Kick-Starting India’s Transition
to a Sustainable Economy

India - Thriving or Surviving?

The Indian economy, now one of the fastest growing economies in the world, has shown an upward trajectory over the last few decades. However, this high growth has brought along with it societal and environmental costs which are likely to hinder the country’s ability to sustain the current development trends. High levels of poverty, inequality, degrading natural resource base are posing a threat to the economy’s health.

Despite India’s economic growth in the recent past, it still ranks 135 out of 187 countries on the Human Development Index. More than 600 million of the country’s citizens have little or no access to basic needs and amenities such as health, education, livelihoods, water, sanitation, energy or housing. This poverty trap has been caused by low incomes which in turn is a result of the economic structure that has perpetuated joblessness and inequality.

The expenditure share of the top 1% of India’s population increased from 6.5% in 1993 to 9% in 2010 and India’s top 5% now spends 21.3 per cent of the total expenditure as against the 17.7% in 1993. India’s richest 10% hold 370 times the wealth that India’s poorest hold. The current economic paradigm has resulted in rapid rise of labour productivity in certain sectors without corresponding improvement in other high employment sectors. The large part of the increase in formal sector jobs is owing to the development of the services sector. The rate of employment in large manufacturing and public sector has remained more or less constant since liberalisation. The increase in labour force in the recent times is either coming from the underperforming agricultural sector or from the growing young population. With labour intensive sectors such as traditional industries and agriculture declining in productivity, people employed in these sectors find themselves unemployed or migrating owing to lack of job opportunities.

This fast and unequal economic expansion has also resulted in exploitation of our natural resources leading to an overstep of 70% more than the biological capacity. With 70% of Indians relying directly on natural resources for their livelihoods, this poses a threat to the livelihood security of our population.

In the absence of mechanisms and structural changes to reverse these trends of the current patterns of economic growth, India is likely to face a social and environmental crisis leading to the stagnation of the economy. From an economic point of view, India is likely to find itself at an all time low economic equilibrium as demand will be limited because of limited purchasing power and supply restricted owing to a drainout of natural resources in a business as usual scenario.

Transforming to a Green and Inclusive Economy

The Indian government has set the development path in the 12th Five-Year Plan with a focus on ‘Faster, Sustainable and More Inclusive Growth’ aligning itself explicitly with the 8th Sustainable Development Goal – ‘Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all’. Yet, much remains to be done to promote true sustainable development for the future of India.

To achieve this, India will need to adopt a structural shift in the development agenda that upholds people and environment wellbeing as the end and also a necessary condition to achieve sustained economic development . Such a transformation will require including the excluded from the mainstream economy by creating economic opportunities through local economic development. The lack of jobs and purchasing power is understood to be the root cause of poverty . Jobs are not only necessary as effective instruments for poverty alleviation, but crucial to address the problem of unemployment. For a country that is adding 12 million to the workforce annually and many migrating from a crisis-ridden agricultural sector, India will have to adopt an inclusive development agenda through green job creation so as to convert the latent human resource into economic output. Creation of jobs will prevent brain and fiscal drain and allow for sustained economic development. These jobs must be green as India’s high ecological footprint and the threats from climate change related adversities are on a rise, rendering livelihoods of 70% of India’s population vulnerable. With India now placed at 28 out of 193 countries (rated as being exposed to ‘extreme risk’) by Maplecroft’s Climate Change Vulnerability Index, there is a need to mainstream technologies and businesses that preserve and regenerate ecological systems as well as promote resource efficiency - a practice neglected by the current growth model.

The creation of green and inclusive jobs will mutually reinforce positive effects between economic, social and environmental sustainability - a true triple win for the Indian economy.

Promoting MSMEs to Achieve Green and Inclusive Development

India, today, is faced by a challenge to enhance economic opportunities and improve living standards for the majority of its population without transgressing environmental limits. We argue that to address this critical challenge, India will have to adopt a structural change in its development model and identify opportunities to tunnel through the ‘grow first clean later’ and ‘trickle down approach’ and lead the path of moving to an equitable, rich and clean society. While such a comprehensive and macroeconomic framework is necessary to achieve green and inclusive development, in this paper we uphold that the development of green MSMEs is one effective strategy to do the same.

Considered as the backbone of the economy, MSMEs are engines that fuel sustainable economic development by creating local job opportunities. They serve as effective platforms for income enhancement and sustainable poverty alleviation. With only a 17% share in GDP, MSMEs provide employment to more than 40 percent of India’s labour force. In 2013, India had about 48 million MSMEs which provided employment to about 81.2 million low skilled people .

MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialisation of rural and backward areas helping reduce regional imbalances, assuring more equitable distribution of national income and wealth. Large parts of India and its people remain excluded from the mainstream economy and with high labour absorptive capacities, MSMEs allow for equitable economic growth.

Being decentralised in nature, MSMEs create resilient local economic systems as a whole. Decentralisation of industry prevents locking of large capital in few projects which decreases the risk of an economic crisis due to dependence on few large projects. This is good on the front of environmental management as small decentralised scale positions SMEs better than large industry to adopt innovative and green technologies more viably. Moreover, MSMEs can potentially result in improved efficiencies and therefore reducing the impacts that the environment sinks can absorb.

However, low carbon and green MSME development also requires a comprehensive development strategy that strengthens both demand and supply side factors for nurturing their growth. Evidence demonstrates that constraints in the form of access to technical knowledge and finance, poor entrepreneurship capacities and market availability inhibit MSME development. Characterised by problems of low productivity, poor efficiencies and sub standard environment management practices, these enterprises often grapple with issues of high externalities or sickness. While efforts have been made over the years by government, civil society and the private sector to promote micro-enterprises, these efforts have either been disintegrated or marginalised with the onslaught of fair and unfair competition in the face of increasing globalisation and liberalisation.

On the supply side, enabling access to finance, promoting business service support vehicles, boosting green technology development and adoption, providing market linkages, pushing green procurement and appropriate skill development to address the issue of skill gap, are effective strategies. On the demand side, rewarding incentives to big industry, banks and civil society based on their association and contribution to green MSME development is an important tool. Moreover to overcome the obstacle of SMEs being commercially competitive as well as accepting environment-friendly techniques; strategies for industrial clustering, aggregation and networking are a promising measure. Partnerships and institutional arrangements for integrated access to services and waste management are crucial supporting instruments while providing advantages like cost-sharing and supply chain management all helping them realise economies of scale. Policy support must also promote opportunities for development of eco-businesses and green business support providers.

While the government of India is providing impetus on skill and enterprise development for job creation through its initiatives, these are either missing a comprehensive strategy for achieving triple bottom line impact or are often not synchronised to other government initiatives to arrive at commonly agreed goals. A coordinated and comprehensive macroeconomic policy with commonly agreed goals and pre-defined targets with delegated roles and responsibilities across sectors and initiatives serves as an essential starting point to achieve this change. By doing so, the Indian economy has the chance to position itself as a leader and champion of sustainable development.  q

Chitrangana Dewan
and Rowena Mathew
cdewan@devalt.org
rmathew@devalt.org

Peer Reviewed by
Dr. Madhu Verma,
Development Economist- IIFM,
Bhopal

References

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Grant Thorton, 2011; Vision 2020: Implications for MSME

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