MUDRA --- An answer to JOBLESS GROWTH !!!

The formal sector generated 26.8 million jobs till 1991 and by 2012 it  had improved the number by just 2.8 million to 29.6 million. This shocking data was no secret. 

• Year after year, the Economic Survey had printed this data in the Statistical Appendices attached to it and the RBI had reported this every year in Table 14 of its Hand Book of Statistics on the Indian economy. But not many looked at the data to get the message it explicitly conveyed, namely that the organised sector can’t employ India.

Who else employs India? 

• The answer to this contained in the data provided  by the surveys of the National Sample Survey Organisation [NSSO]. 
• The NSSO has been reporting in its Economic Census every 10 years that it is the  non-corporate sector-- derogatorily as informal sector by economists--  which keeps India employed and sustaining its economic, even public, order.

Its latest Economic Census [2014] says that some 57.8 million small and micro [most of them unregistered and largely self-employment concerns] provide 128 million jobs. This does not include the construction sector or all limbs of the unorganised sector. 

• The entire unorganised sector put together provide over 460 million jobs. 
• Take the 57.8 million small businesses. Their asset base is `11.4 lakh cr. 
• But annual value addition is `6.28 lakh cr -- that is over 55 per cent. 
• But the value addition by Indian corporate sector-- the crown jewel of our economy--is about 34 per cent of  their gross assets. 

While the organised sector, that provides just a tenth of the non-farm jobs in the country, has almost monopolised the organised capital supply, domestic and foreign, the 57.8 million micro and small businesses that provide 128 million jobs has got only 4 per cent of its capital needs from organised institutions! 

Who owns and operates the millions of micro units? 

• Almost two thirds of them belong to the Scheduled Castes, Scheduled Tribes and Other Backward Castes. 
• More than half of these  units operate from rural areas, where it is difficult to deliver economic growth. 
• More than a third of them are engaged in manufacturing. About a third of them in trade. The rest in different services. 
• Where do they get their finances which is the life-line of businesses. 
• It is from extortionate money lenders, who charge usurious rates ranging from 36 per cent to 365 per cent depending on the type of borrower. 
• This has been the status of this Kamadhenu of employment creation in India.

Birth of MUDRA

• When Narendra Modi took over the nearly ruined economy from the UPA, which had  celebrated jobless growth, someone must have brought this telling data of the highly funded corporates which have failed to deliver on jobs and the  unfunded non-corporates which have provided most of the jobs in India. 
• Modi must have immediately recognised the urgent and the unattended financial needs of these unfunded millions of micro units.
• In the Budget the new government presented in July last, the idea of creating a financial architecture for funding these micro business units was seeded in para 102 of the Budget speech and a Committee was constituted for the purpose. 

The Committee submitted the report days before the 2015-16 Budget. But it rejected a suggestion to create a separate development and regulatory bank like the National Housing Bank to register and regulate and arrange wholesale finance to provide retail finance for the unfunded micro  businesses and also appraise, register, regulate and refinance the existing small finance providers after due appraisal and make them Last Mile Financiers. The Committee rejected these suggestions saying that the Reserve Bank of India had opposed it as theoretically a risk-prone idea. Normally this would be sufficient to close the file.

• But Narendra Modi would not close the file. Because he was perhaps convinced that the existing financial institutions would not fund these unfunded micro businesses which he must have understood as the backbone of job creation in India. 
• Modi shredded the Committee report and went ahead with what he thought would work in and for India. 
• The result is the birth  of MUDRA Bank idea in the Budget 2015-16. 
• Backgrounding the MUDRA bank, the Finance Minsiter emphasised “inclusive growth” has to come from only the non-formal sector, without saying the corporate sector cannot do it.

Referring how the unfunded non-formal sector, largely operated by the economically weaker communities, provides the maximum employment and pointed out how they are unfunded, he proposed the MUDRA Bank for funding the unfunded businesses. 

The MUDRA Bank has theoretical depth and practical wisdom.

