Prime Minister Narendra Modi, recently reelected with another absolute majority in the Lok Sabha, faces two strategic issues that offer much opportunity: increasing weak income in the farm sector and improving the level of employment. Although the Modi government has made progress in infrastructure development, electricity, and sanitation during the past five years, these two structural issues are a critical drag on the country’s economy.
India’s GDP growth has ranged from 9.3% in 2016 to 5.6% year-on-year in January of 2019. The record high was a running rate of over 11% achieved in early 2010. The projection of the World Bank for fiscal 2020 is 7.5%. As the fastest growing major economy in the world, these aggregate figures are impressive. However, they mask a weak and inefficient agricultural sector whose growth rate has ranged from 0.6% to 2.9% since 2016.
Various reasons may be cited for this phenomenon: depletion of aquifers, industrialisation, lack of technological innovation, fragmented land holdings and limited incentives to take risk – and emphasis of other sectors of the economy, most notably IT, telecommunications, consumerism and business services. The Indian agricultural sector was once the beneficiary of the Green Revolution, modernised by tubewell irrigation, boosting yields of food grains per hectare in areas that were once dry-farmed. Now yields are maxed out, and there is an enormous structural inefficiency: 17.1% of India’s GDP is derived from agriculture, but this sector employs almost half the country’s workforce.
A national debate has started on the use of genetically modified (GM) seeds; their impact on human health and the environment is not yet clearly understood. While farmers are adopting these seeds that are resistant to plant diseases and droughts, their use has been mired in a patent dispute (until a Supreme Court ruling in January); controversy over payment of royalties; and central government regulations prohibiting their use.
Most recently, a civil disobedience movement has arisen in Maharashtra, with farmers defying regulations and risking fines and imprisonment to be able to use GM seeds. The fact that distressed farmers are willing to break the law to plant these drought-/disease-resistant seeds and are willing to incur financial and legal exposure, attests to the increasing desperation in the agricultural sector.
The West has made strides in the use of GM crops, but not without controversy. Perceptions are divided between it being a human and environmental threat and a beneficial technology to increase world food production.
Prime Minister Modi is known to be supportive of it, dating to his tenure as chief minister of the state of Gujarat, where genetically modified cotton was introduced successfully. However, the legal proceedings in India of Monsanto, the American agrochemical multinational now owned by Bayer, have, in part, influenced opposition in India to the future of genetic modification in agriculture as have environmental groups in Latin America.
India’s world standing in food and agriculture gives it a strategic platform from which to exert leadership in identifying solutions – by using innovative technology or through genetically modified seeds or risk incentives. A major national undertaking, with sponsorship by the highest levels of the government of India in partnership with the private sector, can conclusively assess the benefits and risks of genetically modified seeds – and uplift the agriculture sector.
The second strategic challenge is unemployment at over 6%, a 45-year high. However, there is debate on whether the focus should be on job creation or the level of wages. Focusing on job creation, the World Bank advises that the Indian working age population increases by 1.3 million per month. However, other expert sources opine that unemployment figures are not relevant because of low wages that offer no incentive, as well as underemployment, where the poor are engaged in “marginal self-employment”.
Thus far, Make in India has yielded some high-visibility joint ventures with U.S. companies: Tata/Boeing production of fuselages for the AH 64 Apache and a Mahindra/Boeing venture to manufacture the F/A-18 Super Hornet fighter are examples. However, foreign joint ventures do not have the scale to address India’s employment challenge.
Further, there is not much data about the incremental effect of Make in India, launched in 2014. Even though the Employees’ Provident Fund Organisation, controlled by the Ministry of Labour and Employment, estimates job creation at almost 500,000 per month, it is significantly less than the envisioned 1 crore per year.
Some experts believe that to increase employment, more development of the Small and Medium-sized Enterprise (SME) sector is necessary. According to Evoma, a Bangalore-based business services firm that assists small companies, there are an estimated 42.5 million SMEs in the country, constituting 95% of industrial units, 45% of total manufacturing and representing the second largest employment sector after agriculture.
However, it is acknowledged that the availability of bank credit is a strategic impediment for SMEs, many of which are not bankable at all or cannot support credit for long-term growth.
In the budget announced on July 5, the government of India announced a Rs 70,000-crore ($10.3 billion) capital infusion for public sector banks in order to increase the supply of credit. This is a positive development for the banking sector, but it does not address credit quality of the corporate sector, particularly SMEs.
To assure more credit for SMEs, structured finance, particularly with the use of insurance to underwrite performance risk, should be reviewed as a national priority. While SMEs may not support credit as standalone entities, they can assign their sales revenue to a lender as a credit enhancement, such that a stronger third party makes loan amortisation payments. The bank will look to that assignment for liquidity, and to the insurer for the underwriting of performance risk, i.e. ensuring that the SME delivers the product to its customer.
Due to exclusions of liability and a slow process for payment, performance risk insurance is generally considered weaker coverage than a bank standby letter of credit as these are often payable on demand. However, such performance risk insurance is a valid means of credit enhancement. And insurance companies typically charge several times the sum that a bank requires to underwrite that which is fundamentally the same risk.
As a major national initiative, and to achieve scale, a syndicate of insurance players, and possibly, the government in some role, will be needed. To offer institutional investors an opportunity to participate, as well as diversification, a bank loan fund, appropriately insured, can also be structured. India needs support for a proactive insurance industry developing a performance risk product for selected SMEs – like in the West.
India is a massively complicated democracy and evolving federal system, with many competing constituencies based on language, religion, caste and regionalism. The country is capable of brilliant diagnostics to address these agricultural and employment challenges. It has also demonstrated the type of leadership and national will power required for implementation. Some examples are: the Green Revolution; family planning movement, with the fertility rate falling from over six in 1947 to 2.4 currently; the national biometric identification programme; the Jan Dhan Yojana for financial inclusivity; and the massive Swachh Bharat sanitation project. The same level of focus and national commitment are required to achieve a game-changer in agriculture and stimulate the SME sector.
Frank Schell is a business strategy consultant and former Senior Vice President of the First National Bank of Chicago, where he had an extensive international career.
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