Mudra Loans Haven’t Created 8 crore Self-Employment Opportunities

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Arjun Kumar and Vivek Kaul

In his fourth Independence Day speech on August 15, 2017 as Prime Minister, Narendra Modi said: “Over the past three years, Pradhan Mantri Mudra Yojana has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”

Similar views were expressed by Amit Shah, the president of the Bharatiya Janata Party in May 2017, when he said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

These remarks emerge out of the assumption that each loan given under the Pradhan Mantri Mudra Yojana(PMMY, and more popularly referred to as a Mudra Loan), leads to the creation of at least one self-employment opportunity. Is that correct? Let’s take a look at Table 1.

Table 1, tells us that up until early September 2017, close to 9 crore loans have been disbursed under the PMMY. When Shah had made the statement in late May, he had perhaps claimed on the basis of this data that the government had made 8 crore people self-employed.

The assumption was that one Mudra loan makes one individual self-employed. PM Modi in his speech essentially seemed to have assumed one Mudra loan leads to one individual becoming self-employed and he, in turn, employs more people. Take a look at Table 2.

What does Table 2 tell us? It tells us that the average loan being given under the PMMY has jumped from Rs 39,405 in 2015-2016 to around Rs 46,528 in the current financial year. Now let’s take a look at the data at a more granular level in Table 3, focusing on two previous financial years.

As can be seen from Table 3, in the previous two financial years, the total number of loans given to new entrepreneurs stood at 2.25 crore. This amounts to a little over 30 per cent of the total loans. Hence, the claim that 8 crore self-employment opportunities have been created because of PMMY loans doesn’t really add up. A bulk of the loans has been given to people who are already self-employed.

The PMMY loans are categorised into three types. These are Shishu (upto Rs 50,000), Kishore (from Rs 50,000 to 5,00,000) and Tarun (from Rs 5,00,000 to 10,00,000). Let’s look at Table 4, which goes into some detail of these different kinds of PMMY loans.

We can see from Table 4 that the most basic Shishu loans over the last two financial years formed around 92-93 per cent of the total loans. Now look at Table 5, which basically tells us the average amount of loan taken under each of the different kind of loans.

The Shishu loans on an average amounted to Rs 19,400 in 2015-2016 and Rs 23,300 in 2016-2017. This basically means that the average loan given under PMMY is very small. It is highly unlikely that such a small amount of capital can create any employment. Hence, it might act more as an overdraft facility for the self-employed (such as Kisan Credit Cards for farmers) than be able to create employment. Also, whether the new entrepreneurs who have taken PMMY loans continue to survive as entrepreneurs, is an interesting question which researchers need to explore.

It is worth pointing out that many self-employed people in India are not self-employed by choice. Economists Abhijit Banerjee and Esther Duflo call them ‘reluctant entrepreneurs’. They do not have a choice. This can be understood from the fact around 46-47 per cent of the Indian workforce is self-employed. Take a look at Table 6.

The above table clearly indicates that the salaried labour force is way better off than the self-employed. Nearly two-thirds of the self-employed earn up to Rs 7,500 per month. For the salaried, this is at a little over 38 per cent.

To conclude, the CEO of Mudra (Micro Units Development & Refinance Agency Ltd.) in an interview to a private media house, when asked the question on the number of jobs created by the Mudra loans, had said: “We are yet to make an assessment on that… We don’t have a number right now, but I understand that NITI Aayog is making an effort to do that.”

In such a situation, the hypothesis of the government that Mudra loans are making crores of youth self-dependent seems to be flawed. It seems more of a political gimmick, because remaining in power is more important than working to allay the distresses of those who are still seeking employment.

This originally appeared in Newslaundry on September 21, 2017.

Dear PM Modi, India is Already Land of Self-Employed, and It Ain’t Working

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The prime minister Narendra Modi in his Independence Day speech made last week said: “The Government has launched several new initiatives in the employment related schemes and also in the manner in which the training is imparted for the development of human resource according to the needs of the 21st century. We have launched a massive program to provide collateral free loans to the youth. Our youth should become independent, he should get the employment, he should become the provider of employment. Over the past three years, ‘Pradhanmantri Mudra Yojana’ has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”

Adding to this, the Bhartiya Janata Party president Amit Shah recently said: “the youth have turned into job-creators from job-seekers“. Dear Reader, I would request you to keep these points in your head, while I set the overall context of this piece. As I have written on several previous occasions in the past, one million Indians enter the workforce every month. That makes it 1.2 crore Indians a year. There is not enough work going around for all these young individuals entering the workforce every year.

While, it is not possible for the government to create jobs for such a huge number of people, it is possible that the government makes it easier for the private sector to create jobs. (I will not go into this, simply because this is a separate topic in itself and I guess I will deal with this on some other occasion).

