Chapter-1 Introduction

Chapter-7

It is said that the real India lives in villages. About 69% of the Indian population resides in rural areas. Rural sector plays an important role in our economy and rural development assumes greater significance in Indian context. Recognizing the importance of rural sector, the Government has given an important place to rural development in its Union budget. In this direction 9% and 7% of the total budget’s outlay was allocated in 2010-11 and 2011-12 respectively and 6% has been budgeted for the upcoming FY of 2012-13. However this share is showing decreasing trend in the annual plans of 11^th Five Year Plan but it is still increased as compared to the outlays of previous plans. This share was only 5.5% in 6^th Plan and 5% in 5^th Plan. After two decades of the liberalization the rural areas have made a remarkable stand in India’s total production and consumption. According to a latest survey of CRISIL, in the F.Y. of 2009-10 and 2011-12 the total consumption in rural areas was about ` 3.75 lakh crore while it was just ` 2.90 lakh crore in urban areas. It is because of increasing non-farm employment opportunities in rural areas. Moreover the remittances to the rural areas are also an important reason for the increasing income of rural residents.

Due to the increasing non-farm employment, the primary sector of our economy is lagging behind. The primary, secondary and tertiary sectors are presently contributing to India’s GDP in the ratio of 14:27:59. The primary sector has shown a decrease of 3% growth during 2007-08 to 2011-12. For the same period the industrial sector has also shown a decrease of 5%. With the growth rate just short of double digits, service sector continues to be the mainstay of the economic holding India’s growth together. Therefore non farm sector will continue to play an important role in growth of our country in terms of its share in both employment and output. Out of all non-farm activities Trade, hotel, transport and communication is the highly grooming activity following the Financing, Insurance, Real Estate and Business Services; Manufacturing; Construction; Community, Social and Personal Services; and lastly Mining and quarrying.

Out of non-farm sector during 1973-74 to 2009-10, tertiary sector had shown a remarkable growth of 12% and 23% in employment and output respectively as compared to growth of 11% and 3% in secondary sector in employment and output respectively. Proportion of agriculture in total employment has declined over the years from 74% in 1972-73 to 51% in 2009-10. It is particularly important to note that the decline in the employment share of farm sector has been much slower than the share of GDP from agriculture. The share of agriculture in GDP declined from 41% in 1972-73 to 15% in 2009-10.

For the upliftment of both the sectors in rural areas some genuine problems need to be solved like poverty, hunger, malnutrition, poor education, unemployment, poor infrastructure, rural-urban migration and most important poor access to finance. However the condition of rural credit has been much improved in recent 3 decades. The formal rural credit had shown a remarkable growth from 7% in 1951-52 to more than 57% in 2001-02 while the share of exploitative informal sources reduced from an average of over 93% in 1951-1952 to less than 43% in 2001-02. The formal rural credit increased more than 8 times during 1951 to 2001. Out of the formal sources the co-operatives availed the highest share (27%) following the CBs (25%). Out of the informal sources professional moneylenders availed the highest share of 21%. NABARD has contributed a lot in changing the scenario of Indian rural credit. Moreover the foreign aid also played an important role in the rural development. The foreign aid has been increased more than 5 times during 1980-81 and 2010-11. NABARD is also getting foreign aid in its projects. During 2011-12, NABARD got ` 53.18 crore as a grant from various International agencies.

As an apex body of rural development agencies NABARD is playing an important role in the rural development of India. Since its establishment the production credit disbursement by NABARD has been increased more than 6 times while the investment credit disbursement has registered a remarkable growth of more than 20 times. The financial support by NABARD has been increased to more than 3 times during 2003-04 to 2011-12. Moreover, since its establishment in 1982, the total refinance support by NABARD has been increased upto 39 times. NABARD is also nurturing its financial viability. Since the establishment the working funds of NABARD has been increased more than 40 times. During the last 11 years the income of national bank had shown an increase of three-fold. While the Profits Before Tax and Profits After Tax had shown an increase of 52% and 47% respectively. The Government had recently contributed ` 1000 crore to the paid-up capital of NABARD.

