Impact of the SGSY

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Several other problems exist with the implementation of the SGSY. The

intended integration of activities of different agencies has not happened.

In most states, there was no evidence of proper planning that was crucial

to setting in motion the overall process identifi ed for implementation.

Selection of key activities was undertaken without involving concerned

agencies, including banks, as specifi ed in the guidelines. Project reports for

the selected activities were either not prepared or were highly defi cient. Even

the identifi cation of individual benefi ciaries and the formation of groups

lacked involvement of line departments and banks, as envisaged. There is

also no evidence of an overall shift of focus, as planned, from individuals to

groups, in part because implementing agencies have been unable to ensure

proper evolution of self-help groups and there have been delays in release

of funds to sustain their evolution.15

Subsidies combined with weak governance are an irresistible magnet

for corruption, and the SGSY is no exception with pervasive malpractice

by lower-level officials. State-wise surveys show a uniform pattern of

deductions made by bank offi cials, as much as 10 per cent of the amount,

on loans sanctioned under SGSY. With the cooperation of local offi cials,

banks have also made illicit ‘charges’ on the benefi ciaries. In other cases,

over 20 per cent of the subsidy component was charged under different

ways as ‘speed money’ or ‘convenience charges’. Several instances have been

found of local offi cials providing the assets to benefi ciaries, in collusion with

intermediaries, in contrast with the requirement that assets be purchased

by benefi ciaries from approved suppliers in exchange for cash payment by

the benefi ciaries.

Malpractice is pervasive not just at the micro-level of implementation of

SGSY. According to an audit test check of Rs 9.9 billion spent on SGSY

(of a total reported expenditure to date of Rs 30.6 billion) as much as

54 per cent of the funds (Rs 5.3 billion) were either diverted, misutilized

or misreported (CAG, 2003). Of the Rs 5.3 billion, about Rs 1.2 billion

were invested by the state governments in special term deposits, Personal

Ledger Accounts and Civil Deposits. Rs. 1.1 billion were accounted for by

infl ated expenditures, and the remainder were attributable to irregularities

in expenditure or misutilization of funds. This refl ects both extremely low

levels of governance in implementation and the desperate fi scal situation

in most states, which are seeking funds in any manner possible to fi nance

their defi cits.

The design innovation in SGSY – relying on self-help groups rather

than individuals – can help reduce leakage since the eligible groups are

to comprise only members classifi ed as poor under the administrative

identifi cation system. These groups are formed by a variety of sources,

including village development offi cials, village government representatives

and NGOs. This innovation can reduce leakage errors relative to those

in the predecessor IRDP and associated schemes that were as high as 25

per cent to 33 per cent. However, the formation of such groups is time

consuming and not always feasible. Groups, once formed, have to be in

operation for at least six months before becoming eligible for SGSY loans.

Often such groups cannot sustain themselves due to differences and even

suspicion amongst members, making it diffi cult for a poor household to

access the SGSY, and leading to higher targeting errors of undercoverage.

It is expected that such type one errors will diminish over time if there is

greater success in forming self-help groups. However, corruption and poor

governance appear to have been immune to the design innovations of the

SGSY. Their effect ultimately is to divert scheme resources to offi cials and

middlemen, leading to higher leakage.

Finally, moving from implementation to the impact of the SGSY, there

are important problems constraining creation of a sustainable productive

asset base for the low-income self-employed. Despite attempts at a holistic

approach, in practice there are no services available to support assets acquired

by the benefi ciaries, such as technical and advisory services and marketing.

Due to the limited ability of government departments in identifying dynamic

business opportunities, the implementation of SGSY has tended to focus

excessively on one particular type of asset, such as dairy cows or sewing

machines, and effective marketing of products is often diffi cult. In several

situations, the lack of adequate insurance for acquired assets, such as

livestock, can make it impossible for benefi ciaries to repay loans in case of

accidental death. The acquisition of assets that ultimately prove unfruitful,

due to poor decisions by the benefi ciary, inadequate support services, nonmarketable

output, or other constraints, can result in transforming a large

number of intended benefi ciaries from being simply poor, to being poor,

as well as defaulters to the formal fi nancial system.