Esther Duflo

On WhatsApp University

Around fifteen days back, a friend of mine from school asked, whether repayment of oil bonds issued during the Congress-UPA regime was responsible for higher petrol and diesel prices. Given that, these bonds had to be repaid, the government had no option, but to charge higher taxes on petrol and diesel.

I said no. He then asked, why are forwards going around on WhatsApp saying so. I wrote a piece explaining why there was no link between repayment of oil bonds and the high prices of petrol and diesel.

This set me thinking and led to the question. Why do people believe things sent on WhatsApp so easily? And here are a few answers that I could come up with.

1) Social media, cyberspace, WhatsApp or whatever else one might want to call it, in a way is an extension of the old village square or simply the park in the housing complex you live in or the little space in front of your building, where you meet your neighbours and friends, and talk and gossip with them. Like was the case earlier, WhatsApp is also a space where people meet, talk, discuss and have views on things they don’t understand, like was and is the case, when they meet physically.

The discussions that happened (or still happen) in a village square kind of space were not recorded anywhere. A version of the discussion existed only in the minds of people who happened to be there. No one remembers their past exactly. We all remember a version of it. And as days went by people forgot about what they had discussed at the village square and moved on.

This is not true about WhatsApp or other forms of social media. If a wrong explanation about a particular issue is offered there is an evidence that it exists. Of course, unlike a village square or a park in the housing complex, WhatsApp is not a physical space. But it is still a space where people meet and interact. So, to that extent things haven’t really changed.

Hence, what was happening earlier is also happening now. Even in the pre-WhatsApp/social media era, people believed in conspiracy theories or offered explanations on topics they had very little idea of and believed in many things without doing some basic research. It’s just that there was no record of such things happening.

But in a digital space, some sort of record of the discussion having happened, remains. Hence, this phenomenon is more obvious now than it was in the past. And to that extent, the fact that most people in general are ignorant about most things, comes out much more clearly now. Of course, their ignorance continues to be directly proportional to their confidence.

2) When I use the word ignorant here, I am not being judgmental, I am only trying to state the obvious. Most of us have extremely limited expertise in extremely limited areas (I suggest that you read another piece titled On Advice that I wrote a while back).

This is primarily because most of us are busy in our own little worlds, trying to make the best of what we have. So, unless something really matters to us, we don’t want to spend time understanding it. This explains why people spend so much time planning holidays but have next to no idea about what the gross domestic product (GDP) of a country really means.

As Thomas Sowell writes in Knowledge and Decisions: 

“To exhort the individual citizen to make investments in knowledge comparable to those of lobbyists and political crusaders (both of whom have much lower costs per unit of personal benefit) is to urge him to behaviour that is irrational, if not physically impossible in a twenty-four hour day.”

Nevertheless, this doesn’t stop us from having views on things that we don’t understand.

This is a weakness, which people with an agenda make use of. Take the case of the high petrol and diesel prices. They are high primarily because corporate tax collections have fallen since September 2019, when the government decided to cut the peak corporate rate from 30% to 22%. In order to make up for this deficit, the central government is charging higher taxes on every litre of petrol and diesel sold, than they did in the past.

This is a politically suicidal explanation when it comes to explaining why petrol prices in many parts of the country have crossed Rs 100 per litre. How can the common man pay more, when the corporates are not paying their fair share of taxes?

Hence, the politicians and many others have come with the story of oil bonds issued by the previous government having to be repaid, as an explanation for high petrol and diesel prices. Of course, a basic Google search can negate this explanation. But once people have read this on WhatsApp their minds are satiated, as an anomaly has been explained away in a way that sounds reasonably true.

Given the fact that people are learning what they are from WhatsApp, it’s even referred to as WhatsApp University in zest. 

3) The question is, why all this possible now, and wasn’t possible earlier. The answer lies in the fact that in the earlier era any large propaganda had to be carried out openly either through newspapers, magazines, TV or radio, for that matter. And given that it came with its own set of limitations.

One, there was a price attached to it. Two, most propaganda came with a face.

