BDS for the poor in India. A synthesis by Vrutti Team - 8 Aug 2010


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A synthesis on "the status of BDS4ME in India and some ways to move forward in supporting this important dimension of development work"

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BDS for the poor in India. A synthesis by Vrutti Team - 8 Aug 2010

  1. 1. BDS4ME: State of Business Development Services for poor people’s Micro enterprises in India –A Synthesis Paper by Vrutti Livelihoods Resource Centre, based on discussions at the EBPDN Platform It is well evident from our experiences that addressing poverty in India and in other developing countries requires financial (micro finance in itself may be insufficient to make a dent in poverty – the income impact through micro finance loan would be marginal, whereas the cost of loan is pretty steep. Loan amount of 5000 to 25000 would be insufficient for a micro enterprise. The clients of micro finance need to graduate to regular bank linked livelihoods financing at bank interest rates) and non-financial (read Business Development Services – BDS) support to the enterprises of the poor. The poor households are involved in agriculture, allied (goatry, poultry, fisheries, piggery, NTFP collection and selling etc.), and non-farm enterprises (kirana shops, mechanic shops etc.). Business Development Services for Micro Enterprise (BDS4ME) refers to non financial and non transactional support services that help in starting, sustaining and strengthening a micro Enterprise. This includes services relating to business planning, marketing, inputs, technology, business processes and information, counselling, hand holding support. Besides access to Credit and other Business Services (that directly relates to the business like input supply), BDS therefore is critical for growth of micro Enterprise sector in India. The South Asia Evidence-Based Policy in Development Network (EBPDN) is an initiative facilitated by the Centre for Poverty Analysis (CEPA, with support of Global Development Network (GDN). The network is an extension of the global evidence based policy in development network facilitated by the Overseas Development Institute (ODI). The SA-EBPDN aims to bring together knowledge organizations like think tanks, research organisations, civil society organizations working in development across South Asia to promote the making of evidence-based, pro-poor development policy. Vrutti is steering the India network. The on line discussions in the EBPDN South Asia forum (and also off line discussions among the India network members of the forum) were pertaining to whether current policies and programs are adequate to support micro Enterprises in India? If not, is there a need to formulate separate policy for micro Enterprises in India? What could be key features of such a policy and related programs? In context of India, do we consider BDS4ME as a critical and central service for promotion of micro Enterprises? If so, how do we move forward? What could be next steps? Should we continue to promote “Supply led BDS” or move towards “Demand led BDS” in the spirit of facilitating “Inclusive Growth” in India. The debate provided ideas on the status of BDS4ME in India and some ways to move forward in supporting this important dimension of development work. Some of these discussions and ideas are summarised below: BDS4ME: Policy and Strategic Issues ‘Micro Enterprises support’ not really within the Policy radar: In 2006, Government of India came up with Micro Small and Medium Enterprise (MSME) Act, which provides a perspective to support micro Enterprises. Some of the State Governments like Government of Orissa, Tamil Nadu has come out with exclusive MSME Policy. The MSME Act 2006 focuses more on credit services and on Government/Government Organization as a buyer of services/products of MSMEs. Within MSMEs, there is limited emphasis on Micro Enterprises. Policy support relating to credit and Govt as a buyer focuses on Micro and Small Enterprises as one single category, and hence Micro enterprises are unable to avail benefit as availed by small enterprises. In context of Self Employment programs (be it earlier IRDP, current SGSY or expected National Rural Livelihoods Mission – NRLM), the focus continues to be on enhancing access to credit through subsidy support, THAN on developing
