The Analysis and the Message

Crisis is a natural corollary of economic growth.  India has a particular economic history and business geography, where the “top of the pyramid” is more visible than the “bottom of the pyramid”.  The enterprise structure in the country is characterized by the hegemony of the corporate sector.  During normal times, everybody talks about the stock market and of the performance of blue chip companies.  However, in exceptional cases, as we have today, when the top of the pyramid crumbles, throwing large number of people out of employment, opportunities at the bottom of the pyramid, ie. the smaller enterprises and income opportunities, become an area of active interest.

In most parts of the world, and especially in countries like USA, smaller enterprises, just as in India, have a significant role in terms of numbers, as also the employment opportunities they provide.  However, India’s industrial structure is unique.  Unlike in other countries, India has a relatively strong manufacturing sector, in which the role and linkages of small scale units are decisive.  Even when the large companies come out with substantial figures of production and export, the actual production takes place, in a large number of smaller companies.

This production structure has significant implications in a crisis situation.  The implications are two fold:  1) the smaller enterprises, just like ants and flies, can foresee tremors and economic calamities in the economy;  2) the smaller units, though much less visible and articulative, can salvage the top of the pyramid, (ie the corporate sector) during times of crisis.  The reason is that, they are not simply service providers for the corporate sector, but are vital links in the manufacturing chain as well.

This is not an over-generalization on the powers of SMEs.  The SMEs are generally powerless and invisible in the policy platforms, as also in the eyes of the media.  But they have a potential to salvage an economy in crisis.  But, in order to play such an instrumental role, however, it need to get adequate public policy support. 

The praxis, however, is not that sweet.  Public policy is often hostile; so also, the attitude of the corporate sector.  But, there are occasions when history turns around.  It is now in the interest of the corporate sector itself to salvage and support SMEs.  Or else, the economy will be in trouble.  This imperative has been increasingly realized by the corporate sector.  But, it is doubtful whether public policy has realized it properly.

ISED predicted this crisis an year back, through India Micro, Small and Medium Enterprises Report -2007.  It has now come true.  

“…………..Despite a commendable growth rate, and the associated structural changes that are taking place in the MSME sector of India, the impending tendency towards a world recession, triggered by such tendencies in the US economy, pose threats to this sector.  This points at the need for acquiring a significant internal resilience which this sector should necessarily acquire.”

(India Micro Small and Medium Enterprises Report 2007, Page No. 87)

The rationale built up on by MSMER-2007, was based on a comparative analysis of the global scene, and calculations on SME performance in the country over the last two decades.  Going by the lessons from economic history, a major crisis was due in U.S. and Europe, even by 2002.  Such a crisis was managed or postponed through the conversion of the external sector of some of these countries into war economies.  The financing of war was managed through the gains accrued through export of defence equipments, as also through the gains of finance capital.  But, finance capital turned out to be the key harbinger of crisis as well.

By normal logic, SMEs are resilient.   As at the fag end of 2008, we see a major economic crisis engulfing the world, under which, the future course of SMEs are also increasingly called into question.  However, the report gives the message that SMEs are relatively resilient than the corporate sector, and therefore, they will evolve appropriate survival strategies. 

This report of 260 pages provides a detailed analysis of India’s SME sector, its strengths, weaknesses, challenges, and overall position in the economy.  India’s experience and the future direction of SME sector in the country are built upon the global experience, which has been discussed, in relation to major countries and geographical blocks in the North and the South.

The analysis of the report and further discussions have been arranged around three key themes, which are the leads of this year’s report:  1) the economic crisis and small enterprises;  2) the Obama Effect and its implications on SME development in the developing countries, and especially in India;  3) the financial inclusion drive in India and its implications for SME development, in the more specific context of the economic crisis.

1)  Economic Crisis

The economic crisis of 2008, is rather different from the previous experiences of 1930s.  The course of this crisis poses significant threats for many developing countries of the world, as also for the developed capitalist countries.  However, India’s experience stands out.  While, the growth of the SME sector is a major development experience throughout the world during the past three decades, in most industrialized countries, this growth was a spill over of the particular type of capitalist development, where outsourcing of services became a major trend.  Therefore, even when more than 90% of the firms are SMEs, the bulk of them are involved in services.   On the other hand, in India, we have a hybrid manufacturing sector where, the role of manufacturing SMEs are much larger than elsewhere.  The Report has identified thirteen sub-sectors which are seriously affected by recession.  It examines the impact of the global slow down at five levels:  1) macro level; 2) cross-sectoral level; 3) spatial level; 4) sub sectoral level; and 5) firm level.  The Report’s analysis at these various levels indicates a significant slow down of activity.  Even then India’s position, given its significant capabilities, is not that precarious.  We will have a mixed experience where many units will die, but many new firms will also come up.   The SME sector, however requires immediate policy intervention, targeted at confidence building.  Confidence building is the mantra of the Report, the initiative for which, has to come from the government itself.

