Policy interventions go wrong

Friday, October 11, 2013

It is a classic case of a government policy going horribly wrong. It was intended to protect consumers’ right, but it ended up hurting them the most.

When the Andhra Pradesh government sought to restrict microfinance institutions’ (MFI) activities in December 2010, it was with good intentions. But the results were bizarre: “The average household expenditure dropped by 19 per cent, and the largest decrease was observed in expenditure on food,” says The real cost of credit constraints: Evidence from micro-finance, a recent paper from the Indira Gandhi Institute of Development Research (IGIDR) written by Renuka Sane and Susan Thomas.

In an email response to Business Standard, Susan Thomas says: “In our sample, we observe the average consumption expenditure of a little more than 13,000 households. In this sample, we see that the average consumption has fallen. We observe this fall, irrespective of the income bracket the household falls in. This fall is also irrespective of which region the household falls in (the data allows us to observe the average consumption in 14 different regions, seven of which are urban and the rest, rural). Of course, the fall is greater for the lower-income households and those in rural regions. But the analysis shows that on average, the households’ consumption fell.”

Source: Business Standard (link opens in a new window)