Promoting Financial Inclusion in India

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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Did bank nationalization save India?

When India survived the global financial crisis relatively unscathed, several prominent public figures claimed that the country’s public sector banks had been pillars of stability and resilience, contributing to the economy’s strong performance under stress. Indeed, during the crisis, households and firms shifted money from private to public banks, and the latter outperformed the former through those tough times. But what really happened? At the recently held India Policy Forum, Viral Acharya of New York University provided a comprehensive and provocative empirical analysis. No such analysis is perfect, but there is great merit in actually digging into the data, rather than jumping to conclusions and shaping policy without adequate investigation.

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