NABARD has been implementing several programmes for farm, non-farm and micro finance sectors. The efforts of NABARD for the financial inclusion in rural areas are most creditworthy in this respect. NABARD’s farm projects are greening the farm sector at the same time non-farm projects are supporting the non-farm activities. Micro finance and financial inclusion projects are linking the rural poor households with the formal organized financial system. Recognizing the promising and potential nature of NFS in generating employment and income in rural areas, Central Government, State Governments, Voluntary Associations, NGOs, other Developmental agencies and NABARD are sincerely working for the upliftment of rural industries.

Over the last 11 years, the refinance disbursement by NABARD for the NFS has shown an increase of more than two-fold. It was just ` 1616 crore in 2001-02 which has become ` 3574 crore in 2011-12. During 2011-12, NFS attracted 23% of the total refinance disbursed.

1. 
   The state is having an economy of ` 775.8 billion GSDP in current prices. Since the inception the per capita income in state had been increased more than four times. The per capita GSDP and NSDP rose from ` 29029 to ` 78482 and ` 25255 to ` 68292 respectively during 2005-06 to 2010-11.
   
2. 
   With a growth rate of 9.31% over the past 5 years the state has been placed third all over the country after Gujarat (11.05%) and Bihar (11.03%).
   
3. 
   The state is having high literacy rate of 77.11% in rural areas especially among 66.79% in females.
   
4. 
   The potential of state as identified by the NABARD has been increased to more than 12 times during 1998-99 to 2011-12.
   
5. 
   The state is having only 13% net sown area which shows huge potentials for farming activities and organic farming also.
   
6. 
   Since the inception of the state, the number of registered SSIs has been increased by more than two times whereas the number of factories has been more than three-fold. Moreover the Khadi and Village Industries got an increase of more than two-fold. There are presently 23765 MSMEs in the state employing about 79941 persons. Now SIDCUL is also going to develop 11 new industrial hubs in the hill regions.
   
7. 
   The women participation rate in farm sector is appreciable but their participation in the non-farm activities is abysmally low. Only 10% of the total registered MSMEs are being women driven.
   
8. 
   The traditional industries i.e., Handloom, Handicraft, Floriculture Industry, Medicinal and Aromatic herbs based Industries, Tea Industry; Forest Based Industries etc are progressing in the state. Moreover there is huge potential for some non-traditional industries also i.e., Agro-food Processing Industry, Sugar and by products Industry, IT industries, Bio-technological Industry, Apiculture based Industries, Hydro Power Industry, Tourism Industry etc. Being a horticulture state the agro-processing Industry is on the peak in the state. The state is emerging as a Tourism Hub in the country. In the last 12 years the number of visits of foreign tourists has been doubled.
   
9. 
   During 1998-99 to 2010-11, the share of crop loan and agricultural term loan in the total GLC disbursed in the state varied between 28% to 27% and 20% to 17% respectively the share of NFS and OPS in the total GLC varied between 27% to 20% and 25% to 36% respectively. It shows the diversification of the state’s economy from farm-subsistence economy to a non-farm economy.
   
10. 
    Under NABARD’s NFS initiatives in the state 5 CDPs and 8 RIF projects were sanctioned. Till March 2011, 43 REDP/291 SDI and 44 Rural Marts have been also sanctioned. Till now the RIDF projects in the state have contributed a GDP of ` 22188 lakh and generated 27534 recurring jobs.
    
11. 
    The industrial development of the state is restricted to few plain districts only. The U.S. Nagar is the most developing district of the state but the hilly districts i.e., Bageshwar, Chamoli, Almora etc are still industrially backward.
    
12. 
    The most persistent problem of the state is the increasing migration rate especially in the hilly districts i.e., Pauri Garhwal, Almora etc. The state is having a population density of only 189 persons as compared to 382 persons in India. The second most important problem is poor infrastructure which is badly affecting the growth of non-farm sector in the state. In this direction the efforts of NABARD’s RIDF projects are appreciable but their low utilization rate is hampering the growth of these infrastructural projects.
    

The government’s report of the Task Force on MSMEs has estimated around 26 million MSMEs operating in India.¹ This sector comprises 8% of GDP, accounts for 40% of our total exports and over 45% of total manufacturing output. It employs 60 million people and is instrumental in facilitating industrialization in rural and backward areas. Rural units account for 52% of MSMEs. Around 72% of small units operate in the service sector while 28% are in the manufacturing sector. A sectoral break-up shows that the largest chunk of service sector MSMEs are in retail trade followed by repair and maintenance and IT and within manufacturing, SMEs operate in the labour intensive segments i.e., textiles, readymade garments, leather goods, drugs and pharmaceuticals, gems and jewellery, sports goods, agro processing, auto components, light engineering, among others. Unfortunately the majority of the units, about 94% of the total units are unregistered while a meager 6% belong to the registered category.