So, let’s say petrol prices had crossed Rs 100 per litre in the early 2000s, when smart phones were not around. Anyone writing a piece in a newspaper offering a reason for it, had to do it in his own name. In that situation, it would be very difficult to offer the wrong reasons in the hope of people buying it and the writer getting away with it. Once a piece had been published, others could easily call out the writer’s bluff leaving his or her reputation in tatters.

In today’s era, with a significant proportion of the population owning smartphones and the availability of cheap internet leading to the rise of social media like WhatsApp, such problems no longer exist. Producing fake news is cheap. All it requires is a literate person, who has a mobile phone with an internet connection. This has made things significantly easy for people who want to spread propaganda or run an agenda or just want to have some fun.

Take the case of vaccine deniers. Social media has made their life very easy. They can propagate any nonsense that they want to. This is not to say that this did not happen earlier. It did. It’s just that now it can be done anonymously and probably at a much faster pace. Anyone can author a post and just send it across. And after it has been forwarded a few times, no one has any idea of who has written it. The anonymity that the social media provides is a big reason why fake news is created in the first place.  

4) Also, given that the social media is more or less free, it comes with the capacity of endless repetition. This is what political parties all over the world try to make use of, by feeding content that their supporters like to believe in and creating hatred towards a class or a community or a caste or a religion.

Or simply offering nonsensical reasons for an economic trend like petrol and diesel prices are high because oil bonds need to be repaid. As Abhijit Banerjee and Esther Duflo write in Good Economics for Hard Times: “The problem with echo chambers is not just that we are only exposed to ideas we like; we are also exposed to them again and again and again, endlessly.” So, every time petrol and diesel prices rise, the oil bond angle is whipped out all over again, because there is no cost attached to it. Also, as Sowell writes: “sober analysis seldom has the appeal of ringing rhetoric.”

In fact, the production of fake news is impacting the traditional mainstream media which wants to do good journalism. As Banerjee and Duflo write: 

“Circulation of news on social media is killing the production of reliable news and analysis. Producing fake news is of course very cheap and very rewarding economically since, unconstrained by reality, it is easy to serve to your readership exactly what they want to read. But if you don’t want to make things up, you can also just copy it from elsewhere.”

The larger point here, as Banerjee and Duflo put it, is ‘the economic model that sustained journalism as a location for “public space” (and correct information) is collapsing’. In this scenario, ‘without access to proper facts, it is easier to indulge in nonsense’.

Of course, this is not to say that the mainstream media is all kosher. It is not. But that is another topic for another day.

5) The major issue at play here is, whether you support the current government or not. This has led to a situation where there is a great need among many people to support the government on everything and anything. What George Orwell called groupthink is at work here.

As Christopher Booker writes in Groupthink—A Study in Self Delusion: “A group of people comes to be fixated on some belief or view of the world which seems hugely important to them.” In this case, the view is that the current Narendra Modi government can do no wrong. Hence, if petrol prices are more than Rs 100 per litre in many parts of the country and diesel prices are very high, there must be a genuine reason for it, for which the current government is not responsible.

And this is where the fake story of oil bonds comes in and satiates the minds of such individuals. Social media like WhatsApp just helps achieve this at a fast pace and an almost costless sort of way.

Also, once such people have a reason, they go out of their way to defend it. As Booker writes: “They are convinced that their opinion is so self-evidently right that no sensible person could disagree with it. Most telling of all, this leads them to treat all those who differ from their beliefs with a peculiar kind of contemptuous hostility.”

This explains why many family WhatsApp groups where people used to share good morning and happy birthday messages, have turned into virtual battlefields. But the trouble is, such individuals are not doing their own thinking. They are just believing in whatever they have been told.

As Booker writes: 

“They have not looked seriously at the facts or the evidence. They have simply taken their opinions or beliefs on trust, ready-made, from others. But the very fact that their opinions are not based on any real understanding of why they believe what they do only allows them to believe even more insistently and intolerantly that their views are right.”

They have become victims of groupthink and are likely to continue to be so.

