Medical Devices Industry of India

Industry overview

The medical device industry of India, consisting of a wide spectrum of components and segments, has been consistently registering a double-digit growth rate in the past few years averaging to 15.8% from 2009-16. The current market size is estimated to be USD 11 billion which is the 4th largest in Asia. With a large number of multinationals dominating the sector and Small and Medium Enterprises (SMEs) growing at an unprecedented rate, the market size is expected to reach USD 50 billion by 2025. Being a “sunrise segment” in the healthcare space under the “Make in India” initiative, the government has been undertaking several proactive policy interventions to promote the industry. An attempt has also been made to simplify the regulatory requirement and restructure the traditional inverted duty structure to enhance domestic production.

However, having said this, the sector is still caught up in the “low-level equilibrium trap”[1]. While some cities of the country attract huge amounts of medical tourists, other areas are deprived of the basic medical facilities. Similarly, the demand for low end consumables overweighs the demand for high-end and high-tech products. The demand constraint of the sector not only limits its future growth prospects but also fails to attract investors and producers. In order to encourage foreign investors,100% FDI is permitted in the sector through automatic route.

The medical device sector of the country is highly fragmented both in terms of scale and geography. Currently, there are five medical device clusters in India viz.

* Haryana (Consumables and dental equipment)

* Surat, Gujrat (Stent manufacturing)

* Delhi (Medtech innovators)

* Karnataka (Insulin pens, Medical IT, Cardiac stents and implants, PCR machines)

* Tamil Nadu (Diagnostics, Critical life support system, Ophthalmology)

Besides, four MedTech parks are being constructed around these clusters to facilitate infrastructural development and proper ecosystem for the suppliers, manufacturers, developers and medical device companies. The industry in India is segregated into five major segments:

* Consumables & Disposables

* Equipment and instruments

* Patient aid

* Implants

* Stents


[1] “Low-level equilibrium trap” concept was introduced by R. R. Nelson in context of low of per- capita income. In context of demand, it means low-level of demand is caused by low investment which in turn restricts the growth of the market and the industry continues to be “trapped” in the low equilibrium situation.

Under the new “Medical Devices Rules 2017”, medical devices are classified into the following four groups as per Global Harmonisation Task Force (GHTF)

* Class A (low risk)

* Class B (low moderate risk)

* Class C (moderate high risk)

* Class D (high risk)

India mostly specializes in the production of the first two categories which involve less innovation and technology. Class C and Class D, largely termed as Advanced Medical Devices (AMDs) involve higher degree of risk. High level of technological expertise is pre-requisite for the production of such AMDs.

Advanced Medical Devices (AMDs) – An emerging subsector

Advanced medical devices are classified to be those devices which are mostly driven by advanced technology and innovation. Manufacturing AMDs require substantial effort, manpower and intelligence devoted towards research and development. Some of the most advanced technology supported with innovations in the field of medical devices are health wearable (Apple Series 4 Watch that has an integrated ECG to monitor the wearer’s heart rhythms), 3-D printing which can be used to create implants and joints to be used during surgery, Bluetooth enabled smart inhalers etc. AMD is largely prevalent in advanced economies mainly in the West and Japan. Indian medical device market lags behind in terms of production of AMDs largely due to the lack of research and development (R&D) and innovation. Traditionally, the industry has been focusing more towards conformance and reproducibility rather than innovation and novelty. Technology based product innovation is almost rare in India. Some initiatives that may be undertaken to expand the AMD market in India include:

* Optimal utilisation of the MedTech parks and customising it as per the need of the producers and industry experts

* Targeted tax interventions, corporate tax benefits and competitive tax breaks on research and development investment can incentivize big houses

* Preferential purchase policy may encourage domestic manufacturers of AMDs by giving preference to in public procurement

* Promoting academia-industry partnership and international collaboration to stimulate research and development efforts in India

* Measures need to be taken to correct the low-level of equilibrium trap and generate sufficient demand to incentivize the investors

Regulatory Landscape

India’s Central Drugs Standard Control Organization (CDSCO) under Directorate General of Health Services, Ministry of Health and Family Welfare (MoHFW) is the responsible regulatory body of medical devices in India. Until recently, Indian regulatory system(medical device directive) only covered 15 “notified categories” and the rest of the market had been largely unregulated. However, starting from April 1, 2020, India has rolled out new regulations that notifies every medical device sold in the country.

