Mini Enterprises: the Missing Link

Ashok Khosla

The central goal for any developing country today, as for an industrialised one, is sustainable development.  In India, as in many other countries, they key strategy to achieve this goal must be through the creation of jobs - and, in particular, jobs of a specific kind.

We need jobs that produce, at a minimum, the goods and services required to fulfil everyone’s basic needs.  Jobs that at the same time generate the widespread income - and therefore purchasing power- necessary to give people access to these goods and
services.  Jobs that regenerate, rather than destroy, the environment and its
resources.  Because of the contribution they can make to economic efficiency, social equity and environmental quality, such jobs are today called sustainable livelihoods - best created by very small, local ecoefficient businesses: sustainable enterprises.

Sustainable livelihoods are particularly suited to the needs of women, the poor and the marginalised.  By providing people with income and some degree of financial security, they are an excellent means of empowering people within their communities.  Most important, together with programmes for education of girls and women, sustainable livelihoods are probably the most effective stimuli for smaller families and lower birth rates.

India now has to create sustainable livelihoods on a large scale.  The capacity of agriculture to absorb more labour is rapidly reaching a plateau.  To close the unemployment gap by the year 2015, India will need to create 12 to 15 million jobs off the farm - each year.  “Modern”, big industry is not capable of creating this many workplaces.  Today, it can hardly create two million jobs per year.

The second, and not unrelated, goal for a country like India clearly is to accelerate the rate of growth of the economy.  While the nation’s planners debate whether this rate should be 7% or 8% per year, eradication of poverty within a reasonable time frame will need growth rates in the double digit region.  China has demonstrated that such a growth rate is not only possible, but that it can be sustained over long periods.

The reasons for both failures lie, ironically, in the very structure of industrial production that has provided so many benefits for so many people all over the world: its emphasis on mechanisation, centralisation, large scale, and use of energy guzzling and material intensive technologies.  The imperatives of competitiveness in the global economy encourages the choice of particular types of production systems.  They are mostly complex and expensive.  The technology used is generally capital intensive and labour displacing; the fossil fuels, raw materials and components are often imported and their availability uncertain; and the management systems required are sophisticated and costly.  Such systems need large investments, have long start-up gestation periods and create few jobs.

In small and mini plants, the scarce capital is recovered in a much shorter time, making it possible to reinvest it in further production and job creation.  The capital cost of creating one workplace in the modern industrial sector in India is well over $ 100,000 - often including a significant component of imported technology and equipment.  At this rate, just the creation of twelve million jobs each year would by itself cost four to six times the GNP of the country.  It simply cannot be done.

Clearly, a better mix of large, small and mini industries is now needed.  Given the continued failure of policies to address the needs of the small, mini and micro sectors, a proper balance will required greatly enhanced encouragement and incentives to such industries.

There are, of course, sectors for which the economies of scale favour large, mechanised production units.  These probably include steel making, oil refining, petrochemicals and automobile manufacture.  But there are many sectors where economies of scale are not relevant.  Most industries producing basic goods for rural populations are commercially viable even at quite small scales.  And because of the low capital requirements, they can have high returns on investment - in some cases even double those for their larger counterparts.

Indeed, if the full economic and environmental costs of the processes and resources used in manufacturing and delivering products is taken into account, and no “perverse” subsidies are allowed for energy, transportation, financial and other services, small scale production are allowed for energy, transportation, financial and other services, small scale production can become quite competitive.

As evidence of this, “small and medium enterprises” already form the backbone of the national economy.  They account for more than 60% of the industrial production in India, and for more than 65% of industrial exports.  They account for more than 70% of industrial employment.  When adjusted for the vast subsidies and infrastructure that large scale industry can take advantage of, their real contribution to the economy is even higher.

Sustainable enterprises are usually quite small.  They have between one and 100 employees, with an average around 20.  They are generally informal and flexible and quite labour intensive.  However, being small, dispersed and largely unregulated, mini enterprises can often have environmental and social impacts that are fairly negative.  To overcome this, they need access to better technologies as well as other supports.

"Mechanisms are now needed to help enterprises
overcome the barriers to obtaining technology,
to using effective transport and communication facilities
and to introducing modern management methods."

Many technologies for such enterprises already exist.  So does the demand for their products.  What prevents the poor from setting up such enterprises is their lack of access to these technologies and their inability to put together the financial capital required.  What prevents then, once set up, from becoming profitable is the absence of entrepreneurial and management skills, infrastructure and marketing channels.  Much more public investment is needed to provide these, but probably not nearly as much as is being made today for the benefit of large, urban industries.

Several mechanisms are now evolving to help enterprises overcome the barriers to obtaining technology, to using effective transport and communication facilities and to introducing modern management methods.  But credit continues to be the key missing link.  Currently, finance is fairly easily available to “small and medium enterprises” that have capital requirements of Rs.10 lakhs ($25,000) or more.  Also increasingly available if finance to micro industries that need capital of less than Rs.10,000 ($250).

However, it is precisely the mini enterprises that fall in the range between these two categories, with capital investment of Rs.10,000 to Rs.10 lakhs, which optimise the twin objectives of sustainable livelihoods and returns on investment.  They are small enough to be responsive to the local economy yet large enough to employ technologies and skilled workers and to maximise labour productivity.  At the same time, they are big enough to take advantage of public infrastructure, credit facilities, technology support and marketing channels provided these are available. There are numerous technology based mini industries in this range that could be set up today and run profitably.

Such enterprises can create, directly, several workplaces, each at a capital investment of Rs.10,000 to 50,000.  In addition, they indirectly lead to the creation of several more jobs, upstream or downstream, usually at an even lower capital cost. 
Such workplaces, in the village or small town, yield incomes for workers whose purchasing power is comparable to, if not better than, those created at a hundred times the cost in large urban industries.  At the same time, they permit very high returns on investment, sometimes with payback periods of less than a year.

The potential clientele for mini credit, accompanied by proper technology, marketing and policy supports is very large, certainly in the millions.  Empirical studies by the Government of India, the World Bank and others show that among these potential clients, a significant percentage has high levels of credit worthiness.  Carefully designed lending programmes can therefore be both financially profitable and socially worthwhile.

The paradox of our economy is that there is virtually no source of funding today that can actually deliver adequate financial credit in this intermediate range (which might properly be termed “mini credit”) where it has greatest potential impact, both on the generation of employment and on the national economy.        r

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