Microenterprise: easing the burden on India’s poor

31st July 2009

Simon Harding

This week, Shankar Acharya, the Indian government’s former Chief Economist, argued in the Financial Times that, “China is no longer a poor country, whereas India still fits that description.” Yet the growth and development it has seen over the past twenty years has seen it move away from a centrally planned economy towards a more business friendly market system with private enterprise flourishing and GDP growth averaging 4% since 1980.

The transformation is well documented. New industries have developed. ICT, telecoms and financial services grew; taking advantage of the mounting numbers of well educated, technologically literate university graduates. Established companies, like Tata and the Aditya Birla Group, took advantage of the new pro-business environment by expanding their operations both domestically and internationally. Indian businesses have, it seems, have moved beyond providing cheap outsourcing options for big western firms and have arrived as serious players on the global stage. 

All this leads Nirmalya Kumar, of London Business School, to argue, ‘for the developed world and its companies, the era of India as a major overseas investor is here’. World class Indian businesses, such as Satyam Services, TCS and Wipro, will compete with western firms for big international contracts.

Kumar sees a shift in global attitudes: away from the tired, conservative and fearful West, towards a newly confident, diligent and dynamic East, driven by India and China. ‘Today Japanese bookstores are filled with such titles as ‘Extreme Indian Arithmetic Drills’ and ‘The Unknown Secrets of the Indians’’, claims Kumar, ‘Indian education is in fashion as Japanese parents in Tokyo rush to enrol their children in English-language schools taught by Indians and other Asians. The thought of viewing another Asian country as a model in education would have been unheard of a few years ago’.

The global economic downturn does little to dampen Kumar’s optimism. ‘The 2008 financial crisis only reinforced the fact that the growth is in the East and the debts are in the West’. Indeed, the Indian banking sector was not overly exposed to the US sub prime crisis and, although India’s 2009 GDP growth forecasts are down 3% on last year, the projected 5.2% GDP growth remains impressive (considering many OECD countries are facing growth contractions). Some financial sector jobs have been lost, but the numbers are small.

Yet despite the global reach of India’s global businesses, 40% of India’s 1.15 billion people live in extreme poverty and 26% live below the Indian government’s poverty line of Rs 12 per day (£0.15p). As many as 80% of Indians rely on insecure informal work in factories, workshops and farms; even well established firms use ‘unorganised’ labour on short-term contracts.  According to Acharya, just 16% of China’s population live in extreme poverty. 

In the words of Indian economist Jayati Ghosh, the twenty year economic boom benefited primarily the richest 20% of the population, leaving most untouched by the increasing national wealth, yet still vulnerable to the global economic crisis. ‘The informal sector has been badly hit’, explains Dr Sud and, ‘since the majority of the Indian economy is in the informal, unorganised sector, India has cause for concern’.

So how well is India placed to weather the storm and grow in a way that reaches out to those below the poverty line?

First, the role of the government cannot be understated.  ‘Unfortunately, the international financial institutions and the Indian government have been reluctant to acknowledge or even try and enumerate the scale of the crisis that is looming for the poor’, says Dr Nikita Sud, an academic at Oxford University who has written extensively on economic development in India, ‘instead, we keep hearing rather optimistic forecasts for a recovery’.

The central government’s National Rural Employment Guarantee Scheme (NREGS) provides some security for the rural poor by offering a guaranteed number of days per year working on local state projects. In 2008 NREGS expanded to cover the entire country, but implementation is still inconsistent, with some states pursuing NREGS projects with considerably more enthusiasm than others. However, NREGS does not cover the urban poor - the group most likely to take the brunt of job losses – and is slow to register returning migrant workers from urban areas. ‘That the budget for this programme has been significantly raised in the last budget seems to acknowledge its potential, especially at the current juncture’, comments Dr Sud, ‘but this programme alone is not going to absorb the millions that face unemployment for well beyond the length of the crisis in the West’.

Second, the differential impact on different sectors and communities needs to be thought through.  According to Vijay Mahajan, CEO of BASIX India, an organisation focusing on improving the livelihoods of the poor, the effects of the downturn are not evenly spread across all sectors which means that some communities are more affected than others. Agriculture, basic construction materials and low end clothing are largely unaffected, as the domestic markets on which they rely remain buoyant, export orientated industries are hard-hit. 

Alongside this, those who remain in work face wage freezes of even cuts. Yet despite near-zero inflation nationally, the prices of food and basic medical supplies are rising rapidly. The majority of both the rural and urban poor are net buyers of food and are adversely affected by the price rises as they spend a comparatively large proportion of their income on feeding themselves and their families. The global economic downturn has severe repercussion for the food security of India’s poor and hits those employed in export-orientated industries doubly hard.