As a part of medical device regulations in India, the government has recently launched Production Linked Incentive (PLI) Scheme which aims at promoting domestic manufacturing of medical devices and attracting foreign investors through incentives ranging from 4%-25%. Since a majority of medical devices related to cancer, radiology, anesthetic, cardio respiratory and heart are being imported, firms manufacturing these medical devices will be incentivized.

Challenges 

Around 70-75% of the domestic demand is met through import while around 30% is produced domestically and exported. Huge import dependence therefore remains one of the major stumbling blocks for the industry. An interesting phenomenon of two-way trade or intra-industry trade dominates the trade scenario between India and its other trading partners where the same product group is both being exported and imported. This seemingly paradoxical situation can be easily explained by variation in product quality and economies of scale. The import basket of India mostly consists of high-tech and high-end consumables whereas its export is biased towards low-end and minimum tech-embedded products. Thus, an insight into India’s trade pattern reveals its traditional production structure and technological backwardness. To achieve self-reliance, India needs to overcome this import dependency through import replacement and focus on domestic market expansion.

The sector also lacks investment dedicated towards research and development services and innovation. For India to emerge from the vicious cycle of low-end production, substantial effort and push has to be given to the private players for undertaking research activities. To overcome the dependence on import for high-end consumables, domestic production of such sophisticated equipment with the required R&Dunits needs to be promoted. Likewise, to prioritize high tech production amongst manufacturers, reliance on imports must be lowered.

The domestic market is also characterised by sporadic demand generation. Considering the highly skewed income and wealth distribution, the demand remains concentrated only within a few segments of the industry. While some cities like Bangalore and Vellore attract a huge pool of medical tourist, many other cities are deprived of basic healthcare amenities. Thus, there persists an asymmetry in the demand generation both across the country and the product groups.

Lastly, both the existing players and the potential entrants of the industry find it difficult to gain clarity on the regulatory environment of the sector. The dynamic nature of the regulatory environment could create obstacles for the companies as they might face problems in coping up with the changing requirements and registration or licensing processes.

Opportunities

The industry being at a very nascent stage possesses significant potential to become the growth driver of the economy. The recent policies and measures adopted by the government open up a plethora of opportunities for the manufacturers and investors. Moreover, the country’s aging population coupled with its increasing disposable income and insurance coverage is expected to generate substantial demand. An insight into the national health profile also unveils the shift of the disease pattern towards chronic diseases like diabetes, cardio-vascular diseases, lung and renal diseases which require prolonged treatment and frequent use of various sophisticated devices. Both private and public spending on healthcare have been rising at a rapid rate. According to the National Health Policy – 2017, healthcare spending by government is estimated to be 2.5 percent of GDP by 2025. Several demand as well as supply side factors continue to provide unique opportunities for the sector. Some of which are as follows-

The recent outbreak of the novel coronavirus has led investors and manufacturers to shift their focus from China which was a major supplier of Active Pharmaceutical Ingredient (API) and Personal Protective Equipment (PPE) towards other emerging nations. India, being a labour-intensive country, stands a good chance to become the next manufacturing hub with introducing incentives to attract multi-nationals from India and beyond. As China lies at an important stage of the product value spectrum, it widens opportunity for India to capture the higher end of the spectrum with its comparative advantage and investor-friendly policies.

Recommendations

Some of the essential factors determining the sector’s future potential and growth prospects  need re-consideration and re-orientation. Policy intervention and measures can be successful only if they are guided by proper implementation. The following measures are necessary in order to re-structure the critical parameters of the industry –

* Boosting research and development (R&D) in businesses is the need of the hour and effective academia-industry partnership is indispensable for it. Innovation lies at the heart of academia, and universities generate high-quality, intellectual property on a large scale. However, most of these innovations do not result in commercial translation. For optimal utilization of such innovations, the industry needs to join hands with the academia.

* Collaboration among the manufacturers and joint venture projects can help overcome various challenges. Seminars and events can be organized at regular intervals to bring the industry together.

