ET2010 ⁽¹²⁾

The impact of the Andhra ordinance on MFIs must yield useful clues to design future regulatory policies.Read full articleConfusion continues to reign in the debate on microfinance that has unfolded following the promulgation of the Andhra ordinance, soon to be replaced by Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010. A key confusion has been that microfinance is a major instrument of poverty alleviation. Going by the available scientific evidence and agreement among scholars, to-date, there exists no compelling study linking the expansion of microfinance to declining levels of poverty. Despite the images of groups of women starting small business projects to exit poverty, commonly promoted on the websites of microfinance institutions (MFIs), the use of microfinance for such projects has been surprisingly tiny. According to a recent survey conducted in Andhra Pradesh, households use less than 2.5% of all micro-loans to start new businesses. By comparison, many more loans go into buying stocks - as much as 10% when the source of the loan is an MFI.

There is a strong case to support Dr Y V Reddy's thesis that for-profit MFIs should be regulated on par with moneylenders.Read full articleThe recent microfinance crisis in Andhra Pradesh has laid bare a fundamental mismatch between instruments and objectives. Directed credit such as microfinance or its broader counterpart called the priority-sector lending is economically justified only if the beneficiary entities use it to finance projects that are profitable at the market rate of interest but go unfounded by the market. When this condition is satisfied, on average, we would observe the same default rates on directed credit as on market-driven credit. But the high rates of default and repeated loan waivers point to the failure of microcredit to satisfy this condition. Indeed, prima facie, the availability of profitable projects in rural Andhra Pradesh at the market interest rate on a scale commensurate with the current volume of microcredit lending would seem to be highly improbable. A plausible conclusion is that at least in rural areas the principal aim of microcredit is not to correct a market failure in the…

Unless we find creative ways to massively increase investment in higher education, India's potential demographic dividend may fail to translate into a real dividend.Read full article While the university system in England is far from broken, in the last several decades, the more dynamic and competitive US universities have relegated it to the second position worldwide. Abandoning the traditional destinations in England, 100,000 Indian students today study in American universities. Aware of the decline, the British authorities have been reforming the system in the last 15 years. The latest step in this direction is the report of the independent panel headed by Lord Browne. The panel was asked to make recommendations to increase investment in education, ensure that the quality of teaching is world class and make higher education accessible to anyone with the talent for it. While the ailments of our higher education system are wider and deeper than those of the British system, there are useful lessons for us in the Browne report.

If promotion of a warm relationship with India is top priority, Obama must drop common practice of insisting on matching concessions.Read full article If the promotion of a warm relationship with India is a top priority, President Obama must drop the common practice of insisting on matching concessions for every concession the US offers. By all accounts, like Prime Minister Manmohan Singh, President Barack Obama is keen to strengthen the India-US ties. Sadly, however, recent actions by the United States have only reinforced the feeling on the part of many in India that the President assigns significantly lower priority to India-US relations than did his predecessor, President George W Bush. This is unfortunate since the US interests in the region align most closely with those of India, at least from a longer-term perspective. Whereas China is already positioning itself as a rival, even belligerent, power and the future of Afghanistan and Pakistan remains highly uncertain, India is a rising democratic power whose national interests are better served by partnership rather than rivalry with the US.

While govt's measured response to inflation is to be admired, its action on food-price inflation cannot escape criticism.Read full article The subject of inflation, which occupied the media and the politicians in 2008 until the global financial crisis put an abrupt end to it, has returned to the centre stage of the policy debate. The big difference, however, is that this time around the government has been much calmer. Previously, the increase in the year-on-year wholesale price index (WPI) to 8% in April 2008 from 4.5% in January 2008 had the government reach out to every conceivable weapon in its arsenal regardless of its suitability for combating inflation. The government’s actions included cuts in import duties, bans on exports, appreciation of the rupee, rise in the cash reserve ratio, suspension of the futures trade, cuts in excise duties, export taxes and threats of price controls.