What is the role of enterprise and entrepreneurship?

The domestic market for food, basic household goods, services and affordable clothing remains largely insulated from the global crisis, which provides a healthy environment for new and existing micro-enterprises which operate on a local scale. With waged employment becoming scarce, micro-enterprise plays a useful role in providing self-employment and a stable income to the poor. The potential of microenterprise is enhanced by India’s booming microfinance sector. Microfinance Institutions (MFIs), often not-for-profit NGOs, make loans to poor people, who do not have access to commercial lenders due to the small and commercially unviable loans they require and their lack of collateral. These loans can provide the initial financial thrust in founding a small business, providing a secure and more reasonable alternative to local money lenders.

There are over 1,000 MFIs in India. Together they lent around £12.5 billion in microloans in 2008. Many large commercial lenders in the West are struggling, but India’s microfinance sector remains upbeat. Due to high loan repayment rates – often nearing 100% - and diverse sources of finance, both from charitable donations and commercial lender, MFIs are still able to raise funds for their lending activities despite the financial crisis. ‘One good news in the middle of all the bad news: microfinance still works’, says Muhammad Yunus, co-founder of the Grameen Bank, a leading MFI, and winner of the 2006 Nobel Peace Prize. India’s MFI appear well placed to back microenterprises during the downturn.  

Employment in the organised sector has struggled to keep pace with India’s rapid population growth, long before the current downturn began, argues Ajaya Mohapatra, head of We The People, an MFI based in Delhi. With GDP growth failing to delivery corresponding rises in formal sector employment in boom times, the more sober growth forecasts for the coming year will see job growth in the organised sector trail far behind the growth of the workforce. Mohapatra believes that self-employment through microenterprises has a vital role to play in absorbing this rapidly growing workforce: ‘In order to address the issues of unemployment and jobless growth in India, especially in a time of global economic downturn, there is a need to promote micro-entrepreneurship, especially amongst women and youths’, he maintains.

But credit alone is not enough, claims Mohapatra. Budding entrepreneurs and struggling small businesses need a range of skills, which goes far beyond the trades on which their nascent businesses are based. ‘It is important to provide microfinance plus service which include multi-skill development amongst women and youth either to set up a microenterprise or expand their small business’, he explains, ‘at the same time these budding microentrepreneurs need hand-holding support initially in terms of business mentoring to develop or expand their businesses’. True to his word, We The People offers business training and mentoring to its customers, who borrow loans of up to Rs 30,000 (£380) to set up or develop microenterprises in the disadvantaged areas of Delhi.

The fruit and vegetable sellers, auto taxi drivers, bicycle repairers and other urban poor struggling to cope with the effects of the global economic downturn seem a world away from the optimistic forecasts and inflated confidence of India’s business leaders. Whilst India’s banks and flagship technological and communications sectors may withstand the worst of the global recession, the effects on the majority of the population should not be ignored. Informal and unorganised sector workers, most of whom battle to get a head above the national poverty line, will be adversely affected, first by job losses and secondly by rising food prices.

‘Over optimism, fiscal injections to large organised sector concerns such as banks and airlines or a lone welfare or social security scheme will only take India so far’, stresses Dr Sud. As the expanding workforce outgrowth the organised sector with rising rapidity, generating incomes through self-employment and microenterprise is becoming increasingly important. Although the critics of microfinance and microenterprise point to its inability to tackle mass poverty and drive national economic growth, as a livelihood strategy, which provides households with reliable incomes, secured by extra services such as mentoring and business advice, it makes a notable contribution to mitigating the effects of the global downturn on India’s poor. ‘To address the issues of unemployment and poverty’, proclaims Mohapatra, ‘the creation of micro-enterprise is the need of the hour’.


See also:

The Global Financial Crisis: The Impact on India’s Poor, UNDP report, available at http://data.undp.org.in/FinancialCrisis/FinalFCP.pdf

Indian MFIs to build portfolio of $6.27 billion by 2012, Microfinance India, 4/2/09, available at http://www.indiamicrofinance.com/microfinance-india/indian-mfis-to-build-portfolio-of-6-27-billion-by-2012.html

Inclusive Growth through Skill Development, Ajaya Mohapatra in Microfinance World, July-September 2009.

“Rising India labours in the shadow of Asia’s real giant” Shankar Acharya, Financial Times, 29th July 2009