By Lalita Tyabji
July 18, 2014
One needed reading glasses to find the handloom and handicraft sector in the Union budget fineprint. It was slightly step-motherly treatment of India’s second-largest employment sector. Especially since it’s the only sector (note the president’s speech earlier this month at the National Master Craftsperson Awards) to show 30 per cent growth during an economic slowdown.
During the elections, a newspaper advertisement had Narendra Modi speaking of new economic prospects for India’s craftspeople and weavers. Those working in this neglected sector were delighted at its inclusion in the promised “achhe din”. The 12th Plan had offered little to craftspeople beyond the old worn-out “schemes”, with review committees given no opportunity to re-evaluate their efficacy and impact, or to revamp them for changing times and markets.
Despite unanimity that livelihood creation and skill development were an urgent priority, India’s economists and planners seemed to see only urban solutions. They were blinkered to the opportunities the craft and handloom sector offers — not just to the millions of existing craftspeople and weavers, but the thousands of ancillary small-scale industries that can be created around craft — raw material cultivation, cotton, silk and wool spinning and dyeing, dry cleaning and packaging plants, wood seasoning depots, loom, forge and tool makers, etc — creating potential employment for the 13 million new job-seekers entering the marketplace each year.
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What the above approach achieves is a preponderance of entrepreneurship schemes and subsidies forced upon people who are unwilling entrepreneurs. For this demographic, the risks of entrepreneurship can neither be abated through "skill development" programs, nor through the absurdly inadequate 2 week long entrepreneurship development workshops that are pre-requisites for business subsidies under various livelihood schemes.
The risks of entrepreneurship for this demographic largely stem from inadequate access to water, electricity, and mechanised equipment, combined with inadequate finances that can allow one to access the above through alternate, private channels when public services do not work (for example, a generator, when electricity fluctuates, or a group-owned borewell when the local government is not supplying adequate tap water). Then of course, transportation and roads are problems for entrepreneurs at all scales of enterprise. (See here for my post on the list of problems faced by micro entrepreneurs in the area where I work).
By Shamika Ravi
May 1st, 2014
Within the Indian context, the MSME sector is a growing and significant segment of the economy. Based on official figures from the MSME ministry (2008), this sector contributes 8 per cent to the national GDP, comprises 50 per cent of India’s total manufactured exports, 45 per cent of India’s total industrial employment and 95 per cent of all industrial units. Post economic liberalisation in 1991, there have been major policy changes at the federal and state levels, aimed at consolidating and developing this sector.
The main story underlying the results points to the fact that while state governments devise special policies targeting the growth of the MSME sector and channel significant resources into these, it is the general development policies that are having a big impact. Our results indicate that improving general access to finance has a bigger impact on the growth of the MSME sector than targeted financial subsidies. We also found that broader improvements in infrastructure of a state go much further in the development of MSMEs than setting up SEZs for the sector.
The result that is particularly interesting concerns financial subsidies to the MSME sector. We found that pumping more financial subsidy into a sector is not necessarily the best way to encourage its growth. In fact, the result yields a deeper insight when we juxtapose it against the strong positive impact that the availability of bank branches has on MSME development within a state. The increased presence of banks and raising subsidies to a sector are ultimately aimed at improving access to credit for entrepreneurs within that sector. But the subsequent impacts that they have on entrepreneurial outcomes are very different. The data revealed that while banks improve the growth of MSMEs, government subsidies are negatively related to all performance measures.
What can explain the drastically opposing effects that banks and financial subsidies have on entrepreneurship? In my opinion, it could be the nature of credit targeting. While banks are providing finance to viable businesses, government subsidies might be channelled into unproductive and non-feasible ventures. Contract theory would also point to various other inefficiencies that emerge when credit is available at below market rates. Jointly, the results strongly suggest that the role of the government should be that of a facilitator . . .
The results imply the core competence of the state lies in improving the general environment through investments in physical and financial infrastructure and strengthening institutions which provide a framework to guide entrepreneurs within India. When a country has clear explicit and tacit “rules of the game”, uncertainty is reduced, which then helps in nurturing entrepreneurship.
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