To conclude, as Alan Rusbridger, writes in Breaking News – The Remaking of Journalism and Why It Matters Now: “ Bad information [is] everywhere: good information [is] increasingly for smaller elites. It [is] harder for good information to compete on equal terms with bad.”

Bad news is driving out good news. And WhatsApp, as a medium, is at the heart of it. 

Revealing the Real Picture Behind India’s Unemployment Problem

BA Kiya, MBA Kiya, 
Lagta Hai Sab Kuch Aiwen Kiya 
— With due apologies to Sampooran Singh Kalra.

The rate of unemployment as of February 2021 stood at 6.9%. This doesn’t sound very high. But the calculation of this figure misses out on a very important nuance. 

Those who follow me on Twitter know that I go by the moniker of Shikshit Berozgar (or educated unemployed). This is basically a joke I crack on myself on not being gainfully employed with a corporate, in the traditional sense of the term.

Nevertheless, on a more serious note, unemployment is a very serious problem in India. In fact, in the recent past, #modi_rojgar_do has been a top Twitter trend. This gives me a reason to look into this economic and social illness which impacts the society at large and the youth in particular, very badly. Of course, nothing is what it seems, which is why it is important to go into details.

I will use unemployment data published by the Centre for Monitoring Indian Economy, which has now been available for a period of five years, hence, will give us a decent long-term trend.

Let’s first look at the unemployment rate over the last five years, starting from January 2016 onward.

Source: Centre for Monitoring Indian Economy.

What does the chart tell us? The unemployment rate has varied quite a bit between January 2016 and February 2021. As of February 2021, the rate of unemployment stood at 6.9%.  Hence, things have improved from April 2020, when the unemployment rate hit a high of 23.52% and nearly one-fourth of the labour force was unemployed. This was when the lockdown enforced by the government was at its peak.

Nonetheless, the unemployment rate is still very high in comparison to the low of 3.37%, which was achieved in July 2017. It needs to be mentioned here that the Goods and Services Tax (GST) came into effect from July 1, 2017 and has been responsible for increased formalisation of the Indian economy. Hence, many informal businesses have been shut down. Formal businesses tend to be more mechanised and hence, employ fewer people, can be one possible explanation for the higher unemployment.

Moving forward if we were to read only the above chart, we are likely to come to the conclusion that the negative economic impact of the covid pandemic and the general slowdown in the Indian economy, over the years, are gone. But there is some nuance we are missing out on here.

While I have shared the unemployment rate in the above chart, I haven’t told you how the term unemployment is defined. A person is categorised as unemployed “because of a lack of job and where such a person is actively looking for a job”. The word to mark here is actively. At the risk of repetition, a person can be categorised as unemployed only if he doesn’t have a job and is searching for one.

As the Centre for Monitoring Indian Economy (CMIE) puts it, a person categorised as unemployed, “should be unemployed on the date of the survey, should be actively looking for a job in the 100 hundred days (approximately three months) preceding the date of the survey and should be willing to take up the job if a job is found.”

They further point out: “A person is considered to be actively looking for a job if such a person has contacted potential employers for jobs, contacted employment agencies, placement agencies, appeared for job interviews, responded to job advertisements, online employment sites, made applications, submitted resumes to potential employers or reached out to family members, friends, teachers to look for jobs from them.”

To put it in short, waiting for a job offer to come, is not considered as actively looking for a job.

It will soon become clear why have I gone into such detail trying to explain what being unemployed exactly means. First let’s take a look at the following chart, which plots the labour participation rate.

Source: Centre for Monitoring Indian Economy.

In fact, this chart is at the heart of the issue of Indian unemployment. As can be seen from it, the labour participation rate has been falling over the years. It was at a peak of 48.47% in May 2016 and fell to a low of 35.57% in April 2020. In February 2021, it stood at 40.5%.

Now what does this mean? Labour participation rate is the ratio of the labour force to the population greater than 15 years of age. And what is the labour force? As per CMIE, labour force consists of persons who are of 15 years of age or more, and are employed, or are unemployed and are actively looking for a job.

