In many discussions and debates India is bandied as the x largest consumer market of the future. Different reports give you impressive figures that are designed to display the mammoth opportunity lying ahead. Reality check – 1 billion people; 300 million from the middle class and the remaining 700 million live on less than $ 2 a day .Are they the average consumer who will contribute to the growth story of tomorrow?
Why Micro Finance?
- Next big opportunity – in 1980’s the Indian middle class did not have access to financial services like house/car loans etc. 3 decades later the access to financial services has vastly improved. This has given unprecedented fillip to demand which in turn has contributed to the growth of the economy. Think of what a similar access for 700 million can do.
- Middle class bulge – Assuming a 25% savings rate, the total consumption by the middle class will roughly amount to $ 650 Billion (65% of the Indian GDP). Uplifting 700 million people is the equivalent of tripling your current middle class. It means a total buying power of $ 2 trillion!!! Now that’s an opportunity.
I am not sure if Micro Finance Institutions alone can help in providing for the economic well-being of this 700 million. Financial access (provided by MFI’s) alone is insufficient. We need value generating opportunities i.e. it is not enough to provide a loan, there must be an economic scenario where the loan can be invested as capital to generate returns. To create an economic scenario where returns on invested capital are better, we need better infrastructure, bigger markets (more consumers), access to power etc.
I think the answer lies in Accelerated Local Economic activity (ALE). ALE is in theory a mechanism to provide financial access and create investment opportunities in a localized fashion.
ALE requires support from the 3 entities
- Micro Finance Institutions – (providing financial access in area Y)
- The Government – (generating investment opportunities in area Y)
- Localized infrastructure spending: with the help of existing programs like NREGA. The government should invest in productive infrastructure like a bridge to connect 2 areas, better roads, etc. This not only stimulates demand (more money in the hands of the people) in the area but also makes capital more productive (better ROI)
- Tax breaks: The next major step is to create incentives for capital to flow into MFI in area Y.
Hypothetical E.g.: A person with an effective tax rate of 15% and the government provides a tax break (over and above 80C) to investment in MFI‘s in area Y (a typical MFI can generate 2% returns). Rs 1000 investment in an MFI will yield 1020 Versus Rs 880 from investing in a vanilla savings account.
If we can extend these incentives to individuals and foundations a substantial amount of money will start flowing towards these select MFI’s.
- External Organizations: Organizations’ like Unitus.com can also help small islands of sustainable MFI models to expand.
ALE is in essence a holistic mechanism to kick start the economic engine and harnesses the power of markets to uplift the poor. The goals of this mechanism are not just financial access but economic well-being of participants
Somewhere in the distant future when investment opportunities become scarce and we become blind to this new landscape, we will then pile on a mountain of debt lured by shiny bubbles (real-estates, stocks)…but today we are in a situation where there are enough opportunities.
The pent-up entrepreneurial energy of these people is waiting for an expression. They are ready to join the ranks of value creators.…
“This teeming mass driven by ambition and shackled by circumstances is straining at their leashes… Unleash them!”