Urban Poverty: Issues and Approaches

1. Urban Poverty: Issues and Approaches Prodipto Ghosh, Ph.D Additional Secretary to PM 24 January 2003

2. Preamble • Economic reforms cannot be only for the rich. They must benefit the poor directly and visibly, if political support for reforms is to be sustained. • Thesis: The poor are poor because of regulatory, institutional and policy failures • “Couldst thou and I with fate conspire To change this sorry scheme of things entire Would not we shatter it to bits and then Mould it nearer the heart’s desire?” (Rubbait of Omar Khayyam)

3. This presentation deals with 3 issues and approaches to their solution: • A supportive regulatory framework for the urban informal sector • Mainstreaming microfinance for the unorganized sector • Laws and regulations which adversely impact the poor

4. Supportive regulatory framework • The urban informal sector is the principal means of livelihood of the urban poor • However, they rarely get out of the poverty trap thru participation in urban informal occupations • One, perhaps the principal reason is that almost all such occupations fall foul of one or the other law/regulation, and are, in effect illegal

5. Supportive regulatory framework... • This has two effects: • First, their entire surplus is realized as rent by police, municipal, and other officials who enforce these regulations • Second, because they are illegal, they cannot access the institutions of the formal economy (e.g. financial institutions, marketing networks) to enhance scale, technology, etc.

6. Example: Delhi • A licensing regime is in place for street vendors and cycle rickshaws • The licensing regime imposes quantitative restrictions, ostensibly on grounds of congestion, hygiene and security, and derives from a SC order which (i) upheld their right to transact their business; and (ii) that the right is subject to regulation on grounds of “general convenience of the public”

7. Quantitative licensing regime... • Effect: Supply of these services is reduced below the market clearing level, leading to higher than marginal cost of these services • This leads to rental possibilities in 2 ways: (i) At the time of (discretionary) issue of licenses, and • (ii) During enforcement, non-licensed suppliers seek to enter the market because of prevailing higher than marginal cost prices

8. Effects of quantitative licensing... • Estimates of rents collected are c. Rs 1000 pm per vendor/rickshaw puller, and a total of Rs 50 cr pm in Delhi (Manushi study) • Enforcement usually involves destruction of wares and capital stock • Impact is perpetuation of poverty • Situation is typical of urban areas in the country

9. The needed paradigm shift • A key approach in economic reforms is a shift from fiats based, to market based regulation: Social objectives are safeguarded by appropriate price signals to agents to respond to these objectives • There is no rational reason why this approach would not work in the urban informal sector as well

10. One approach to market based regulation • Divide city areas into “green” (open access), red (closed access), and amber (restricted access) zones, thru a participative process involving city authorities, service providers, and residents (service users). Classification of a given area may vary with day of week, time of day, etc. • Any vendor may apply for registration on simple identification, without numerical limits • Access to amber zones is by payment upfront of an access fee, scaled so that resulting market clearing price is at desired level of supply

11. One approach... • Effect is to eliminate rents by local authorities • Rents due to limitation of access accrues to municipalty as revenue • Registration by secure identification enables access to formal economy institutions • Sad story of misapplication by Delhi authorities!

12. Draft National Policy on Urban Vendors • Objectives are: • Give legal status by amendments/repeal of perverse laws, provide secure zoning • Provide facilities for appropriate use of identified areas • Regulation: Eschew numerical limits on access to public spaces and move to fee based access • Role in distribution: Make vendors a special component in zoning by recognizing their role in providing goods & services

13. Draft National Policy... • Promote self-compliance • Promote organizations (e.g. coops) of urban vendors to facilitate their empowerment • Promote participation by vendors organizations, VOs, local authorities, RWAs, police, for orderly conduct of vending (e.g. zoning) • Rehabilitation of child vendors • Promote social security and financial services to vendors through SHGs, coops.

14. Draft National Policy • However, domain of these reforms are the State and municipal Govts • Implementation of this policy needs political articulation • Central Govt could promote implementation through covenants on Central assistance to States, local bodies.

15. Access to financial services • Issue is salient because traditional lenders charge usurious rates • Why do they do so? The poor have little collateral; information about capacity to repay is limited to persons in close daily contact; moneylender by virtue of possessing this information acts as monopolist provider of financial services

16. Mainstreaming microfinance • Without access to diverse financial services - credit, deposits, insurance - the poor will remain poor • Microfinance remains a backwater in the Indian financial institutions, despite established record of repayments on par with the prime corporate sector (> 98%) • The key is promoting access, not provision of subsidies • Established microfinance models break monopoly of traditional lender by accessing information possessed by peers, and using peer pressure to incentivize repayment

17. Microfinance... • To mainstream microfinance, an Empowered Committee, headed by Secretary Banking has been set up • Cttee set up 6 sub-groups to study critical issues (heads in brackets): • Validated credit delivery models (NABARD) • Capacity Building for enhancing access (DHAN Foundation)

18. Microfinance sub-groups... • Enhancing resource flows (BASIX) • Women and Microfinance (Independent Commission for People’s Rights & Development) • Identification of new technologies (Indian Banks Assoc) • Legal and Regulatory Challenges (Sa-Dhan) • All sub-groups have completed their tasks • Next step: Banking Division to formulate draft Action Plan (March 2003).

19. Laws & Regulations which adversely impact urban poor • “Here’s a fish hangs in the net, like a poor man’s right in the law ‘Twill hardly come out!” (W. Shakespeare)

20. Laws impacting urban poor • While a large number of laws/regulations impact the poor generally, some are salient wrt the urban poor: • Sec 283 IPC: Danger or obstruction in public way or line of navigation: This provision is used extensively to extract rents from mobile vendors, rickshaw/tonga plyers, etc.

21. Laws… • Sec 34 of the Police Act: Prohibits any use of public places for halting vehicles, sale of goods, etc: This provision effectively renders illegal all mobile vending activity • Sec 109, 151 CrPC: Vagrancy: Used extensively to extract rents from the poor