Karmayogi<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Imagine what life would be today in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />India if hire purchase had never been introduced. Lorries would be almost as rare a sight as they were in 1950, confined to the cities and larger towns. Bus travel would remain the luxury of the urban middle class, far beyond the reach of the masses and the rural areas. Motor cars would be few. Where lakhs of stone houses now stand, there would still be empty fields, paddy lands, and hutments. Just as the computer has revolutionised modern business by performing highly complex tasks in a fraction of the time and cost required by man, creating new jobs, new industries, new wealth in the process, so hire purchase has revolutionised commerce in India.

The traditional view that development is solely a function of capital has given way to the realisation that a new system or a new institution can have a greater developmental impact than thousands of crores of investment. The rapid proliferation of drive-in restaurants in the USA like MacDonalds, which has five thousand branches offering quick service meals at nearly the same cost as home cooking, is an example of a new system that generates billions of dollars of business every year.

In India the system known as hire purchase has played a parallel role, stimulating a dramatic growth in the road transport and housing industries. About 50% of passenger road transport and nearly all lorry transport is in the private sector. Since 1960 there has been a fivefold increase in the total number of motor vehicles. This enormous expansion was made possible by a system permitting the owner to make a 25% down-payment on a new vehicle and pay the balance in installments over several years.

More recently this system has been extended to the purchase of motorcycles and auto-rickshaws accounting for a twenty-fold increase in these vehicles in the last twenty years.

A similar expansion has taken place in the housing industry by permitting would-be home owners to borrow 75% of the construction cost and repay it by installment out of future income. House building which was once beyond the means of nearly the entire population due to the need for a huge lump sum investment, has now become possible for many more people with steady income and job security.

Actually the use of the term hire purchase for these activities is a misnomer inherited from the British who remain confused on this issue up to this day. The purchase of houses or vehicles on an installment basis with transfer of ownership at the time payment is completed, is properly referred to as a conditional sale, the transfer being conditional on completion of the payment schedule. Whereas hire purchase refers to a lease or rental transaction wherein the leasee retains an option to either return the property at the end of the lease period like any rental or purchase it for a fixed amount.

This system is known as lease purchase in the USA where it is widely employed due to certain tax advantages in transactions involving motor vehicles and office equipment. It has more recently been extended to the leasing of large office buildings and even industrial units. Internationally, lease purchase is being used by bank consortiums to finance large petro-chemical complexes in Asia for hundreds of millions of dollars.

By whatever name you call it -- hire purchase, installment loan, conditional sale, lease purchase -- there is vast scope for application of this very useful system in India to the benefit of both industry and the consumer.

Money, labour, raw materials and machines can only generate wealth when they are put to use; and it is one of the chief characteristics of the poorer nations that the bulk of their resources lie untapped or under-utilised. Hire purchase is a means by which a portion of this potential can be brought into productivity.

When a pump or tractor sits in a showroom for months, it brings no benefit to anyone. The same pump or tractor put to work on the field can bring new land under cultivation and produce new wealth from crops where previously there was none. All that is needed is a system that can secure a buyer for the pump salesman and provide a means for the farmer to pay for the pump out of the new wealth generated by its use.

Hire purchase is such a system and it can be employed not only to put new equipment into production but for establishing new industries as well.

The Government of Tamil Nadu has recently sanctioned a few crores for development of the jasmine and citronella oil industries. In both cases a simple oil extraction unit, which can be operated by any farmer on his own lands, costs only about Rs.25,000. The Government can arrange for fabrication of these extraction units and make them available even to small farmers on a hire purchase basis to be paid for out of earnings from production. A farmer with two acres of jasmine can easily pay for the unit in the first year of operation and earn a Rs.50,000 profit besides.

The same principle can be extended to stimulate the growth of many other industries where market demand is greater than present supply. For instance, handmade cardboard units can be established in industrial estates by institutions like SIPCOT for Rs.2 or 3 lakhs and leased to capable entrepreneurs or experienced engineers who could repay quarterly installments out of profits from the industry.

Two hundred years ago Adam Smith described in The Wealth of Nations the great spur to commerce in Scotland resulting from a new system of installment credit available to any individual who could procure two persons of proven worth as surety. This innovation permitted Edinburgh merchants to outperform their London counterparts to the great benefit of that country.