What has happened in the last five years? Let’s take the case of May 2016. In May 2016, the population greater than 15 years or what is referred to as working-age population, stood at 94.58 crore. Of this, 45.84 crore individuals formed the labour force, which means they were either employed or were unemployed and actively looking for a job. Hence, labour participation rate, which is the ratio of the labour force to the population greater than 15 years of age, was at 48.47%.

Now what’s the scene in February 2021? The population greater than 15 years stood at 105.80 crore. The labour force stood at 42.85 crore. This implies a labour participation rate of 40.5%.

In simple English, in February 2021, a smaller proportion the working age population is working or is unemployed and looking for a job, than was the case in May 2016.

The working age population, between May 2016 and February 2021, has gone up from 94.58 crore to 105.8 crore, this implies an increase of 11.22 crore.

Nevertheless, the number of people employed or unemployed and looking for a job, that is the total labour force, has fallen from 45.84 crore to 42.85 crore, or by 2.99 crore.

So, the working age population has increased by 11.22 crore between May 2016 and February 2021, but the total labour force as such has fallen by 2.99 crore. This is India’s real unemployment problem, which isn’t reflected in the unemployment rate, and needs a lot more digging.

What is happening here? A very small proportion of the population is studying more and some may also be retiring early. But that hardly explains the scale of this problem. The explanation lies in the fact that more people are simply dropping out of the labour force, because they are not able to find jobs over a period of time and hence, are not actively looking for jobs anymore.

Let’s look at how the situation has changed post-covid. In January 2020, before covid had struck, the working age population had  stood at 103.13 crore. By February 2021, this had jumped to 105.8 crore, a jump of 2.67 crore. Meanwhile, the labour force as of January 2020 stood at 44.24 crore. It has since shrunk to 42.85 crore, by 1.39 crore. So, post-covid, the working age population has gone up by 2.67 crore, but the workforce has shrunk by 1.39 crore.

Clearly, covid has only accentuated the larger unemployment trend India was already going through. In a sense, many jobs have simply been destroyed, leading to people dropping out of the workforce and in the process, making the overall unemployment number look much better than it actually is.

In the conventional definition of unemployment, individuals who are not actively looking for a job and drop out of the workforce, do not get counted, but ultimately, they are also not gainfully employed. And that’s where the problem lies and explains hashtags like #modi_rojgar_do.

If you still haven’t got it, let me share a very simple example. Let’s say the labour force has 100 individuals. The working age population of people above 15 years of age comprises 200 individuals. Hence, the labour participation rate is 50%. Let’s further assume that the unemployment rate is 10%. This means that 10 individuals are unemployed (10% of 100) and are actively looking for a job.

These individuals do not get a job for a while and let’s further assume that four of them stop actively looking for a job. Given this, the labour force size will fall to 96 (100 minus 4). Those categorised as unemployed will fall to six (10 minus 4). The rate of unemployment will fall to 6.25% (6 expressed as a percentage of 96).

So, the rate of unemployment will come down from 10% to 6.25%, nevertheless, the number of people without jobs will continue to remain at 10. The labour participation rate will come down to 48% (96 expressed as a percentage of 200), from the earlier 50%.  This is how the maths will work out.  This is precisely what is happening in India, of course, at a much larger level.

Now let’s take a look at the unemployment rate and labour participation rate among the youth, that is those aged between 20 and 29. This is where things get very interesting.

Source: Author calculations using data from Centre for Monitoring Indian Economy.

As can be seen from the above chart, the unemployment among youth, which was always on the higher side, has gone even higher, in the last five years. It peaked at 40.41% in April 2020, and in February 2021, was still at a very high rate of 25.68%.

What this means is that one in every four Indian youths is unemployed and is actively looking for a job. And that is clearly bad news. The situation has deteriorated over the last five years.

Now let’s take a look at the labour participation rate among youth.

Source: Author calculations using data from Centre for Monitoring Indian Economy.

