UPSC Essay: Are our traditional handicrafts doomed to a slow death?

The success of any business in today’s competitive world depends upon how well it is able to capitalize upon its core competencies. Indian handicraft industry, too, can’t be any different. So it is natural to ask ourselves – what are these core competencies of this sector?

Indian handicraft industry can be divided into two broad segments – one being the ‘high end’ segment comprising of the luxury products and catering often to the foreign markets. Examples could be the pashmina shawls or the fine sari works of Kanchi. The other segment is the one catering to the local market and often selling the ‘no frills’ products at cheap rates. Examples could be the temporary stalls put up around festival times in many cities selling flower garlands or pots for the ‘pooja’. Both are obviously different and have different sets of core competencies. Some further thought quickly tells us that while the former segment draws its strength from the rich socio-cultural heritage of India, the ‘no frills’ sector depends upon its ease in cost effective geographical penetration. Clearly the wants of both segments are very different.

Next we must ask ourselves what does it take for a business to be able to successfully draw upon its core competency or what are the key factors driving success. In the framework we use, such factors can be broadly classified under three ‘pillars’:

– The Knowledge Pillar,
– The Linkages Pillar, and
– The Environmental Pillar.

The knowledge pillar includes factors like how well is the business using modern management techniques, or how is it faring on the technology front. Is the entrepreneur willing to take the needed risk to grow his business or are there certain factors which are systematically suppressing the risk taking appetite in the industry? Finally, is the entrepreneur being able to impart the needed skill training to the labor employed (including his self labor and that of his family as the case may be). Needless to say the importance of this pillar cannot be under emphasized and it is often this one which becomes a determinant of how the business fares in the other pillars as well.

The second pillar of business success is the linkages pillar and this stems from the fact that every business today is linked with other businesses in the economy. It draws from others and supplies to others. Thus an entire supply chain is formed and constraints arising anywhere in this chain may hamper the development of this business. In our framework, this supply chain includes the forward linkages, the backward linkages, the infrastructural linkages and the capital linkages. Here the questions we ask are – is the business able to reap the rewards of its venture and sell its output profitably or are there other players in the supply chain who cream off all the profits leaving little for our business? Are the poor infrastructural amenities driving up the costs too high so as to nullify any advantage arising out of our core competencies? Or despite having everything else, the business just can’t get enough capital to make it big?

Finally there is the environmental pillar which means are the macro (both national as well as the international) conditions favorable for the business? Are the governmental policies really enabling? Also (and with growing importance in modern times), is the business being able to comply with the new environmental regulations being set across the world?

Having defined the framework let us now see how does the Indian handicraft industry (both segments) fit into it so that we may be able to determine if its doomsday is inevitable. A convenient tool for such purposes is the SWOT analysis tool i.e. analyzing the strengths, the weaknesses, the opportunities and the threats to the business.

Let us begin with a quick review of the current situation. it is no secret that the Indian handicrafts are struggling. We had expected that post-WTO, our handicraft exports would increase due to improved market access. And they did for a while though not quite as much as we had expected. And finally in 2008 when we were expecting them to increase from Rs. 17,000 crore (in 2008) to Rs. 30,000 crore in 2010, they actually almost halved (Rs. 8,000 crore in 2010) and have stagnated since! One easy way out is to ascribe the phenomenon to the global meltdown and definitely its role can’t be denied, but the consider this. China which commands a much larger export share than us in the global handicrafts market (despite having considerably less cultural diversity than us) is now again seeing an exponential growth in its handicrafts exports after the 2008-10 blip. So clearly our SWOT analysis needs to probe deeper and into each of the pillar. Since the current state of affairs is not particularly an exciting one, let us begin by seeing why it has come to what it is today.

To see the weaknesses / challenges in the knowledge pillar first, it is important to analyze the background of the Indian handicrafts sector first. Virtually the entire sector lies in the unorganized sector. Not just this, the entrepreneurs are marred by chronic poverty (the percentage of poor in this sector is abnormally high), social injustice (due to cultural factors, it is mostly the scheduled castes / tribes or the other backward sections – specially the backward minorities who are engaged in the sector) and serious insecurities relating to health and education. The net result of these disabilities is that the entrepreneurs are forced to be risk averse (how can we expect a person on the verge of starvation to assume any risk when his survival could be at stake). Thus they are not able to adopt modern management practices, latest technology or even provide the needed skill training to the labor.

Now this has the effect of landing them into a vicious cycle. For the lack of above means a denial of capital since the potential lenders / investors suffer from informational asymmetry and our entrepreneur suffers from lack of credibility. With no capital his bargaining position becomes weak and he can be easily denied even his rightful gains by the supply chain. That would mean lack of capital generation and thus he would never be able to make a transition to the modern management, technology and skills. Hence the loop.

Similar loop exists in the linkages pillar as well. By definition the handicraft units are small and thus suffer from diseconomies of scale. Add to it the fact that most of them lie in the rural areas where the infrastructure access is poor or else they are too poor to afford infrastructure access even when it exists. Thus a ‘crowding out’ mechanism sets in as they now become cost inefficient which further weakens their bargaining power and thus the vicious loop.