Take a look at Table 1. This is a table that I have used on previous occasions as well. But I need to repeat it, in order to set the context for this piece.

Table 1: Percentage distribution of persons available for 12 months 

What does Table 1 tell us? It tells us that only 60.6 per cent of the individuals who were looking for work all through the year, were able to find it. This basically means that nearly 40 out of every 100 Indians who are a part of the workforce and were looking for work all through the year, could not find regular work. In rural India, around half of the workforce wasn’t able to find regular work through the year.

This table is at the heart of India’s unemployment problem. Actually, we do not have an unemployment problem, what we have is an underemployment problem. There isn’t enough work going from everyone who joins the workforce. The solution that prime minister Narendra Modi has to this is that India’s youth should become self-dependent and seek self-employment. In the era of post-truth, this sounds like a terrific idea. But this is nothing more than marketing spin.

Let’s look at some data on this front. As the Report on the Fifth Annual Employment-Unemployment Survey, 2016, points out: “At the All India level, 46.6 per cent of the workers were found to be self-employed… followed by 32.8 per cent as casual labour. Only 17 per cent of the employed persons were wage/salary earners and the rest 3.7 per cent were contract workers.”

The point being that nearly half of India’s workforce is already self-employed. And they aren’t doing well in comparison to those who have regular jobs. Take a look at Table 2.

Table 2: Self-employed/Regular wage salaried/Contract/Casual Workers
according to Average Monthly Earnings (in %) 

What does Table 2 tell us? It tells us very clearly that self-employment is not as well-paying as a regular salaried job is. As is clear from the table nearly two-thirds of the self-employed make up to Rs 7,500 per month. In case of the regular salaried lot this is at a little over 38 per cent. Clearly, those with regular jobs make much more money on an average.

Further, only 4 per cent of the self-employed make Rs 20,000 or more during the course of a month. In comparison, more than 19 per cent of individuals with jobs make Rs 20,000 or more during the course of a month.

What Table 1 and Table 2 tell us is that India’s youth have already taken to being self-employed. Hence, there is nothing new in Narendra Modi’s idea. Further, it is clearly not working.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. The phrase summarises the situation very well.

Other than the reluctant entrepreneurs, more than 30 per cent of the workforce comprises casual labourers, who seek employment on an almost daily basis. The reluctant entrepreneurs and casual labourers looking for daily work essentially tell us that no one can really afford to stay unemployed.

Hence, the problem is not a lack of employment but a lack of employment which is productive enough.

Prime minister Modi talked about his government launching, “several new initiatives in the employment related schemes and also in the manner in which the training is imparted for the development of human resource according to the needs of the 21st century.

How good does the data look on this front? As the Volume 2 of the Economic Survey of 2016-2017 points out: “For urban poor, Deendayal Antyodaya Yojana National Urban Livelihoods Mission (DAYNULM) imparts skill training for self and wage-employment through setting up self-employment ventures by providing credit at subsidized rates of interest. The government has now expanded the scope of DAY-NULM from 790 cities to 4,041 statutory towns in the country. So far, 8,37,764 beneficiaries have been skill-trained [and] 4,27,470 persons have been given employment.

The annual report of 2016-2017 of the Ministry of Skill Development and Entrepreneurship of the government of India makes an estimate about the number of people trained by different ministries during the course of the financial year. For the period April to December 2016, the number is at around 19.59 lakh. The annual target was set at 99.35 lakh. Given this, the gap between the target set and the target achieved is huge.

Another way of looking at this is that 1.2 crore Indians are entering the workforce every year. They have had an average education of around five years (i.e. they have passed primary school). Given this, they really don’t have any work-related skillset. At best, they can add and subtract, and perhaps read a little.

Hence, they need to be trained or there need to be enough low skill jobs going around. Real estate and construction, the two sectors that can create these kind of jobs, are in a huge mess. This is something that can be sorted, but in order to do that some serious decisions on black money need to made. This includes cleaning up of political funding and the change in land usage regulations at state government level.

Take a look at the following graphic (Figure 1) reproduced from the annual report of the Ministry of Skill Development and Entrepreneurship.

Figure 1: 

What Figure 1 tells us very clearly is that the scale that is needed to train people is simply not there. And this will lead to a substantial chunk of individuals entering the workforce looking for low end self-employment opportunities anyway, as has been the case in the past. Or people will continue to stick to agriculture.

Prime Minister Modi in his speech further said: “Over the past three years, ‘Pradhanmantri Mudra Yojana’ has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”

Let’s look at this statement in some detail. Between April 2015 and August 11, 2017, the government gave out Mudra (Micro Units Development and Refinance Agency Bank) loans worth Rs 3.63 lakh crore to 8.7 crore individuals. This works out to an average loan of around Rs 41,724. There is no evidence until now whether this is working or not. Can a loan of a little under Rs 42,000 provide employment to one, two or three more people, is a question which hasn’t been answered up until now.