As is the overall trend, the labour force participation rate among youth has come down dramatically over the years. It peaked at 53.18% in May 2016 and in February 2021, it stood at 45.42%. Of course, one explanation for this is lies in youth spending more years in college. Nevertheless, the broader explanation for this lies in youth dropping out of the labour force given their inability to find a job. Also, even those who are in college are actively looking for a job. Or sometimes college is just an excuse to postpone actively looking for a job. These are points that need to be remembered.

What explains this situation? One reason for this lies in the fact that the investment to gross domestic product (GDP) has fallen over the years from a high of 34.31% of the GDP in 2011-12 and is expected to be at 30.91% in 2020-21. Hence, with a lower investment in the economy, fewer jobs are being created.

Over the last few years, the government has made attempts at formalizing the economy through a harebrained measure like demonetization and a half-baked measure like goods and services tax.

As an August 2018 Mint Street Memo published by the Reserve Bank of India points out:

“The MSME ( micro, small and medium enterprises) sector has witnessed two major recent shocks, viz., demonetisation and introduction of goods and services tax (GST). For instance, contractual labour in both the wearing apparel and gems and jewellery sectors reportedly suffered as payments from employers became constrained after demonetisation (RBI, 2017). Similarly, the introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net.”

This has hit jobs badly as well.

It needs to be understood here that many employees of MSMEs that shut down did not come under the income tax slab. Nevertheless, whenever they make a purchase as a consumer, they do pay some form of indirect tax. This is a point those celebrating the increasing formalisation of the economy, seem to miss out on.

Let’s take a look at a few more trends, starting with female labour participation rate.


Source: Centre for Monitoring Indian Economy.

This is a very disturbing chart. The female labour participation rate has crashed to just 10.89%. In urban India, it was at 6.56% in February. This means more and more women are getting educated but are not working in salaried jobs. In fact, this is a trend that started before 2014 and it has only accentuated since then. As per surveys carried out by the Labour Bureau, the female labour participation rate in 2012-13 and 2013-14 stood at 25% and 28.7%.

Economists have struggled to come up with an explanation for this. One possible explanation lies in the fact that the number of jobs available haven’t grown at the pace that could accommodate the new individuals, both men and women, entering the workforce. Hence, in a patriarchal society, men in deciding positions, have offered jobs to other men. This needs more research, and I will write about it in detail in the days to come.

Another interesting trend is the unemployment rate depending on the education level. The following chart plots the unemployment rate by level of education for February 2021.

Source: Centre for Monitoring Indian Economy.

While I have only shared data for February 2021, this is a trend that has played out over the years.

World over there is a wage premium for education, which means, the more educated you are, the higher your income is likely to be. That might be the case in India as well, but along with that we have another very interesting phenomenon.

The rate of unemployment increases with the number of years of education, with one in every five graduates being unemployed. The fact many graduates are unemployed again explains the popularity of trends like #modi_rojgar_do. The graduates have the time, the energy and the internet bandwidth, to get such an important issue to trend.

The larger explanation for this lies in the fact that graduates tend to wait for that good job, which never really comes. That is a choice that the less educated don’t make.

Let’s now look at a chart which plots the rate of unemployment across different age brackets, for the month of February 2021.

Source: Centre for Monitoring Indian Economy.

The rate of unemployment is highest at the younger ages and as one ages, it comes down dramatically.

The high rate of unemployment for the ages between 15-19 can be explained by the fact that more individuals now spend time in school and go to college. But what about rates beyond that bracket?

The interesting thing is that rate of unemployment in the age category 25-29 stood at 11.53% in February 2021. For the age group, 30-34, it was at only 1.32%. While I have only shared data for February 2021, this is a trend that has played out over the years.

What’s happening here? It seems this is a problem that isn’t just peculiar to India and is prevalent in other parts of the world, including South Africa, Egypt and countries in the Middle East.

A part of the problem, like most disappointments in life, is a mismatch of expectations that the unemployed youth have, and the situation as it prevails.

As Abhijit Banerjee and Esther Duflo write in Good Economics for Hard Times:

“They [i.e. the youth] were told that if they studied hard they would get a good job, meaning mostly a desk job or a teaching job. This was closer to the truth in their parents’ generation than it is today… The growth in government jobs slowed and eventually stopped in the face of budgetary pressures.”