2)  The Obama Effect

While the SME sector in India will have to suffer a lot under the present global crisis, it visualizes a resurgence of the sector, from the ashes of the crisis.  The global crisis will lead to a non-confidence in the older paradigm of development, driven by finance capital.  Naturally, other experiments of business organization will emerge, where SMEs will have a significant role to play.  New enterprise solution will emerge.  Mergers and acquisitions, which were characteristic of corporate capital, will gradually spread to the SME sector as well.  In such a situation, India, given its larger capabilities, will be a country to benefit most, as we have a better manufacturing base.  Moreover, in the agenda of donor assistance program for enterprise development, India is likely to have a decisive role.

3)  Financial Inclusion and Beyond

Finance is going to be a big problem for SMEs, because of the drying up of external commercial borrowings (ECBs), as also because of the enhanced trade-off between SME financing and other forms of financing by the banks.  In a recessionary situation, and given the prevailing prudential norms, applicable to banks, directives of the RBI relating to priority sector lending, are not likely to yield significant results.

Innovations in banking are likely to take a back seat.  Public sector banks, who have ‘salvaged’ the economy, are likely to turn into a new financial aristocracy.   Will it lead to a major set-back to SMEs?  Logically yes.  But one need to study the trend at the grass root level.

Another critical area is micro finance.  This is the time for the micro finance movement to reinvent itself.  If not, the legacy of the past one decade is not likely to continue.

Recommendations of the Report

The Report comes out with some concrete recommendations.  On the economic crisis, the Report makes recommendations for action at the above five levels.  On the Obama effect, it perceives significant opportunities for India.  On financial inclusion, and credit flow to the SME sector, the Report foresees a difficult path ahead.

The Report identifies the government’s proactive role as a key agent of confidence building under the present crisis.  It also envisage the potential of utilizing new opportunities for SMEs, under the present crisis situation.

A key suggestion of the Report is the setting up of SME Intelligence and surveillance units at the national and state level, which should help to mobilize the expertise of various stake holders and experts to collect field level feed back on a war footing and to initiate action urgently.

The Report which makes concrete suggestions on what to do under recession, provides a direction for various stake holders.  But there is much more to be done in terms of very concrete action points at all these levels.    

The Report also advocates a redefinition of the role of the voluntary sector and its enhanced involvement in public enterprise development programmes.

Dr. Jose Maurel, Director, Special Advisory Services Division, Commonwealth Secretariat, London,  applauded the India Micro Small and Medium Enterprises Report 2007 for its content and intent. “Invisibility syndrome, the key constraint of MSMEs, as identified by the ISED Small Enterprise Observatory, which brings out this annual Series, need to be addressed with the help of visibility-enhancing initiatives. The MSMER Series stands out in this regard”, he said. “It is a well researched document, written in a comparative international perspective. As such, it provides food for thought, not only to Indian policy makers and practitioners, but to the international community as well”, he added.

The Commonwealth Secretariat Chief received the first copy of the Report from Mr.A.C.Jose, Chairman, Coir Board, the Chief Guest of the Commonwealth – India Small Business Competitiveness Conference, on December 5, 2007.

In MSMER 2008 has identified 13 key sub sectors, that have been seriously affected by the recent economic crisis. The crisis in these subsectors have serious employment consequences, as also problems relating to Local Economic Development.

The India Micro, Small and Medium Enterprises Report 2008 has come out with some shocking revelations on the state of India’s SME economy, in the specific context of the current economic crisis. The report underscores the “perceived crisis effect” as the villain of the piece, which need to be addressed through, SME-specific intervention programmes. The report implicitly says that, the packages announced by the Prime Minister and the Reserve Bank of India, are not likely to yield significant results. The report which makes an assessment of the impact of the economic crisis, in terms of its five dimensions, ie, macro level effects, cross sectoral impacts and firm level impacts, has identified 13 crucial sub sectors, which have already been seriously affected. The report, which touches upon several functional areas of SME development.

The innovativeness of the report, lies in the observatories initiatives to predict this crisis, more than an year back.
 

Cochin, December 5-6, 2008)

Having deliberated on the twin roles of SMEs, as wealth generators and socially responsible economic entities, we, at the International Conference on “SME Social Responsibility and Opportunities at the Bottom of the Pyramid” resolves the following road map and action points, based broadly on the global experience, but more specifically in a context of the global crisis and the related imperatives of developing countries:

• The visibility of the SME sector in the policy platforms, despite public pronouncements on its role and relevance, is much limited.  The experience of the economic crisis offers a logical ground for articulating the case for enhanced visibility for this sector.  Visibility need to be translated in terms of: 1) separate nodal Ministries; 2) maintenance of dedicated Funds; 3) effective advocacy mechanisms; 4) State of the Sector Reports; and 5) periodic reporting to the Parliament. Some countries have made significant achievement relating to a few of these points. However, scaling up of these achievements and sharing of experience among countries, has much greater significance during these times of global economic crisis.

