In my last column, I argued that reforms to relax short-term financing
constraints for small producers can have a high payoff in terms of
economic benefits. Directly improving the business environment for small
firms seems more consistent with avowed goals of inclusive growth than
letting in large multinationals, though the latter may provide a
different set of benefits that come with size and global experience. I
looked at the recent development of the factoring industry in India as
something to be encouraged and widened.
The topic of financial inclusion is worth considering more
broadly than just improving small businesses’ short-term financing.
Access to financial services is so limited in India that there are any
number of areas for reform and expansion. As always with finance, the
worry is that expansion will result in instability, but careful
institutional reform can minimise the potential risks of reform. A look
at some of the proposals for reform of financial sector components, as
mentioned in the Union Budget last month, suggest that much is going on
in terms of a detailed clean-up and modernisation of legislation, some
of which goes back to the 19th century. Besides individual legislative
reforms, it is useful also to step back and think about how to serve the
objective of inclusive financial sector development.
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