In fact, in the Indian case, the pace of creation of government jobs has slowed down over the years. As far as central public sector enterprises (CPSEs) are concerned, the total number of employees has gone down over the years.

Take a look at the following table.

Employment at CPSEs


Source: Public Sector Enterprises Survey 2018-19.

The number of employees in 2009-10 had stood at 14.90 lakh. It has fallen to 10.33 lakh in 2018-19. This is largely true of the government as a whole. But the fascination for a government job still remains strong and there is an economic incentive for it as well.

As can be seen from the above table, while the number of jobs in CPSEs has come down, the emoluments have gone up. In 2009-10, it stood at Rs 5.89 lakh. In 2018-19, it had jumped to Rs 14.78 lakh. And this is just the emoluments. There are other things that come with a government job, employment guarantee for life, access to good medical facilities, pension in many cases, and so on.

This explains why every few months we get stories in the media about graduates, engineers, post graduates and even PhDs, applying for low-level government jobs like that of peons, sweepers etc.

As Banerjee and Duflo write:

“There are small fraction of jobs that are much more attractive than the rest, for the reasons having nothing to do with productivity. The best example are government jobs… In the poorest countries, public-sector workers earn more than double the average wage in the private sector. And this is not counting generous health and pension benefits.”

What this ensures is that many individuals spend the best part of their youth preparing and writing exams to get into a government job. As Banerjee and Duflo write: “These young people are mostly waiting for jobs they will not get… If the government jobs stopped being quite so desirable, the economy would gain many years of productive labour.”

But given that there are very few government jobs going around at the end of the day, the futility of it all, ultimately hits individuals who cannot see a world beyond a government job. What this basically means is that as people age, they eventually do start working, once their overall expectations fall in line with what is on offer.

So, other than the fact that there aren’t enough jobs going around for anyone, the love of a government job also seems to hold people back.

To conclude, you won’t get to read this anywhere in the mainstream media. Hence, it is very important that you continue supporting my work.

PS: This is not to say that all was well before 2014. It clearly wasn’t. As the Report on Employment-Unemployment Survey of 2013-14 points out: “Full employment was available to only 63.4 per cent of self-employed persons, the figure being as low as 42.1 among ‘casual’ workers.” The government has done away with the publishing of this report, since then. Such big structural problems don’t manifest overnight. If not tackled on a war footing, they only get worse with time and which is what seems to have happened.