There are total 1563974 MSMEs in India (94.94% micro, 4.89% small and 0.17% medium units). In Uttarakhand this number is 23765 units (98.25% micro, 1.64% small and 0.11% medium units). The large portion of MSMEs are micro units in the state as well as in the country, it indicates that the initiatives to develop the MSMEs should be focused on the exploration of these micro units.

Even after several efforts the desired growth of rural industries is still ailing due to several problems. To overcome these difficulties and problems the collective efforts of Government and Developmental Agencies, especially of NABARD as being an apex body, are required. Development is the business of NABARD and it should always strive for growth and stand high at all times. NABARD has to be development oriented in heart and market oriented in mind.

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  Government generally focuses on two kinds of interventions for MSMEs: Policy interventions and Programmatic interventions. The Government may take NABARD as partner in its all rural development projects/schemes. The Government and NABARD should partner with good NGOs/voluntary sector to ensure an effective implementation of schemes/ policies. NABARD should build up the capacity of NGOs to increase their outreach in tribal and remote areas. A few Resource NGOs may be created to train smaller NGOs and to build their capabilities. All the schemes should be widely publicized in all local and regional languages. Moreover a convergence between various schemes for education, health, nutrition, etc., should also be ensured by the Government.
  
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  However the budgetary support for SSIs and Khadi and Village Industries are continuously increasing yet its reducing share in the total outlay is a matter of concern. Thus the Government should try to increase its share in the total outlays of the five year plans.
  
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  It is also suggested that each State should have a separate Ministry for MSMEs just as it is at central level. In addition, the State Governments should also have long term and short term policy to promote and develop MSMEs in their respective state. Industry specific studies under MSME sector for different regions on ongoing basis should be carried out to find out the profile of the people engaged in the sector, as well as to check their viability. Moreover suggestive corrective actions should also be quoted.
  

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  Recognizing the slow growth of hilly regions of Uttarakhand it is suggested that its state capital should be at a centre place having an equal distance from hilly as well as from plain areas so that the development of both the regions will be maintained. The State Governments and NABARD may also consider introduction of a ‘National Rural Disaster Mitigation Fund’ for calamity prone zone states like Uttarakhand. NABARD should become a leader in ‘Natural Resource Management’ interventions in the state so as to make optimum utilization of the available resources. The MSME Associations in the State should also be promoted to play an important role in arranging mentoring of new entrepreneurs by the established players of their field.
  
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  There is an urgent need to relax some legal requirements applicable on MSMEs especially concerning labour laws. At the same time some regulatory modifications are also required. The procedure to obtain several clearances, especially concerning Environment Protection and Pollution Control, should be more simplified and transparent and less time consuming. The guidelines of credit for MSMEs should be modified. A proper legislation for factoring services especially concerning MSMEs is needed.
  

• 
  Non availability of funds has been often identified as one of the major reasons hampering growth of MSMEs and rehabilitation efforts in case of sickness. Continuing commitment to priority lending for MSMEs, an essential feature of development banking, needs to be encouraged. There is a need to establish better linkages among the rural industries. Development of a secondary market on the basis of financial instruments and negotiable receipt system is necessary for providing liquidity to these industries. Moreover the banks may be encouraged to accept interchangeability of margin and collateral so as to enable the borrowers having poor liquidity to provide additional collateral without inducting funds and the banks accordingly reducing the margin.
  

Moreover the issuing banks may develop appropriate Credit Appraisal and Rating Tool for credit facilities to SMEs. There is a need to impart training not only to the bank’s staff but also to the branch managers and their loan officers for change in their mindset, away from the perceived risk in financing MSMEs. There must be more specialised MSMEs branches of banks with new products for credit. The MSME Associations along with NABARD should play a greater role in educating the small entrepreneurs on the need for financial transparency so that the banks should come forth to finance them.

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  Obsolete technology is a major handicap (ranking just after availability of credit) and to overcome the problem the Package for Promotion of MSMEs proposes constitution of a Technology Mission. While implementing any scheme for the technological upgradation of MSMEs, the Government and NABARD must consider the following points as their technological mission:
  

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  Promotion of introduction of new and emerging technologies
  
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  Setting up of Information Centres/Data Bank for sourcing technologies from India and abroad and support institutions for facilitating Technology Transfer and Upgradation. An I.T. Portal may be set up for information, dissemination and creating awareness.
  