• The articulation of the case for the SME sector has improved during the past one decade.  However, the thrust on key streams, such as, micro finance, entrepreneurship development and technology development have not led to a significant synergies, leading to more concrete action.  These key functional areas of   intervention, need to be developed meticulously and with focus on linkages, in order to ensure tangible results.

• SME promotion need to get increasing focus in the CSR agenda of the corporate sector.  Appropriate amendments to the Income Tax laws of countries may help to influence corporate strategies. Besides, the business for an SME-focused CSR need to be properly articulated, in order to attract the corporates to this vital area.

• There are several cases of success stories in community enterprise in the developing countries.  This demands development of an appropriate theoretical framework and relevant social enterprise models to the context of developing countries.  This obviously should be based on in-depth research on the ground level experience of these countries.

• Cleaner production models in the SME sector can make a significant social impact.  However, there are not many SME specific public programmes in this area.   The priority given to global warming as a key global concern, provides a conducive environment for the development of entrepreneurship which is sensitive to cleaner production lines. The present state of technology in  individual plants and  industrial clusters can be improved on these lines, preferably on a public-private partnership mode.

• There is also a significant scope for developing a cleaner production agenda around MSME .They should be encouraged to focus on waste management, environment friendly production processes, thereby enabling them to contribute in a drive towards reducing social costs, and ensuring sustainable development.  Policy environment should be fine tuned to enthuse the SMEs and social enterprises to enter this new area.

• Despite the presence of several responsible entrepreneurship models in developing countries, their contribution often does not get reflected in the National Accounts Statistics.  The initiatives in India of the Central Statistical Organisation (CSO) , to capture the economic contribution of the voluntary sector and their activities  is commendable.  However, such an exercise need to be more focused. The UNDP, which was instrumental in this project, need to play the lead role in disseminating the Indian experience in other countries as well.

• The general threat perception on the SME sector, in the context of the global economic crisis, is something which needs close examination.  A proactive interventionist role of the government in this context is crucial. The key action points identified by the India Micro, Small and Medium Enterprises Report 2008 (MSMER- 2008), in this regard deserve active consideration. MSMER 2008 advocates a massive infrastructure progamme which is closely targeted to SMEs.

• While entrepreneurship development is often used as a catchword, its benefits and modalities are not properly communicated among various stake holders.  Mainstreaming and strengthening entrepreneurship education, with significant focus on appropriate curriculum development and research, should get priority.

• Kick-starting entrepreneurial activities at the bottom of the pyramid is a vitality in the context of the present economic crisis.  We feel that a new culture of SME development will emerge from the ashes of the economic crisis. This Conference perceives the emergence of a new world economic order emerging from the present economic crisis where, SMEs play a much greater role and influence than what we have today. This message should be properly understood by all stakeholders. This message should also be properly disseminated as part of a confidence-building exercise.

• Responsible business is not a concept bereft of political economy connotations.  This connotation should be clearly understood and strategies need to be evolved for the specific context of each country.  However, ideological predilections should not stand in the way of debates in this area.  Academicians and policy experts have a key role to play.  This Conference recommends that, helping the SME sector to thrive over the present economic crisis, should be the prime goal of economic policy in developing countries.  This is vital for salvaging these economies as such.

• This Conference recommends the setting up of a Surveillance and Intelligence System for the SME sector at national and sub-national levels.  At the international level, the lead role in this context has to be shouldered by the ILO, the international organization having Local Economic Development (LED) as its key thrust. 

• The SME economy should be declared as a powerful instrument for maintaining effective demand and thereby mitigating the present global crisis.  This message should go down from the ILO and national governments.  While recommending this, we also admit that SMEs will be seriously affected by the crisis.  The mediatory role in this case should come from the governments. The governments should come forward with a massive SME Regeneration Programme.

• The fact that the majority of the units in Special Economic Zones and Industrial Parks in India and in many other Countries are SMEs, demands a special policy preference and package for these units. This may also provide an opportunity to channelise remittances of non-resident Indians under the present economic crisis (Action in India: Ministry of Commerce and Industry, State Governments)

• The initiatives of the Global Compact, as also the thrust given by the EU Charter, indicate that, the SME social responsibility agenda will be mainstreamed in the near future.  Anticipating such changes, voluntary business codes focusing on the principle of “triple bottom line” should be introduced by the Government of India.  Such a code should be developed, taking into consideration, the specific circumstances and imperatives of each country. Such an agenda should be dovtailed into the International Cooperation programmes of these countries.

• The so-called ‘invisibility syndrome’ is a key constraint on the SMEs in most countries.  Showcasing best practices, by the various state and non-state actors can be a first step in disseminating best practices. Initiatives, such as ‘State of the Sector’ Reports and ‘SME Observatory’, as initiated by the ISED, should get public policy support and patronage by governments.

• Entrepreneurial initiatives by members of socially marginal groups such as tribals and craftsmen is a new area that require detailed examination.  Modeling of such ‘transitional entrepreneurship’ can be a major step in experimenting better models of inclusive development. This has also implica