The power of context

Vivek Kaul

We live in an era of instant coffee and analysis.
Even before something has happened, the analysis on why it has happened is ready. Given this, it leads to situations where we analyse using what we think is “common sense”.
But common sense does not always work. The simplest answer is not always the right one. Life can get a little more complicated than that.
Consider the story of a woman who the economists Abhijit V Banerjee and Esther Duflo met in the slums of Hyderabad. The economists recount this story in their book Poor Economics-Rethinking Poverty & the Ways to End It: “A woman we met in a slum in Hyderabad told us that she had borrowed Rs 10,000 from Spandana and immediately deposited the proceeds of the loan in a savings bank account. Thus, she was paying a 24 percent annual interest rate to Spandana, while earning about 4 percent on her savings account.” Spandana is a micro-finance institution.
Common sense tells us that anyone in their right mind wouldn’t do anything like this. But the economists soon found out that there was a method to the madness, once they saw the context in which the woman was operating.
As they write: “When we asked her why this made sense, she explained that her daughter, now 16, would need to get married in about two years. That Rs 10,000 was the beginning of her dowry. When we asked why she had not opted to simply put the money she was paying to Spandana for the loan into her savings bank account directly every week, she explained that it was simply not possible: other things would keep coming up…The point, as we eventually figured out, is that the obligation to pay what you owe to Spandana – which is well enforced -imposes a discipline that the borrowers might not manage on their own.”
Once viewed in this context the story makes immense sense. The woman was borrowing at 24% and investing it at 4% in order to build a savings kitty for her daughter’s dowry. Of course, prima facie this wouldn’t have seemed obvious at all. As Nicholas Epley writes in Mindwise: How We Understand What Others Think, Believe, Feel, and Want “The mistakes we make when reasoning about the minds of others all have the same central outcome: underestimating their complexity, depth, detail, and richness. When we’re indifferent to others, it’s easy to overlook their minds altogether, treating such people as relatively mindless animals or objects than as fully mindful persons.”
Epley gives a brilliant example of people who chose to stay back in in New Orleans when Hurricane Katrina hit the city in August 2005. The experts were at it with their instant analysis. As ABC News put it, “It’s hard to understand the mind-set of those who ignored evacuation orders.” Michael Chertoff, the Chief of Homeland Security said that those who stayed back made a “mistake on their part”. Psychiatrists suggested that there was a “certain amount of denial involved” on part of those who had chosen to stay back in New Orleans, given that they believed that they could handle the storm.
All these explanations sound pretty convincing, “but it does not resonate as well with the actual experience of most who left and stayed, because the broader context is not quite as easy to see.” It is simple to come to the conclusion that anyone choosing to stay back and take on a category 5 hurricane was not right in the head. But anyone who came to that conclusion ignored the context in which the people who had chosen to stay back, were operating.
As Epley writes “Compared to those who left, those who stayed were disproportionately poor, had geographically narrower social network, had larger families (both children and extended members), had less access to reliable news, and were considerably less likely to own a car.” And given this it was not easy for these people to just pack up and leave.
“If you had money to pay for an extended hotel stay, relatively small family to move, a car to get all of you there, or had far-away friends to stay with, you could choose to leave. If you had no money for an extended hotel stay, no car to get you out, a large family to move and no long distance-friends to stay with, what choice did you have?” asks Epley.
Of course, people who analysed the situation did not understand this broader context. Given this, before passing judgements it is important to understand the context in which people are operating. People who chose to stay back when Katrina hit New Orleans, did not need convincing to leave the city, what they needed was a bus. As Epley puts it “Many who stayed wanted to desperately to leave but couldn’t. They didn’t need convincing, they needed a bus.”
And what about the woman who borrowed money at 24% and invested it at 4%? What it clearly tells us is that there is a need for a savings solution which allows the poor to save on a daily basis. If they can discipline themselves to pay back micro-finance institutions every week, they can easily discipline themselves to save small amounts on a daily basis. Of course, there are financial institutions which cater to this market, but most of them are of dubious nature. Hence, there is a clear market out there for anyone who is willing to take the risk.

The article originally appeared in the Wealth Insight magazine August 2014

(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected])