New systems of credit can play an equally beneficial role in the field of consumer credit. Poverty like depression is a vicious cycle which tends to perpetuate itself because it lacks the purchasing power necessary to stimulate demand and generate greater economic activity.

Consumer credit is a means to break this cycle by giving purchasing power to future income and thereby creating demand in the present which stimulates production, creates new jobs, increases wage incomes, and consequently further increases demand. Thus a positive cycle of economic expansion replaces a negative cycle of stable poverty.

The tremendous growth in consumer credit after World War I was an important factor in the development of mass markets for consumer durables and luxury goods, and in the overall rise in living standards in the West. The movement began in the USA and spread rapidly in Europe. The Soviet Union and other Communist countries followed in the 1960's.

Modern society has adopted many new forms of credit to suit the needs of the consumer public and business -- the credit card, the charge account, the installment loan, hire purchase, etc. The installment loan for automobiles and the house mortgage were the common early forms.

The credit card was first introduced in the 1940's by large American petrol companies. A customer possessing a plastic card issued by one of these companies, can present it at any of the company's petrol stations in the USA, and charge his purchase of petrol, replacement equipment, and repairs. The company then sends a monthly total bill to the customer by post and payment is returned in the post by cheque.

Later the same idea was extended to payment of restaurant and hotel bills, then consumer goods and durable goods. Today some of these credit cards are accepted for a wide variety of purchases including air travel, car rental and gifts by merchants on every continent.

With the latest developments in computer electronics, credit is more and more replacing cash as a means of exchange in the western nations. In 1945 American consumer credit purchases excluding housing mortgages totaled $6 billion (Rs.5000 crores). By 1950 the total was over $25 billion, representing 12% of personal income in the USA; and in 1979 the total exceeded $375 billion (Rs.300,000 crores) or 22.4% of personal income -- an increase of 36 times over 35 years. Of this amount approximately 25% was for purchase of automobiles on an installment basis. Mortgages are usually considered separately since repayment is over many years. In the USA mortgage debt is more than double the size of all other consumer debt, and together they equal about 2/3 of total disposable income.

While India lags far behind the West in this field, there is a growing consumer credit system here which has already made a substantial contribution to the living standards and comfort of many in the urban areas. Government servants and industrial workers who used to walk miles to work every day are now riding cycles purchased on installment basis. Higher level officers, college lecturers and plant managers have financed their scooters in like manner. Today it is possible to buy nearly every type of consumer product -- TV's, radio, clocks, mixers -- on credit.

Recently Co-optex introduced installment sales for handloom cloth at their retail outlets and found many more employees of government and private industry purchasing these goods.

The Diner's Club credit card, first introduced in America forty years ago for payment on restaurant and hotel bills, is gradually coming into use here, signaling the emergence of an entirely new way of life which requires a new legal basis.

What is needed now is to make these systems available to a much wider section of the population, to the weaker sections in the cities and villages, to enhance their purchasing power. This is especially important as a means to increase productivity and incomes by making the means of production, e.g. pumps, motors, sprayers, fertilizers, tools, carts, etc. available on credit and payable out of the greater future income these products can generate. This expansion can be facilitated by introducing new laws to define and protect the rights of buyer and seller alike. Britain established its first Hire Purchase Law in 1938 and there have been many more since.

As far as the seller is concerned he will extend credit wherever he is confident of recovering the money due him without trouble. The Government can pass a law in support of installment purchases backed by the security of an employee's pay cheque.

Suppose a government clerk, assistant engineer, college lecturer or factory superintendent earning around Rs.1500 wants to buy new furniture worth Rs.500 to be paid in 5 installments over 5 months time. A new law can specify a standard form of coupon, perhaps carrying a Re.1 stamp, to be filled in by the buyer for each of the Rs.100 installments and endorsed by his employer if the employer is willing. In case the buyer fails to pay any installment on time, the employer can deduct the Rs.100 from his pay cheque and pay it directly to the seller on presentation of the coupon.

This law would guarantee the right of the seller to recover his dues without recourse to costly and time-consuming legal action, thus increasing his willingness to extend credit to lesser known and lower income parties with permanent jobs.

Legislation is also needed to protect the buyer from unfair interest rates which are often difficult for him to calculate, by making the seller declare the actual simple interest rate, and also to define the rights of both parties in cases of defective merchandise or payment defaults.