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  Assessment of the present level of technology in the various sectors and forecast of technology level to be achieved.
  
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  Coordination of the efforts of various agencies, technical centres and institutions engaged in technology management.
  
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  Detailed technology audit studies and detailed work plan for 5 years for every sector to be competitive in the domestic as well as in international market with appropriate inputs resulting in increased exports. Other sectors may be added in a phased manner.
  
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  Encouragement to R&D of indigenous technologies to help the SMEs.
  
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  Creation of incubator infrastructure facilities in technical institutions.
  
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  Motivation to SMEs to obtain BIS/ ISO certification.
  
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  Organization of awareness campaigns among the MSMEs pertaining to quality, standardization and customer satisfaction.
  
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  Promotion of energy conserving and eco-friendly technologies and addressing of the issues relating to pollution control by SMEs, including common effluent treatment plants.
  
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  With a view focused attention, technology mission in the first instance may give priority to selected sectors i.e., garments, leather and leather products, gems and jewellery, auto components, pharmaceuticals, toys, food processing, drugs and IT, dyes and intermediates, glass and ceramic items, electronic industry related to design and measurement, tyres, hand tools, bicycle parts and ferrous and cast iron foundries.
  
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  Technological assistance through National Research Laboratories.
  

• 
  It is needed to develop the MSMEs in such a fashion that the micro units produce small components or do preliminary processing of inputs or engage in job works for small units, the small units undertake the assembling of parts produced by the micro units. The designing, technology and marketing should be handled by medium units. This arrangement will protect the SMEs from the planning and capital intensive aspects of industrial activity.
  
• 
  To improve the managerial efficiency of MSMEs, a hybrid structure like limited liability partnership should facilitate the entry of small players in the area as it shall have the advantages of both–the informal arrangement of partnership and the advantages of a company without its cumbersome procedures. Further, such arrangement may be incentivized by taxing only the income earned by the partners and not the firm.
  
• 
  India has a large pool of people to be employed. A dynamic skill development process linking industry needs with training processes, can give Indian SMEs a huge competitive advantage. Thus the training programmes of the Government and NABARD should be suitably revamped to be able to impart market oriented training to the workforce. These programmes should be based on ‘7Cs Framework’ to capture the key challenges to training and skills development of Indian SMEs; Complexity, Capability, Continuity, Comprehension, Contact, Collaboration and Culture.
  
• 
  To promote entrepreneurship development in the rural areas, NABARD is conducting REDPs. But unfortunately REDPs are based on target oriented approach without any structure or pointed focus on improving the entrepreneurial talents of rural and educated unemployment youth. Thus, the target-oriented approach should be replaced with a structured, need-based strategy with a pointed focus on improving the entrepreneurial talent of local rural and educated unemployed youth. It has been observed by the researcher that the trainees lose their confidence on the entrepreneurial skill after a year or so, when they feel that the design that learnt during the REDP became outdated and unable to fetch market. Thus supplementary training programmes should also be arranged after a year of completion of REDP. This will support the trainees to innovate their skills.
  

The Commercial Banks may be suggested to take further steps to set up institutes on the lines of RUDSETIs in collaboration with NABARD. Apart from Entrepreneurship Development Institutions (EDIs), NABARD should strengthen tie up with Government run polytechnics/ ITIs to conduct REDPs in those areas where no EDIs are present.

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  There is an urgent need of more emphasis on women entrepreneurship development in Uttarakhand as the participation of women in the NFS is very low as compared to farm sector.
  

• 
  Recognizing the importance of industrial clusters, there is a need of Cluster Development Authority to undertake the concerted efforts for development of business clusters. The authority should be associated with the Cluster Development Programme of NABARD to strengthen it. Induced clusters can also be located close to the existing clusters so as to capitalize on the existing backward and forward linkages. However, it must be ensured that these Industrial Estates have complete infrastructure (roads, uninterrupted power supply, banking facilities and necessary security arrangement).
  
