Aformer investment banker who gave up a high-profile job at Citibank to return to India and work in the social sector, Ramesh Ramanathan has intimate knowledge of how markets can make a real difference for the poor.

Janalakshmi Financial Services, an urban microfinance company he set up in 2006, disbursed over Rs 250 crore in the year ending March 2011 in small loans to the urban poor. Last year he started Janaadhar, a housing venture that is among the country's first to sell homes at about Rs 5 lakh to low-income consumers.

Ramanathan, who is curating this series on making markets work for the poor, speaks to ET about the need for a sustained debate on whether markets can promote inclusive growth.

What does 'making markets work for the poor' mean?

I think we are at interesting cross-roads in India. Liberalisation in 1991 brought in a more market-friendly approach to economic growth, reducing the burden of regulations, bureaucracy and red tape, and unleashing the entrepreneurial spirit of the average Indian.

Today there is a clamour for the second wave of reforms. But if you look at the content of this new wave of reforms, it is still about the formal economy. It is about foreign investment in retail, financial sector reforms, and insurance reforms and so on. Nothing wrong with it. Clearly the formal sector of India's economy does need lots of reforms to ensure that it is competitive.

But we need to also keep in mind another India. The framework that we seem to be working with is that the formal economy needs reforms but for the poor we will give entitlements. Instead we need to actually think if markets can work for everyone.

You need a set of reforms for the formal economy and similar reforms to make the markets work for the poor. If we take that approach, we will think about reforms and markets differently, unleashing the power of millions of Indians. This is the idea of making markets work for the poor.

If we don't do this, what is the danger?

There are multiple dangers. Many people, including economists, have spoken of two potential scenarios for India. In one, we truly embrace our economic possibilities and emerge as the second-largest economy in the world in the next 30 years or 40 years.

Another possibility is that we get trapped in a middle equilibrium, like many countries have in Latin America, and we don't realise our potential.

What is the key risk? The central risk is that not every Indian is participating in the economic growth in the same trajectory. The danger is that if we don't think about markets working for everyone, we will be actually compromising the trajectory of India's long term growth.

The second danger is political. If we don't take a path where markets work for the poor we will end up creating a self-reinforcing argument that markets are only for the rich and the poor will have to rely on entitlements.