Finally in the environmental pillar as well, the challenges are not any less daunting. The government policies no doubt appear to be favoring the handicrafts. But for a long time they suffered from over emphasis on reservations for the sector or we can say were anchored in a Keynesian framework. The logic was simple that reservations would create enhanced demand and thus enhanced production. But Keynesian policies alone are not found to be as effective in the traditional sectors of developing countries due to the presence of the large number of market distortions. So there is a need for supply side ‘enabling’ measures in such cases and such a need was felt in our case as well. Then we took some supply side measures like ‘cheap’ credit. But we failed to address the ground level problems effectively and such measures as the ‘cheap’ credit remained an illusion since credit itself was simply not available. The 4th Census of small industries (2006-07) reveals that over 92% of such units don’t have access to any form of credit (institutional or otherwise)! In the international front also the OECD countries accounted for a large market share and when the financial crisis struck, the demand for the ‘luxury’ items from India crashed as well. Then the sector also became victim to the various environmental regulations – genuine or otherwise – imposed by the developed countries such as the REACH regulations by EU on leather works.

Clearly the challenges are immense both on domestic and international front and it may very well explain the stagnated state of affairs today. However before writing off the case of the Indian handicrafts industry to doom, let us also look at the various strengths and opportunities and evaluate whether they present a genuinely viable case or not.

As we have already highlighted the strength of the industry is the rich cultural heritage of India and nothing can ever take that away (at least for perhaps next few centuries!). On the other hand, it were the other challenges mentioned earlier which prevent us from reaping the dividends of this heritage. So is there any feasible way to overcome such challenges? We believe yes, and we also believe that those very weaknesses vis the rural, unorganized setup are its biggest strengths.

Indian villages are unique in having immense ‘social capital’. True they may be lacking in finance capital but finance capital can easily flow in from outside if the conditions are appropriate. We saw how the informational asymmetry and diseconomies of scale prevented this and led to the denial of capital and crowding out. But if we utilize the social capital of the villages to form self help groups such information asymmetry and scale problems can be effectively addressed. We can then train these SHGs to adopt modern management practices, we can incentivize them to get credit ratings done from standardized agencies which will then address the informational and scale problems and thus the capital will flow in (and there will be no need to dedicate public capital here as private capital specially the micro finance groups have shown to effectively step in such cases). Banks too have found it useful to lend to such SHGs via the new Business Correspondents model and if we amend some laws, these SHGs may have the potential to raise capital directly from the markets via SME exchanges. By creating viable SHGs of critical mass, we are also doing away with the bargaining weakness problems since the entrepreneurs will be able to negotiate better terms. Thus the inefficiencies in the supply chain will be weeded away by a market based process and the entrepreneurs will now be able to generate capital, invest in technology and skill training and thus be able to create a virtuous cycle out of the vicious one. Also, importantly, we already have seen that the SHG model works in real life as well (NRLM, Kudumbshree in Kerala, NE-RLM in Assam). Similarly while it may be a tall order for the government to provide infrastructural facilities to every village, the ‘cluster’ based approach can help us overcome the infrastructure barrier and can also increase the bargaining power of the entrepreneurs.

Another important challenge which we saw was how these entrepreneurs are forced to be risk averse out of socio – economic disabilities. Definitely we need to remove the impediments to their risk taking ability. And such impediments as we saw were the chronic poverty, health and educational insecurities and social injustice. This is where the fundamental right to education (implemented via Sarv Sikhsha Abhiyan), providing food security (proposed under National Food Security (Draft) Bill, 2012) and universal health care (Planning Commission high level group recommendations) step in. Once such ‘unfreedoms’ (to borrow from Prof. Sen) are removed, there is no reason why can’t unleash the enterprising potential of the handicrafts sector in India as China has already done.

Finally, like any other business, handicrafts too will need an enabling policy environment framework. Focus needs to shift from Keynesian approach to a more enabling approach. Some of the aspects of the enabling approach we have already covered above. To address some other concerns like the skill training in the knowledge pillar, we have come up with the National Skill Development Programme directed by the National Skill Development Council. The increasing penetration of cellular and broadband services (as envisaged under the National Telecom Policy, 2012) can help address many of the concerns under the knowledge pillar and the linkages pillar. The PURA 2.0 scheme of the 12th FYP too is a highly cost effective scheme to improve the rural connectivities and thus help overcome the infrastructure constraints.

Finally in terms of improving the international environment, we need to diversify into newer markets (and for this we already have a Focus Product Market Scheme under the Foreign Trade Policy 2009). To help our handicrafts comply with the international regulations, we definitely need the state to disseminate information and to aid the entrepreneurs in making the transition. We have already seen this in the leather industry of Kanpur where the state provided grant (60% center and 15% state) to the leather units to set up waste treatment plants to comply with EU’s REACH regulations. Such informational exchange can also be enhanced along with improved supply chain efficiency if we increase the participation of our entrepreneurs in various trade fairs.

Thus we see step by step, how there is a genuine viable case for the handicrafts here. We don’t need to ape other countries and spend huge sums of public money, rather just need a change in approach and follow a unique model to utilize our own core competencies – and we can turn our handicrafts around.