• In July 2013, a study titled ‘India’s better half: the informal economy’ by the Credit Suisse Asia Pacific Equity Division on the non-formal sector in India told the world that nine out of 10 jobs in India and half of its GDP originated in the non-formal sector including the 57.7 million micro businesses. 
• The study reduced the status of the corporates in the Indian economy as the “tail cannot wag the dog”. The sheer size of the non-formal business in India obviously persuaded even 
• The Economist magazine to see the reality and to say that the best way to  organise the non-formal sector in India was to provide formal finance to  it.

MUDRA Idea Potential Game Changer

The Press Brief of the Ministry of Finance Department of Financial Services on MUDRA brings out how it is a Made in India idea for funding  micro businesses. As a bank to be established under a new law, MUDRA will register, regulate and refinance all small business finance institutions.

• It will partner state level and regional level coordinators to enable them to provide refinance to Last Mile Financiers [LMFs] of micro businesses. 
• The inclusion of the local LMFs is a very innovative idea. And  a potential game changer. 
• The MUDRA idea realises that only the LMFs can have local knowledge and of the borrowers’ character and worth and seeks to formalise their involvement in credit distribution to micro businesses. A real innovation indeed. 
• MUDRA will Register small financiers of micro businesses. Regulate them. Accredit them. Rate them. Fix responsible  financial practices, client protection principles and methods of recovery.
• Formulate and run credit guarantee schemes for credit extended to micro businesses. 
• Integrating the LMFS to deliver credit to micro businesses is entirely an indigenous idea. An ingenious too. If LMFs are evaluated, appraised, registered and given refinance at lower rates, the ultimate interest rate for micro businesses would be far lower.

The innovative bank has four unique features. 

One, 

• It is structured as an apex refinancer to enable over 50 million unfunded entrepreneurs to access formal credit from and through layers of credit institutions registered under it. 
• The micro entrepreneurs not only earn their livelihood but also provide jobs to others. 
• They need credit at reasonable interest, not doles or subsidies with which, sadly, the idea of inclusive growth has come to be associated.

Two, 

• MUDRA will fund the micro units which are more efficient than modern corporates. 
• According to the Economic Census 2014, the gross fixed assets of the 5.77 crore small businesses is about Rs.11.5 lakh crore.
• But their value addition is Rs. 6.26 lakh crore — almost 55 per cent of their gross fixed assets. But the comparative figure for Indian corporates, according to Reserve Bank of India data, is 34 per cent.
• While corporates pay interest at 9 to 14 per cent, micro units pay at least ten times more. Despite that, micro units add 60 per cent more value on their assets than corporates do. And more.

The Economic Census 2014 says that while the 57.7 million micro units provide 128 million jobs, banks fund only 4 per cent of their needs — just Rs. 46,000 crore out of their gross assets of Rs. 11.5 lakh crore.

• Modern corporates in the public and private sector have absorbed over Rs. 50 lakh crore through FDI and FII investments and bank credit since 1991, but added just 2.8 million jobs. Yes, just about a lakh of jobs per year for 21 years. Is the corporate sector driving the national economy or the non-corporate sector?

Three, 

• The MUDRA Bank concept rests on theoretical depth and practical wisdom. It challenges the experts who thought that micro businesses and marginal farming would face eventual euthanasia. Why then worry about them, they felt. An economist who had headed the Planning Commission for a decade had even said that the jobs generated by the micro units were not clean.

• Over 70 per cent of the micro businesses are unregistered. This also justified our experts shutting their eyes to them. But the MUDRA concept looks at micro businesses differently. It sees micro businesses as an open air university for mass entrepreneurship development and growth. It believes that the best way to register them into the national economic records is to provide organised financing to them.

Lastly, 

• The MUDRA architecture is indigenously designed to fund the uniquely Indian non-formal sector. The press brief of the finance ministry’s department of financial services on MUDRA issued on the day of the Budget explains its structure.

• It will be a bank established under a new law. It will register, regulate and refinance all small business finance institutions including those already in the business. It will partner with State level and regional level coordinators to enable them to provide finance to last mile financiers (LMFs) of micro businesses.

• The MUDRA bank will be at the top with national, State and regional level coordinators in the middle and the LMFs at the end.