More on Finance and Inclusive Growth

Suddenly, the idea that financial sophistication leads to inclusive growth seems to have caught on (well, except with the Ministry of Finance, which is actually in a position to do something about it). First there was my Pragati piece. Yesterday, Nivirkar Singh’s column in Mint also touched on this:

Petia Topalova of the International Monetary Fund has recently examined the links between policy and inclusiveness of growth. In particular, she uses variation across states as well as three time periods, spanning 1983 to 2005, to examine these links. Inclusiveness is defined as the difference between the consumption growth rate of the poorest and richest 30% Indians.

First, higher financial development, measured either by real credit per capita or by a larger initial share of agricultural labourers with loans from formal financial institutions, is significantly associated with more inclusive growth.


OK, this is interesting. One of the points the Raghuram Rajan report raises is that access to credit is actually only one leg of financial inclusion, and is the most overused one. The other two legs – access to savings instruments and access to risk management instruments like insurance – have traditionally been missing. So there are two ways to read this:

  1. The correlation between credit and inclusive growth doesn’t mean anything. It’s just a coincidence that this turned up, and might be caused by something else – more urbanisation, say, or might even run in the opposite direction – financial inclusion leads to more demand for credit (though I personally think it’s a positive feedback loop – they cause each other)
  2. The research is right. Credit might be only one leg, but it still has an impact. And we haven’t even seen what would happen once savings and insurance also get taken up. In that case, the gap could close in a stunning way.

Moving on. After Nivirkar Singh’s column, there’s also the cover story in today’s Business Standard the Strategist. It’s about FabIndia, and how they’re encouraging artisan communities to set up private limited companies where the shareholding is split between the artisans themselves, their employees, FabIndia, and outside private investors.

The concept, now a Harvard Business School case study, is simple. A fully-owned subsidiary of FabIndia, Artisans Micro Finance, a venture fund, facilitates the setting up of these companies, which are owned 49 per cent by the fund, 26 per cent by the artisans, 15 per cent by private investors and 10 per cent by the employees of the community-owned company.

The artisans gain in many ways. The value of their shares goes up. They earn dividends when the company is in a position to declare them.

The shares offer the artisans a divisible asset class (land can be divided but its divisions are often disputed and jewellery is largely indivisible) and community-owned companies help convert FabIndia’s artisan base into an asset.

“If he wants to get his daughter married and needs money, he can sell his shares and realise the appreciation. He can also take a loan by offering his shares as collateral,” says Bissell.

(the Strategist)

The article is worth reading even if you aren’t interested in finance, and you’re more interested in social entrepreneurship or marketing or traditional handicrafts. Axshully it is worth reading even if you are a metrosexual and only buy organic muesli as you will get to know about new and exciting opportunities to buy it as FabIndia expands.

By the way, William Bissel mentions in the article that the co-operative system imposes too many restrictions on the artisan and the private limited company makes more sense. This is a massive understatement. The legal and accounting procedures for co-operatives in India are so totally broken that co-ops inevitably end up in the hands of regional politicians. That, however, is the subject of another post, and by someone else.

0 Responses to More on Finance and Inclusive Growth

  1. Himanshu says:

    The idea of inclusiveness is good and seems to be on the gov agenda as well ( the loan waiver). However, what is not convincing is that the possible solution to improve the situation is access to credit, saving instruments and insurance.
    Farming in India is not a paying proposition – that is the basic issue.

  2. Aadisht says:


    you are confusing the specific problem of agricultural financing with the more general problem of inclusive growth. Some points:

    * Inclusion refers to all segments: rural and urban, agricultural and non-agricultural
    * More than half the rural economy is non-agricultural

    Also, inclusive growth (which the government hammers on about) is different from financial inclusion (which the Rajan committee report and the RBI hammer on about). But inclusive growth is dependent on financial inclusion – read the Rajan committee report to understand why.

  3. Himanshu says:

    Aaha! I got your point.

    I would not go with your second point on the *. I would say almost 60% rural economy is agri ( NSSO) and hence my contention with re to agri finance

    Where is the Rajan report?

  4. Aadisht says:

    Subir Gokarn of CRISIL has estimated that the agricultural component of rural GDP has fallen from 56% in 1993-94 to 48% in 2000-01 – that was my source.

    Rajan report is on the ministry of finance website. Google about.

  5. Himanshu says:

    I think I have got a totally different angle to all of this. Need to put mea nose to ground and read all of this aloud again.

    Your stats are right. So are mine. I was talking livelihood and dependence.Not a pure economist’s view, I guess 🙂

    Best Regards

  6. Pradeep says:

    Aadisht, I read your article at Pragati but could not understand how you define “financial inclusion” vis-a-vis inclusive growth.
    there was a phrase – “poor (should) have access to capital” – assuming this as a proxy definition for the time being –
    why is this important?
    why should poor have access to capital?
    Isn’t that against the allocative efficiency of the economy?
    the capital should be available to those who can put it to its most productive use….which means more jobs and well being for the poor…leading to inclusive growth. (you can even apply this argument to agriculture sector to a large extent)
    While I agree with your arguments on financial system development….I can’t really see how it relates to the rationale for “financial inclusion”?
    Why is inclusive growth not enough for the poor?

  7. Lekhni says:

    Of the three legs, I would argue that access to insurance is the most important. You can plow in your savings, so you may not need to borrow, or you can get credit (if at usurious rates). But if the cow dies or the crop fails, you have nowhere to go.

    It’s good that we have made some progress in the funding part, but in an ideal world,we would have started with the insurance.

  8. Aadisht says:


    Raghuram Rajan agrees with you. In fact the Rajan Committee report expresses despair that financial inclusion has been a credit-only mentality till now. In a best case scenario, this is because nobody realised the importance of insurance. In a worst-case scenario, it was because concentrating on loans rather than insurance ensured that politicians could tell PSU banks where to give loans (of course with little to no care given to repayment).

    You’re also correct that access to insurance is the most important, but that’s only in the current very-big all-India picture. Depending on what you’re doing, any of the three could be really important.

    Also – you seem to be overoptimistic about the ability to plow in your savings. If you’re not bankable you have to store your savings in cash or durables. There is a standard worry (not sure how true this is) that for large sections of under-privileged males, access to cash means they spend it on booze. Hence the popularity of savings scheme with negative interest rates – someone comes around to the woman of the house every day, takes ten rupees, and returns two hundred and eighty rupees at the end of the month (paraphrasing from memory). Leave alone pensions and mutual funds, a current account would be better than this.

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