  2. 2. market or facilitating BDS4ME as a service. In NRLM and review of SGSY, the need for “handholding services” (more like BDS) is well recognized. But the approach to provide handholding services is not well defined. The current Self Employment programs focus more on group based enterprises. Large numbers of individual enterprises are unable to avail benefit of Govt programs. Many a time individual entrepreneurs are forced to form a group to avail benefits of self employment schemes. Similarly, there is focus more on women enterprises than men enterprises or HH enterprises (where both male and female may be involved). Typically, in policy circles micro Enterprises refer to non-farm or off farm enterprises and do not include agriculture. There is need to include agriculture related enterprise as part of micro Enterprise promotion agenda.There is a huge need for viable micro enterprises in the agriculture value chain –from input supply, to value addition. There is a need for innovative market led solutions where poor run the agri-business micro enterprises. Therefore the policy intent currently excludes actual support provision to vast number of micro enterprises in India, which can support livelihoods of the poorest people of this country. As per the ‘National Commission for Micro Enterprises in Unorganised Sectors’ (established by the Government to understand status of micro enterprises), non-farm enterprises in the unorganised sector contributes to generate two thirds of employment in the sector. This clearly shows why policy neglect needs to be highlighted. Government is the main players in BDS delivery, however delivery constraints are too many: The government continues to the main players for largest number of rural micro enterprises through its agriculture extension services, veterinary services, and other commodity /product specific schemes and programs. In many cases, technical services of Government would more relate to “business services” than BDS. Currently, micro Enterprises are availing BDS mainly from informal sources. The government witness bureaucracy, inefficiency, inappropriate targeting, ‘supply driven’ (e.g. Government decides to conduct a enterprise related technical training and then looks for trainees, rather than understanding the demands of micro enterprise and design interventions based on that) problems while providing BDS. The discipline as a whole is required in the government delivery systems. The Government is also looking for better BDS models to improve its’ effectiveness. BDS Market is nearly absent in poorest pockets of the country: Near non-existence of the BDS markets is noticed and voiced by the stakeholders. The informal level arrangements are working between poor households (e.g. having a small Goatry unit of 3 flocks) and other fellow villagers (who provide information, knowledge about animal husbandry, disease and vaccination, markets etc.), however these are neither sufficient nor consistent. Commodity /sub-sector based advice to rural entrepreneurs is nearly absent. Developing a skilled cadre of BDS providers (preferably village based) and linking them up with the enterprises is the need of the hour. Current initiatives focus on organizing exhibitions. But most micro Enterprises look for information and facilitating market linkage. There is also a lack of knowledge bank easily accessible to poor. Say in case of a small goatry unit – across the country there should be thousands of experiments – but if a poor micro finance client needs to start a new goatry unit there is no help available from this vast collective knowledge base, one has to still depend on local informal sources for knowledge support. If a easily accessible platform is created where for any and every micro enterprise sector thousands of case studies are collected from across the country and the main success factor or learnings are summarised in simple language – a start up entrepreneur can be greatly helped. Non-existent BDS4ME provisions suggest market failure: Markets operating in an inclusive manner serve the poor by offering them the things they need – jobs, opportunities, finance, products – to increase their incomes. Conversely, where markets are working exclusively, poor people have fewer chances to participate and benefit from economic growth. Clearly the market access (for the poor to participate in economic activities), price (the rules of the game are written by formal and informal institutions which are not favourable to the poor people) and market conditions are such poor are left out from participating in economic activities. BDS has a potential to address these inequities in current market structure. However the market for BDS4ME provisions needs to be developed through grant, subsidy and other market based instruments. Research is
  3. 3. needed on why private sector is not coming in to provide more effective BDS delivery. Before the advent of micro finance, government was the only ‘formal’ source of financing in rural areas; it required an innovative business model to emerge to get private MFI providers to come in and do a much better job. Same type of innovation is required on the BDS front as well... As BDS is a reasonably high-skill service – most private players opt to price it in high-margin SME sector rather than focus on micro enterprise sector where both volume as well as margin is low. BDS4ME: Models and Programmatic Issues Grant led BDS models are available, some through financial institutions, largely through international donors: Some financial institutions and mFIs in India have supported micro enterprises with BDS /non-financial support provisions. However the evaluations reports /other secondary literature show that these have not been inclusive of the marginalised households. International donors through their support