of funds without leakage. The Direct Benefit Transfer Scheme of LPG is now the world’s biggest such delivery of Government funds having overtaken Brazil’s famed Bolsa Familia[1]. That this can be done in India – where for six decades we could not fix the “leaky bucket” called PDS, where Rajiv Gandhi famously told Atal Bihari Vajpayee that “when one rupee has to travel out of Delhi to distant parts of India, it wears off” – is certainly a new beginning. One has reason to believe that this trinity of schemes, the Brahma, Vishnu, Mahesh, as it were, of delivering money into the hands of the people who most need it will give the growth-boost India so desperately needs.  


-(Hindol Sengupta is the author of six books, including the forthcoming Being Hindu (Penguin, Fall 2015). His last book Recasting India: How Entrepreneurship is Revolutionizing the World’s Largest Democracy (Palgrave Macmillan) was nominated for the Hayek Book Prize, one of the world’s most prestigious non-fiction awards. He is the only Indian, and the youngest writer ever, to be nominated for the Hayek Prize. The Hayek Book Prize is given by the Manhattan Institute to celebrate original writing propagating economic freedom in memory of the Nobel laureate F. A. Hayek. Hindol is also Editor-at-Large for Fortune India. Hel has been invited at the XXI World Congress of the International Association for the History of Religions to present his research paper on modern Hinduism, technology and caste.)


[1] Bolsa Familia is a Brazil Government social support transfer (a scheme of family allowance), is a cash-transfer scheme instituted in Brazil which has benefitted over 12 million people. It shows that cash transfers often work better material benefit.