The CEO of Mudra was asked by NDTV recently, as to how many jobs had the Mudra loans created. He said: “We are yet to make an assessment on that… We don’t have a number right now, but I understand that NITI Aayog is making an effort to do that.”Given this, Mudra loans making millions of youth self-dependent is presently nothing more than something that prime minister Modi likes to believe in.

While he is entitled to his beliefs, I would like to look at some data before concluding that Mudra loans are the answer to India’s job crisis.

The column was originally published on Equitymaster on August 21, 2017.

After Farm Loans, Will Govts Waive Off Mudra Loans Next?

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A few days back I suggested on Twitter that people with outstanding home loans should organise themselves and ask the government to waive off their loans.

This idea basically came from several state governments waiving off loans given to farmers. It was started by Andhra Pradesh and Telangana, the two states to come out of the erstwhile Andhra Pradesh.

Then it was followed in Uttar Pradesh, where the newly elected government decided to waive off farm loans of around Rs 36,359 crore. It was followed by Maharashtra.

There is a clear trend here. Maharashtra chief minister Devendra Fadnavis recently explained his decision to waive off loans to farm loans by saying:Neighbouring Telangana and Andhra did it first. It created pressure and then UP announced the waiver. The demand had been there but it became very strong after UP’s decision.”

The idea also came from the fact that banks were busy treating large corporates which had defaulted on their loans, with kids gloves, by restructuring their loans and giving them a longer time to repay. This was basically happening because the corporates owed a large amount of money to banks. And any default would hit them hard.

Now as a home loan borrower, try going to a bank and ask for the postponement of payment of EMI to repay the home loan and see how a bank reacts. Obviously, different kind of borrowers get treated differently.

What has helped the cause of the farmers is that they are numerous in number and the fact that they are organised, which helps them carry out protests at a level so that the government registers it. What has helped the corporates is that their average loan amounts are very large and any default would hit the banks hard.

These factors are missing in case of individuals who have taken on home loans. They are not many in number. They are spread across the length and breadth of India. And they are not organised. In 2013, the number of outstanding home loans stood at 46.43 lakh. I couldn’t find a more recent number. Over and above this, there would be home loans given by housing finance companies, as well.

Typically, the outstanding home loans (in value) are around 60:40 (scheduled commercial banks: housing finance companies). Taking the housing finance companies into account, as well as the fact that the total outstanding home loans may have gone up from where they were in 2013, it is safe to say that the total number of outstanding home loans will be still less than 1 crore.

Also, the individuals who have taken on these home loans would be spread across the length and breadth of the country. Hence, it is difficult for them to get together and protest that the government waive off their home loans, like has been the case with farm loans. The same stands for other kinds of retail loans which have smaller average ticket value, in comparison to the home loan, which is usually the largest loan that an individual ever takes on.

Over and above this, the average loan amount owed by them is very small and that ensures that they are likely to face the full legal wrath of the bank, if they default on their home loans, which is not the case with corporates.

Having said that, there is a precedent of a government waiving off home loans as well. In December 2016, the Telangana government had announced a waiver of home loans of around Rs 3,920 crore to individuals who had benefitted from the housing schemes for economically weaker sections of the society over the years.

So, if individuals with home loans, can get themselves organised they might also be able to get a loan waive off.

But there is one particular kind of borrower, who is in a position to organise himself, protest and ask for a loan waive off.

In 2016-2017 and 2015-2016, the total amount of loans extended under the Pradhan Mantri Mudra Yojana (PMMY or better known as Mudra loans) stood at Rs 3,17,977.81 crore. The total number of borrowers over the two-year period stood at around 7.46 crore. A bulk of these loans have been made to women.

Taking cue from farmers, if these borrowers can manage to organise themselves and protest and demand a waive off of their loans, there is a good chance that they might get it. Assuming that only one individual in one household has got a loan under PMMY, we are looking at 7.46 crore households. At five members per household, we are looking at more than 37 crore individuals, on whom these loans have had some impact. And that is a large vote bank.

If these individuals can get themselves organised they are in a very good position to demand and get a waive off on their PMMY loans. Also, the governments have already set a precedent and will find it very difficult to say no.

This will be especially true for states where elections are scheduled before the Lok Sabha election of 2019. On a totally different note, they might not even need to take it up as an issue, some lazy politician might just do the job for them, by promising a waive off.
And that is the problem with these waive offs. They are unlikely to stop in a hurry.

The column originally appeared on June 19, 2017, on Equitymaster.