Pain at the Bottom of Pyramid
Fortune lies at the bottom of pyramid. This is being told to us repeatedly by reports, books, media etc. Yet, why there is so much lackadaisical attitude by the authorities towards the bottom? There are reports which says that MSME sector was not that much affected during the crisis as is the common perception (see this)
The paper says:
Comparative performance measure index for micro and small scale (MSEs) items and non- small scale (Non-MSEs) items is constructed to evaluate the performance of the industry groups during the period 2001-09, with a particular focus on the slowdown period of 2007-09. Econometric analysis is then performed to explain the causal factors behind variations in the MSE production index. The paper finds evidence that the cyclical slowdown in the industry that set in during 2007-08Q1, retarded the pace of growth in MSEs as well as Non-MSEs. However, MSEs have recorded relatively better performance than Non-MSEs during the slowdown period at least in the ten items under review. Econometric analysis shows that both domestic and external demand bears a statistically significant influence on MSE output. However, the impact of domestic demand is comparatively stronger. Interestingly, credit to MSEs has been found to be very significant, although the sign of the coefficient (negative in this case) is contrary to theoretical expectations.
I have one reservation. How can you club Micro with Small and look at them at an aggregate level? The statistics may hide the pain at the real bottom or at the bottom of bottom. See today's Busines Line editorial. It says:
The Karnataka numbers point to what one might have suspected anyway — that the bulk of the credit has been cornered by medium-scale units.
I suspect this may be a pan India phenomena. We need to nurture the bottom. The data must be available at a very disaggregated level in regular frequency by RBI or by Ministry of MSME. Let's segregate the first M from the MSME. Fortune lies there and we must focus on Micro enterprises. That is the way to provide employment to vast rural youth.
Labels: Policy talk
posted by Manu at 12:25 AM
3 Comments:
Actually. The important role of microenterprises in the development of the economy is widely acknowledged. The micro, small and medium enterprises (MSMEs) are estimated to contribute 8% of the country’s GDP, 45% of the manufactured output and 40% of its exports. Among MSMEs, microenterprises display a high degree of heterogeneity. India is estimated to have more than 26 million MSMEs . While a few of the MSMEs operate as registered entities (with at-least minimal registration required as per the taxation laws) a large majority (94%) of them operate as very small unregistered proprietary concerns owned by micro entrepreneurs.
These MSMEs are estimated to provide employment to about 60 million which is evenly distributed across different geographies. Among the MSMEs the unregistered ones provide for nearly 83% of the total employment attributed to MSMEs.
On the basis of the data quoted in the PM's Task Force (NCEUS data quoted from the Report of Prime Minister's Task Force, on Micro, Small and Medium Enterprises,
Submitted to Government of India, January 2010.) :
1. The average employment per unit among the unregistered enterprises was 2.05 persons – with the average being 3.5 for the manufacturing enterprises and 1.5 for those in the services sector
2. The average employment per unit among the registered enterprises was 6.5 persons – with the average being 8.4 for the manufacturing enterprises and 2.6 for those in the services sector
The report of the PM’s task force states that a large number of unregistered enterprises have been established in the informal or the unorganized sector. These enterprises:
1. Are typically established through own funds or funds obtained through non-institutional sources;
2. Lack managerial bandwidth;
3. Do not have established channels for marketing and
4. Are centered around a single traditional technology.
Furthermore, according to the National Commission for Enterprises in the Unorganized Sector (NCEUS), the real estimated number of unorganized enterprises, which employ less than ten workers is 58 million, with employment generated of 104 million persons . However, more than half of these are classified as self-employed. Thus, the in addition to the 24.5 million unregistered enterprises, more than 29 million “self-employed” complete the picture of the microenterprise landscape in the country. The NCEUS adds, “A large segment in this universe of self-employed consists of those who are engaged in non-farm activities. This segment predominantly consists of own account enterprises, i.e., where there are no hired workers and are run by self with or without the help of unpaid family members. The own account enterprises can be distinguished into those running within households and those outside the households. The household enterprises operate on the basis of family labour – organizing production on its own, acquire its own raw material, use its own machinery and tools and market its products. Apart from own account enterprises, this segment also consists of enterprises having hired workers between 2 to 9. Very often, these enterprises are located in clusters but function independently without inter-firm linkages.”
It has been widely acknowledged that bank- lending to microenterprises has been inadequate when compared to the financing needs of these enterprises. The report of the Prime Minister’s Task Force on Micro, Medium and Small Enterprises finds that they face some common problems, which include:
• Lack of availability of adequate and timely credit;
• High cost of credit;
• Collateral requirements;
• Limited access to equity capital.
Its safe to assume that these problems, particularly those related to credit, are even more severe for the unregistered microenterprises, and they have insignificant access to bank-financing. It is in this light that access to finance as well as business development services become critical for their formalization and growth. The Microfinance Institutions (MFIs) can play a vital role in addressing this need.
Thanks. Could you sometime lay out a plan as to how a rural youth with a bankable idea can start a business and how can micro finance organization come to his help? We have heard a lot about MFIs and their positive role towards building the rural economy. Still there are lots of doubt. As an expert in Micro financing, can you simulate a scenario or can you give a live example. That would be great help to many people. Also, as an important stakeholder of MFIs, could you address the issues related to interest rate? In some cases, the annualized interest rate which MFIs charges is usurious. Then, how they are different from moneylenders. These are general concerns. It must be explained. Is there any radical reforms required in this sector or things are perfectly rosy? Should the MFIs go public? Is there any necessity? Well, you may take up these one by one in your leisure time.
Sure I would like to do that. Interestingly, RBI's paper finds a negative correlation between credit and MSME output. M2i recently did a research (50 odd microenteprises operating in the Delhi cloth cluster)for GTZ and one of our findings was:
"When only assets are financed and the microenterprises do not have access to the required levels of working capital, idle capacity is created. In the absence of working capital, entrepreneurs find it difficult to utilize the increased production capacity to their advantage. Thus a working capital component should also be provided in addition to asset financing."
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