The Hindu Business Line : Micro enterprises in rural areas need credit oxygen

If properly nurtured and strengthened, the unorganised non-farm sector can be a potent tool for employment creation, poverty reduction and faster inclusive growth and would go a long way in closing the widening divide between urban and rural India.

quotes an NCEUS study to highlight the critical gaps in funding for a large segment of entrepreneurs.

Dr Arjun Sengupta, Chairman, National Commission for Enterprises in the Unorganised Sector.

With the Eleventh Five-Year Plan (2007-12) foreseeing an additional workforce of 65 million joining the army of unemployed or under-employed in the country and the organised sector revealing no special yen for absorptive capacity of low-end jobs, the need for creation of employment opportunities in the unorganised non-farm sector assumes added significance.

More importantly, the top functionaries of the UPA coalition government have been laying special accent on inclusive economic growth so that the left-out and marginalised sections get a modicum of the benefits of development and growth. The Common Minimum Programme (CMP) of the ruling dispensation too mandated the National Commission for Enterprises in the Unorganised Sector (NCEUS), under the chairmanship of Dr Arjun K. Sengupta, to “make appropriate recommendations to provide technical, marketing and credit support to these enterprises”. The CMP has also proposed the creation of a National Fund for this purpose.

In its comprehensive deliberations on the constraints plaguing the unorganised sector enterprises in terms of credit and developmental support including marketing, the Commission suggested the creation of a statutory body under an act of Parliament to utilise the proposed national fund.

Based on projections using the National Sample Survey (NSS) and Economic Census data, the Commission assessed the number of unorganised non-farm enterprises at 58 million in 2007.

Potent tool for job creation

Given the gigantic size and high growth potential of the unorganised sector, its innumerable enterprises need to be bolstered to a higher growth level, so that additional employment opportunities in the sector creates more income, which could add directly more than one per cent to GDP growth, the Commission pointed out. It feels that, if properly nurtured and strengthened, the unorganised non-farm sector would emerge as a potent tool for employment creation, poverty reduction and faster inclusive growth during the current Plan.

The rationale for focusing on this much-neglected sector flows from the incontrovertible fact that the contribution of the total unorganised sector as defined by NCEUS to total value added in 2004-05 (at 1999-2000 pries) is estimated at 50.6 per cent. Non-agricultural unorganised sector enterprises contribute as much as 62 per cent to total unorganised sector GDP and 31.5 per cent to total GDP.

Difinition changed

The Government has defined the smallest segment of industries as micro enterprises (earlier tiny enterprises) covering the manufacturing sector and selected services. Till October 2, 2006, tiny units were defined as a segment of small-scale units, with investment in plant and machinery up to Rs 25 lakh.

The Micro, Small and Medium Enterprises Act 2006, which has come into force from October 2, 2006, has redefined micro enterprises as a separate segment of small industries which in the case of manufacturing enterprises has an investment in plant and machinery of up to Rs 25 lakh and in the case of services, an investment limit of Rs 10 lakh in plant and machinery.

Even with this definition of micro enterprises, they barely received about three per cent of gross bank credit during 2002-03 to 2004-05. Against the RBI priority sector stipulation that micro enterprises should get 60 per cent of total credit to small scale industry, they have been getting just about 40 per cent and even this had skidded to 34 per cent in 2004-05.

What is more galling is that even within the non-farm unorganised sector, the most vulnerable group is the smaller size micro enterprises with investment up to Rs 5 lakh. According to the Commission, this segment of unorganised enterprises, it is just about 2.2 per cent of gross bank credit from scheduled commercial banks, regional rural banks and urban cooperative banks. Even this was estimated to remain stagnant at that lamentably low level for the years 2004-05 to 2006-07!

Shockingly, only 4.2 per cent of such units (or an estimated 2.4 millions of the 58 million in 2006-07) availed of institutional credit. This is notwithstanding a banking network of more than 75,000 branches of scheduled commercial banks across the country.

In a clear case of adding salt to the wounds of this segment that bleeds for want of requisite modest credit to overcome a host of other constraints they are facing in a high cost economy, is “the substantial piggy-backing of the loans at the lower segment of the unorganised sector enterprises with investment of less than Rs 5 lakh on the credit-cum-subsidy linked self-employment schemes”, the numbers of which are legion.

Incidentally, in the latter scheme implemented by the Government, banks are confident that a part of the loans advanced would come back to them in the form of subsidy for margin money!

Bankers’ risk perception

The Commission notes that the reluctance of the banks primarily reflects the bankers’ high-risk perception of this sector. Having burnt their fingers lending to big corporates by throwing prudential norms to the winds, some banks have developed risk aversion, so much so they are content with parking their money in safe instruments even if they yield next to nothing in terms of improving their margins.

Considering the exceptionally high rate of recovery in the case of micro credit, the banks’ fear of high transaction cost for small loans and non-stipulation of any priority sector target for the sector should not deprive “a vast productive sector of the economy populated by numerous micro enterprises”, so argues the Sengupta Commission.

Dejected by the poor institutional mechanisms to provide this vibrant segment of the economy its small but nevertheless substantive credit needs, NCEUS proposes an authorised capital of Rs 1,000 crore for the proposed national fund for this sector. The initial paid-up capital is proposed at Rs 500 crore in 2008, which would be gradually stepped up to Rs 1,000 crore by 2011-12.

The target group for this corpus are enterprises in the unorganised sector covering non-farm activities employing less than 10 workers, primarily those with investment in plant and machinery not exceeding Rs 5 lakh (excluding land and buildings) at 2004-05 prices, if engaged in manufacturing and investment in plant and machinery not exceeding Rs 2 lakh if engaged in non-manufacturing.

However, the upper limit of financing by the Fund would be enterprises with investment in plant and machinery not exceeding Rs 25 lakh if engaged in manufacturing and investment in equipment not exceeding Rs 10 lakh in engaged in non-manufacturing activities.

As the Commission cites the Third Census of SSI (2001-02), 98 per cent of all the manufacturing non-agricultural small enterprises employ less than 10 workers with an average capital investment of Rs 1.47 lakh, quite a good number of them are also engaged in service, business and trade.

These enterprises account for 30 per cent of industrial production and provide employment to 70 million persons, not an insubstantial number considering the scale of widening income disparity in a country of continental size like ours.

In sum, the NCEUS has highlighted the critical gaps in the funding requirements of a substantial segment of entrepreneurs in the country, the emancipation of whom for unleashing their productive powers would go a long way in closing the widening divide between urban and rural India.

The launching of the Fund would definitely help ensure inclusive growth through providing greater employment in non-farm jobs to millions of people outside the closed ambit of the organised sector.

The latter is today in an unenviable quandary, contending with a series of problems ranging from finding skilled, educated workers and disciplined workers to providing reservation of jobs through quotas under political pressure.

G. SRINIVASAN

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