to civil society organisations have developed value chain based BDS provisions successfully and institutionalised these provisions through producers companies and other forms of community organisations. Grant led BDS interventions mainly focuses on cluster development. In this case, requirement of BDS, that is more individual enterprise focused do not get addressed. The focus is more on small and medium enterprises than micro enterprises. Non-grants based (like Producer Company based social enterprises, supported by venture funds) BDS models are very few. Clearly there is a need to consistent efforts by many agencies to develop working models for sustained BDS support to micro enterprises of the poor. Even the BDS providers need to innovate – provide assured base returns for the micro enterprenuer against investment and carrying some part of the risk of the business failure. Need for donor and government funds to support development of demand led BDS model: BDS can strengthen existing enterprises of the poor. However the incentives structures and institutional arrangement for providing the BDS services need to be established at large scale. Herein the need is for the change in mindsets of the government and donors. Micro enterprises more than any other form and scale of enterprises need governmental and donor policy and subsidy support. The market for BDS services need to be developed which can happen with the grant funds available and once this happen than the market can take care of the BDS demands of poor people’s enterprises. We need to showcase such models through civil society, private players and public private partnership (PPP) route. The donors and the government need to channelize their innovations funds to support establishment of rural BDS model. We need to pilot and test few well designed initiatives in this regard. It is also important to capture and disseminate (widely) the current approaches, instruments and impact of BDS. Market access is a key BDS need: Market access is a problem for most micro enterprises in developing countries and in transition economies. At macro level, market access is limited by external frame conditions like tariff or technical barriers. But difficulties of accessing markets are also due to internal factors like the lack of information on markets (e.g. on prices), the clash between offer and demand or the difficulties to condition the product in an appropriate way. This is more problematic in rural areas due to the distance to the markets and the complex relationship between rural and urban areas where the main markets are located. Typically micro Enterprises look for support to market their produce (more of business services), which few micro Enterprise promoting organizations are interested to offer. Providing market support is beyond capacity of many micro Enterprise promoting organizations (GO and NGO). Traditional Systems also facilitate /inhibit BDS delivery: Rural societies tend to have stronger traditional systems, which can include vocational training, mentoring, marketing services etc. This is not exactly commercial delivery, but builds on indigenous systems and so seems to be very compatible with the BDS approach. Conversely, some traditional barriers are cultural; if raw material suppliers come from a different social or ethnic group to rural producers, the latter may not get the best deals from the former. These aspects may provide many opportunities for fruitful interventions.
  4. 4. Role of Mass Media in BDS provision to micro enterprises: Mass media can provide many functions, such as providing information on markets and techniques, or can act as a forum for discussion of 'hot' issues; similarly, this can happen in many different formats, including documentaries and dramas (sitcoms, soap operas etc.) The utilisation of mass media proves to be particularly useful in rural areas where the density of enterprises may not attract many service providers. The paper presents a range of issues that needs to taken up in action research and advocacy mode for improving the BDS market for micro enterprises of the poor. The partners engaged in EBPDN have initiated some of these actions already and will share the update based on the experiences so gained. Following persons contributed towards and gave suggestions for preparing and improving the above synthesis paper. Their insights are greatly appreciated: 1. Jitesh Panda, Ravinder Kumar, N.Raghunathan and other members of Vrutti team 2. Munni Lal Verma, Livelihoods Manager, Tejaswini Programme in Madhya Pradesh (supported by IFAD and Government of Madhya Pradesh) 3. Prema Gera, Head, Poverty Unit, and other members of UNDP –India 4. Rajeev Sharma, NRM Specialist, GTZ –India 5. Shaheel Rafique, World Food Programme /IFAD –India 6. Nazme Sabina, Livelihoods Specialist, Save the Children –Bangladesh 7. Bishwadeep Ghose, Programme Officer, HIVOS 8. Rakesh Supkar, Techincal Advisor, TechnoServe Many other have responded with their inputs or will be responding in due course. Vrutti will bring out the updated version of this paper based on further inputs.