Focusing on the small economies is the need of the hour


Strengthening village economy and MSMEs can help decrease the intensity of the economic slowdown, writes Amrita. S. Nair, as she offers a few suggestions to revive growth.

India’s growth fell below 5% this year from a robust 9.4% in 2007. However the reason for the slow growth needs to be traced if we have to ease the situation of economic uncertainty which has fuelled the slowdown.

India has been seeing persistent high inflation for a while. With slow growth this year and falling rupee the inflation rate is much higher with WPI (Wholesale Price Index) and CPI (Consumer Price Index) being 5.79% and 9.87% respectively which is a difficult scenario. Looking at the fact that inflation has been there for a while now, urgent measures for reducing the supply side constraints are required. CAD (Current Account Deficit) has been sounding as a fierce word now. CAD should not be a cause for concern especially for a country like India which cannot impose import control on the much needed capital goods. CAD is currently 4.9% of GDP which the Finance Minister has said will be reduced to 3.7% by 2014. Though the high CAD has affected investor sentiments resulting in capital outflows, it’s not a scary situation of 1991 as we have much more foreign reserves now then before.

The slow down in growth, high inflation and disturbing level of CAD has taken away some of the sheen from the India growth story. Considering the overall global economic gloom, India’s economic slowdown should not be considered irreparable. So relatively speaking, we are better off than many other nations including the developed ones. But no doubt we had negative growth because of which the take-off will be slow as we are currently witnessing. What we now see is natural given the hard monetary and fiscal policies that were taken some time back and its impact on the economy is being felt now. This coupled with slow global demand we face a tough situation. To top it, market sentiments on India’s growth has been negative. Though a little exaggerated, these sentiments have been successful in driving foreign funds out of India. So improving market sentiments and attracting foreign funds are necessary to increase reserves to be able to stand up against CAD. But this cannot be a long term solution to our problem simply because we shouldn’t rely heavily on the FIIs but rather make our fundamentals stronger. Driving up consumer demand should be the essential objective. Better supply chain management which can help curb unreasonable inflation and stress on research and development becomes an inevitable factor which will support the economy bounce back. At a time when our export growth has weakened due to weak global demand, it’s necessary that the government look inward for pushing up demand within the economy. With most India Inc. companies slowing down, the MSMEs which contribute to 45% of the manufacturing sector and 40% to the export sector should be given its due importance. Along with this the cottage industries which almost collapsed in an unbalanced economy, should be encouraged as well, as a part of boosting the village economy.

Boosting village economy

Various employment schemes and poverty alleviation programmes have been in place till date, but not all of them have been effective enough in meeting their objectives. Those schemes such as MGNREGA, Jawahar Gram Saridhi Yojna, National Family Benefit Scheme etc., though much lauded, have invited equally strong criticism as they are not seen as sustainable for employed workers in the longer run. These schemes do not make a permanent solution for unemployment or poverty. So they should be implemented with an objective of reducing the temporary problem of unemployment and avoiding extreme deprivation. We have to build a separate model of growth for our villages keeping in mind the available resources and how efficiently they can be distributed within as well as between villages. Improving village to village connectivity and village to cities connectivity is essential. Basic infrastructure needs to be built without harming the village environment and ecosystem. Promoting the cottage industries, handicrafts and other small scale industries viable in villages is inevitable and thereby by encouraging their creativity and ability we are strengthening their confidence. But we still need aggressive policies in this area. Strengthening our federal structure through decentralisation of power is the only way of empowering the local administrators. In other words the state governments and moreover the local government will have to be vested with more powers. In case of agriculture the local agricultural offices play a very important role of providing all the needed support and assistance to the farmers by way of spreading awareness about the latest techniques, supply of good quality seeds etc. Animal husbandry is also growing well in villages and in most cases is able to provide a permanent income to the families involved in this business. Product diversification like making curd, butter, cottage cheese out of the milk by farmers rearing cows is seen to be profitable. The self help groups mostly involving women in different kinds of business needs better assistance by way of introducing affordable as well as smart marketing techniques that are easy as well. Managerial and accounting problems are seen as prominent problems among the SHGs. Special programmes by the government to educate them on these skills and making them aware of its importance will help strengthen these groups. This task rests in the hands of the local and state bodies that are well aware of the conditions of the SHGs in their respective states. Bringing in basic technical skills in the enterprises of our villages will boost their business, without actually using any costly or highly modernised machines and equipment. With more rigorous measures from the state and local governments for improving village economics, the distance to self-sufficiency won’t be far.

MSME (Micro Small Medium Enterprises)

Worldwide MSMEs have significantly contributed to economic growth in many countries. In India this sector has been able to give employment to 73 million people inclusive of registered as well as unregistered SMEs. Even with economic slowdown MSMEs increasingly contributed to growth during 2009. When the economy slowed to 7.4% MSMEs grew from 8% to 8.8%. In Germany for example the local MSME, known as Mittelstand companies, contribute to about 50% of the country’s GDP growth. In case of Italy, SME clusters have played a major role in helping Italy to overcome the economic crisis of 2008. While in India the contribution of this sector to manufacturing is 45%, however the share of manufacturing in turn to the nations GDP is quite low at 15.2%. In the export sector they contribute 35% directly and, 15% indirectly in the form of production of parts and components of large finished exportable goods. Those that dominate our exports from this sector include sports goods, readymade garments, woollen garments and knitwear, plastic products, processed food and leather products.

Difficulty in availing credit has been one of the greatest constraints faced by MSMEs. Though there have been various regulations and measures by the RBI in regard to this, many commercial banks are not willing to extend credit facilities to them. It’s mostly the public sector banks that extend the majority of the credit needed in this category. In this context it’s important to remember that more than half of them are unregistered which implies that availability of credit facilities is really difficult for the larger section of MSMEs considering the fact that the registered ones themselves find it difficult to avail loans. Bringing the unregistered MSMEs into the formal sector through their registration will make things better for the unregistered ones. Also by not bringing them wholly in the formal sector has made us to underestimate their contribution in strengthening our economy. Apart from this, the lack of innovative marketing techniques also stands as a limitation. The recent slowdown too has reduced the export demand in the manufacturing sector. Encouragement and essential aid from the government for research and product innovation to the MSMEs will be highly valuable. Innovation in product packaging for exportable goods is gaining prominence. For innovation to happen in-house R&D is necessary. However this is not seen even at a satisfactory level in our MSMEs as they come with want of consistent funds. Government has to initiate immediate steps for prepping this up so that in the long run this will have tremendous positive impact on their growth. Every product needs to be reinvented in order to survive the increasing competition and sustain their consumer demand.

Innovations that help products adapt to the changing needs of the consumers can never fail to attract them. This in turn is the key to sustaining in a competitive environment. At the end of everything we realise the importance of investing in human resource! All slowdowns come with a cost to the economy in different intensities every time, so strengthening where we are weak is the solution for decreasing the intensity of the slowdown.


Amrita. S. Nair

The writer is an Economics graduate from Jai Hind College, Mumbai. She was an active member of the economics association of her college and have been a part of various group presentations concerning the economics seminars.