Why the poor are willing to hand over their money to Sahara


Vivek Kaul

Abhijit V Banerjee and Esther Duflo in their book Poor Economics – Rethinking Poverty & the Ways to End It write a very interesting story about a woman they met in the slums of Hyderabad. This woman had borrowed Rs 10,000 from Spandana, a microfinance institution.
As they write “A woman we met in a slum in Hyderabad told us that she had borrowed 10,000 rupees from Spandana and immediately deposited the proceeds of the loan in a savings bank account. Thus, she was paying a 24 percent annual interest rate to Spandana, while earning about 4 percent on her savings account”.
The question of course was why would anyone in their right mind do something like this? Borrow at 24% and invest at 4%? But as the authors found out there was a clear method in the woman’s madness. “When we asked her why this made sense, she explained that her daughter, now sixteen, would need to get married in about two years. That 10,000 rupees was the beginning of her dowry. When we asked why she had not opted to simply put the money she was paying to Spandana for the loan into her savings bank account directly every week, she explained that it was simply not possible: other things would keep coming up…The point as we eventually figured out, is that the obligation to pay what you owe to Spandana – which is well enforced – imposes a discipline that the borrowers might not manage on their own.”
The example brings out a basic point that those with low income find it very difficult to save money and in some cases they even go to the extent of taking a loan and repaying it, rather than saving regularly to build a corpus.
This includes a lot of very small entrepreneurs and people who do odd jobs and make money on a daily basis. Such individuals have to meet their expenses on a daily basis and that leaves very little money to save at the end of the day. Also the chances of the little money they save, being spent are very high. As Abhijit Banerjee told me in an interview I did for the Economic Times “The broader issue is that savings is a huge problem. Cash doesn’t stay. Money in the pillow doesn’t work.”
Hence, as the above example showed it is easier for people to build a savings nest by borrowing and then repaying that loan, rather than by saving regularly.
Another way building a savings nest is by visiting a bank regularly and depositing that money almost on a daily basis. But that is easier said than done. In a number of cases, the small entrepreneur or the person doing odd jobs, figures out what he has made for the day, only by late evening. By the time the banks have closed for the day.
The money saved can easily be spent between the evening and the next morning when the banks open. Also, in the morning the person will have to get back to whatever he does, and may not find time to visit the bank. Banks also do not encourage people depositing small amounts on a daily basis. It pushes up their cost of transacting business.
But what if the bank or a financial institution comes to the person everyday late in the evening, once he is done with his business for the day and knows exactly what he has saved for the day. It also does not throw tantrums about taking on very low amounts.
This is precisely what Subrata Roy’s Sahara group has been doing for years, through its parabankers who number anywhere from six lakh to a million. They go and collect money from homes or work places of people almost on a daily basis.
The Sahara group fulfilled this basic financial need of having to save on a daily basis for those at the bottom of the pyramid (as the management guru CK Prahalad called them). The trouble of course was that there was very little transparency in where this money went. The group has had multiple interests ranging from real estate, films, television, and now even retail. A lot of these businesses are supposedly not doing well.
Over the last few years, both the Reserve Bank of India (RBI) and Securities and Exchange Board of India(Sebi), have cracked down on the money raising schemes of the Sahara group. In a decision today, the Supreme Court of India has directed that the Sahara group refund more around Rs 17,700 crore that it raised through its two unlisted companies between 2008 and 2011. The money was raised from 2.2crore small investors through an instrument known as fully convertible debenture. The money has to be returned in three months.
Sebi had ordered Sahara last year to refund this money with 15% interest. This was because the fund-raising process did not comply with the Sebi rules. Sahara had challenged this, but the Supreme Court upheld Sebi’
The question that arises here is that why has Sahara managed to raise money running into thousands of crores over the last few decades? The answer probably lies in our underdeveloped banking system. In a November 2011 presentation made by the India Brand Equity Foundation ( a trust established by the Ministry of Commerce with the Confederation of Indian Industry (CII) as its associate) throws up some very interesting facts. A few of them are listed below:
– Despite healthy growth over the past few years, the Indian banking sector is relatively underpenetrated.
– Limited banking penetration in India is also evident from low branch per 100,000 adults ratio – – Branch per 100,000 adults ratio in India stands at 747 compared to 1,065 for Brazil and 2,063 for Malaysia
– Of the 600,000 village habitations in India only 5 per cent have a commercial bank branch
– Only 40 per cent of the adult population has bank accounts
What these facts tell us very clearly is that even if a person wants to save it is not very easy for him to save because chances are he does not have a bank account or there is no bank in the vicinity. This is where Sahara comes in. The parabanker comes to the individual on a regular basis and collects his money.
As a Reuters story on Sahara points out “Investors in Sahara’s financial products tend to be from small towns and rural areas where banking penetration is low. “They see Sahara on television everyday as sponsor of the cricket team and that leads them to believe that this is the best company,” said a spokesman for the Investors and Consumers Guidance Cell, a consumer activist group.”
Sahara has built trust over the years by being a highly visible brand. It sponsors the Indian cricket and hockey team. It has television channels and a newspaper as well. Hence people feel safe handing over their money to Sahara.
The irony of this of course is that RBI which has been trying to shut down the money raising activities of Sahara is in a way responsible for its rise, given the low level of banking penetration in the country.
(The article originally appeared on www.firstpost.com on August 31,2012. http://www.firstpost.com/business/why-the-poor-are-willing-to-hand-over-their-money-to-sahara-438276.html)
(Vivek Kaul is a writer and can be reached at [email protected])