The Reserve Bank of India (RBI) Governor Raghuram Rajan comes across on television as the savvy voice of financial street smarts, but his 11 August speech in Mumbai on “Finance and Opportunity in India” showed him to be confused and out of touch with Indian realities. The first sign of this was his observation that because life expectancy in India was lower six decades ago “it is safe to say that most Indians born just after independence are now no more.”

It is not safe to say that at all. Life expectancy is an average heavily weighted by high infant mortality in developing countries; it is not a measure of the actual longevity of those who survive.

That conceptual misstep is perhaps forgivable, but not Rajan’s explanation of why poor Indians keep re-electing corrupt politicians. “Their “tolerance for the venal politician is because he is the crutch that helps the poor and underprivileged navigate a system that gives them so little access.”

“While the poor do not have the money to “purchase” public services that are their right, they have a vote that the politician wants. The politician does a little bit to make life a little more tolerable for his poor constituents – a government job here, an FIR registered there, a land right honoured somewhere else. For this, he gets the gratitude of his voters, and more important, their vote.”

A footnote in the text crediting that view to an American writer in the early 20th Century underlined how vaguely it relates to India; our corrupt politicians endure not because they help the poor but because they exploit the prevailing dynamics of caste, community, illicit funding and venal mass media.

Given that broad misreading of Indian reality, it is not surprising that Rajan’s argument for financial inclusion is dicey. He believes that giving the poor money instead of public services such as subsidized food, public schools and hospitals will be “liberating,” freeing them on the one hand, from the corrupt politician, and on the other hand, allowing them to “patronize” private providers newly respectful of their financial clout.

Rajan discounted the fears of some NGOs that cash transfers will be misused and noted several other problems that might crop up. However, he ignored the most likely outcome of a cash transfer system: that as with any other public service for the poor, corrupt politicians will steal much of the money and cut deals with private providers to cheat the intended beneficiaries.

His take on what cash transfers will achieve was rosy: they would “help the poor out of poverty and towards true political independence.” Credit and advice “to the entrepreneurial amongst the poor,” and giving households “the ability to save and insure against accidents” would free them “from the clutches of the moneylender” and “set them on the road to economic independence, thus strengthening the political freedom that good public services will bring.”

I don’t quite understand how political freedom will be strengthened by giving the poor - some 60 per cent of the Indian population - “unique biometric identifiers” linked to bank accounts into which the government makes regular transfers. In fact, such a system is likely to make the poor incapable of resisting official pressures on any issue and that could tip the country quite easily into a bureaucrat-controlled fascism.

Those concerns were accentuated by the clarity with which Rajan stated the interest of the corporate elite in the whole matter. There “should be profits at the bottom of the pyramid … the government should be willing to pay reasonable commissions punctually for benefits transfers, and bankers should be able to charge reasonable and transparent fees or interest rates for offering services to the poor.”

It is amazing that this regressive proposal has been unveiled at a time when there is a clear alternative, the democratization of the financial sector through crowd-funding.

So far, the only action the RBI has taken on crowd-funding has been to limit participation to Internet users who have demat accounts (perhaps in a bid to protect people without experience in investing). But there is need for much more pro-active action to realize the potential of changes that will transform all economic realities and put traditional financial institutions on the path to extinction.

To see what must be done, consider a concrete situation: achieving Prime Minister Modi’s vision of housing and proper sanitation for all Indians.

Those goals cannot be met in a country as poor as ours if we rely on conventional mortgage/public financing, but are well in reach with innovative crowd-funding policies and mechanisms. How?

I suggest the government establish a web-based National Housing Lottery and appoint a Commission to oversee the operations of a portal segmented by region, district, city and town. The portal would allow owners and developers to present housing units as prizes in lotteries. Each property would have a fixed number of tickets for sale, enough to reimburse the owner/builder and cover the costs of the lottery itself.

Such a system would finance a robust house building sector at no cost to the exchequer. Winners of the lottery would get housing for the price of a ticket, which should be set at no more than ten rupees each.

Those who win properties they do not want to use should be free to put them back into the lottery and get a fixed lump sum. That should ensure the continuing popularity of the lottery and also attract an international clientele: in effect, the entire world would be crowd-funding the Indian housing sector.

For the scheme to succeed, it will be essential to develop strict building standards and impose rigorous inspections for properties put up as prizes. Inspections should be left to a new business sector of small and medium enterprises operating within the framework of regulations set by the Lottery Commission. A zero tolerance policy on corruption, encouraging whistle-blowers and banning offenders from the lottery for life should help maintain high standards. Overall, the scheme will send the national GDP growth rate into the stratosphere and provide millions of new jobs at all skill levels.

Housing & Smart Cities

The rapid buildup in housing should dovetail with the government’s proposal to build 100 “smart cities” over the next decade, with policy-makers deciding on the look, feel and nature of development to suit location-specific human and natural environments.

This does not mean massive urban planning. On the contrary, it means little more than formulating a local consensus on the aesthetics of development and providing the relevant institutional framework for growth.

What will that entail?

To answer that question it is necessary to look at the profound impact on urbanization of the ongoing IT and connectivity revolutions.

Over the last four centuries, the growth of cities was driven by the need to realize industrial economies of scale: factory production required large volumes of raw materials (brought in by road, ship or train), plentiful and cheap energy, a large enough workforce and the ancillary services necessary to sell to mass markets.

All those factors are irrelevant to the urban areas of the Information Age. Silicon Valley in the United States, one of the most important economic hubs in the world, has little in common with America’s old “rust belt” manufacturing centres. Similarly, the giant film industries of India and the United States have no need for most industrial era infrastructure. Neither does tourism, now the world's largest “industry.”

In creating our 100 “smart cities,” the government might need to do no more than decide on an overall plan in areas where it will offer enhanced support and incentives to attract a range of preferred economic enterprises, including orchards, farms, flower gardens and entertainment complexes.

The detailed planning and building of the necessary infrastructure could be left to corporations, domestic and foreign, that have the necessary expertise and capacities. The government role should be to prevent corruption and ensure that contractual goals are met. (Any public finance necessary could be derived from small adjustments in the pricing of units in the housing lottery.)

Achieving clarity on where the country should develop what kind of smart city should be a high priority on the agenda of the new brains trust that is to replace the Planning Commission.