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  Small entrepreneurs are too small or have little competence to conduct market research for their products or proposed products. They need market intelligence support on continuing basis. For concerted marketing efforts of the products of rural industries and the rural clusters, there is an urgent need of an organization to take up the activity of market research on a regular basis. This will support the small entrepreneurs to get an advantage of market research in marketing of their products. Direct contacts of these entrepreneurs with the final consumers should be encouraged. Moreover the Government and NABARD should be ensured about the proper branding of the products. Specific marking should also be encouraged to popularize handmade products and to guarantee the buyer that the product being purchased is genuinely handmade. A mechanism to ensure the better packaging and better quality of these products should also be evolved.
  
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  The untapped domestic and international markets for traditional crafts should be explored. Advertising campaigns in India and abroad should be encouraged to make people aware of products of rural industries and to project it as a fashion statement for the youth. Shops should also be opened at all international airports in India and the possibility of marketing of products through e-commerce should be explored. Moreover, the Government and NABARD may also consider setting up of permanent exhibition centres on the lines of Delhi Haat. Periodic exhibitions may be held by the Government and NABARD in partnership with private businesses/ MSME Associations. Private business houses should also be requested to earmark outlets for the products of MSMEs.
  
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  In order to improve the competitiveness of SMEs, schemes for establishing mini tool rooms, setting up of design clinics and providing marketing support should be innovated on Public Private Partnership basis. Financial aid for market survey, publicity, design development, product diversification, and market incentives should be encouraged. Moreover a scheme for Product Development, Design Intervention, and Packaging may be introduced.
  
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  The Government should assign priority to MSMEs in its procurement policy also. In this direction, NABARD may act as the Nodal Agency for procurement preferences by way of consolidating Government requirements and disseminating information to MSMEs, coordinating the procurement procedures, and even acting as the negotiator on behalf of the MSMEs. A nominal fee may be charged for the services rendered to SMEs.
  
• 
  Although improper infrastructure is barring the growth of RNFS yet the expansion of roads, transport, and communications infrastructure leads to specialization and division of rural workforce. It develops the trade, marketing, and distribution network; including subcontracting arrangements linking farm and non-farm sector to local towns/big cities. But this may also have a negative impact on RNFS. As rural areas become more accessible, competition from cheaper urban or imported products and changes in rural consumption patterns may also result. Therefore all the infrastructure development schemes of the Government and NABARD should be as such to avoid this disadvantageous factor and should focus on the stimulated growth of rural sector.
  

To overcome the severe problem of power, new hydro plants should be established. In this respect the Uttarakhand state has a huge potential to generate the hydro power as it is having huge water resources. This potential should be utilized by the State Government for enhancing the employment opportunities as well as to provide support system for non-farm activities in the state. Moreover the power tariffs need to be lowered while its quality and consistency should be improved.

RIDF, infrastructural development fund of the NABARD, is a substantial and cost effective source of fund for the State Governments for investment in rural infrastructure, the demand for which always surpasses its supply. Lakhs of projects in irrigation, rural connectivity, and other vital sectors are being financed from RIDF. However there is no long term and assured fund flow for RIDF. The ability of the State Governments to raise resources is restricted by the borrowing limited imposed on them under the constitution. The State Governments therefore need to earmark adequate funds in their budgets and their borrowing plans for completing the RIDF projects.

There must be an adequate planning at the grass root level of RIDF projects. These diversified projects entail the participation of many State Government Departments. For timely completion of RIDF project, the staff of various State Government Departments needs to be adequately trained in techno-financial appraisals of the projects under RIDF. Further, the State Governments need to maintain a ‘shelf of projects’, in the order of priority.

Despite lakhs of RIDF projects in irrigation, rural connectivity, and other vital sectors, it is felt that the gigantic gap in rural infrastructure cannot be bridged by the State Governments due to their limited resources and organizational structure. NABARD is looking at leveraging public-private participation with private entities for bringing private sector competence and funds into the realm of rural infrastructure through a separate window called NIDA. However it is a praiseworthy effort yet it should be utilize in a proper way to make inclusive infrastructural growth in the rural and remote areas.

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  A more secure system of accrediting warehouses should be also encouraged so that certification about quality and quantity of the goods plus credits and standards of the goods stored can be provided. The Amendment to the Warehousing Act, pending in the Parliament should also be expedited. To explore the horticultural aspect of the state, the food processing centres, flowers processing centres, and cold storages should be encouraged. Besides this there must be a compilation of an accurate database of the SMEs.