* A sturdy infrastructure is a pre-requisite for the expansion of the sector. The industry needs to replace its structural backwardness and traditional technology with modern AI based capital-intensive methods.

* Insufficient domestic demand contributes to low productivity and limited market size. A thrust to the healthcare system is expected to generate substantial demand for the medical devices. Improvement of the overall healthcare structure will also attract medical tourists which would also contribute to the demand.

* The medical devices in our country are categorised into four broad risk categories with Class A being the lowest and class D being the highest risk category. Thus, policies need to be designed separately for each of the risk categories keeping in mind their special features and needs.

Conclusion

Medical devices sector of India is at a crossroad and needs intervention in many ways. In the recent past, a number of measures have also been undertaken to ensure sustainable and substantial growth of the sector. However, growing health concerns and stress on achieving self-reliance demand faster growth of the sector. Although many measures have been taken in the past to redress these issues and significant impetus initiatives like “Make in India” have already been implemented, more needs to be done to support the industry. Thus, the potentialities of the Indian medical device sector as a growth driver would enable India to emerge as the next medical device manufacturing hub of the world.

Authored by: Antara Mukherjee, Head of Research
Contact details:
antara.mukherjee@intueriglobal.com

About Intueri: Intueri Consulting is a management consulting firm with nearly 100 man-years of experience in managing organizational challenges, including managing firms and clients through some of history’s biggest crisis periods such as the 1997 Asian Financial Crisis, 9/11 led crisis, 2007-08 global financial crisis. This vast repository of organizational management experience, accrued by senior management, over decades of managing large multinational firms and clients enables Intuerito develop effective, efficient crisis management strategies and provides it with a unique perspective into events and decisions that take into consideration all important aspects of a firm, including assessment of primary, secondary and even tertiary order potential effects on the firm on account of implementation of strategies. Intueri has been helping organizations of a different scale to raise funds in a hyper-competitive ecosystem and has prepared an end to end value offering for an investor roundtable. The firm has consultants, well balanced with the domain knowledge and cross-sectoral industry analysis approach and possesses a strong network of financial advisors.

Feel free to reach out to us for a detailed discussion.

Opportunities in the Indian Pharmaceutical Sector Post COVID-19

Objective

Introduction

The ongoing COVID-19 pandemic has shown the Indian pharmaceutical sector in good light recently, while at the same time, it has significantly exposed the frailties of the sector. Currently, the Indian pharmaceutical sector is in the news for good reasons as it is able to export millions of doses of hydroxychloroquine, an antimalarial which, while not conclusively tested to be able to cure the coronavirus, has had some cases of making patients recover to countries like the United States and Brazil. However, the initial outbreak of the disease in China was a crisis for this very sector, as 70% of the active pharmaceutical ingredient (API) requirement was met by imports from China2 and as supplies for APIs, which is the principal raw material for drug manufacturers stopped, there were worries about how long can the pharmaceutical sector produce at maximum capacity.

Due to this challenge that the sector faced during this crisis, various economic bodies in the country such as the NITI Aayog have mentioned that this needs to be addressed and a new policy must ensure that the manufacturing of APIs and pharmaceutical intermediates within the country should be promoted. The NITI Aayog CEO Amitabh Kant has met representatives of pharmaceutical companies to discuss reducing API dependency on China3, and according to the national president of the Bulk Drug Manufacturers’ Association, the government is looking to build API parks3. While this is an obvious opportunity for pharmaceutical companies to backward integrate and start producing APIs and intermediates, it also provides companies in other sectors such as speciality chemicals to enter this sector. For these players to enter, it would be necessary to know the numerous manufacturing steps that convert a naturally-found product into a tablet.

What is a Drug?

In pharmacological terms, the definition of a drug would be a chemical substance of known composition which evokes a biological effect when administered into a living organism5. In case of a pharmaceutical drug, that biological response would be to treat, cure or prevent a disease or alleviate the symptoms.

The major component of a drug would be the active pharmaceutical ingredient (API). This is the biologically active compound that acts on the body to produce the desired response. In some cases, a drug would have multiple APIs, such as the combination of amoxicillin and potassium clavulanate which forms a more efficient antibiotic than just amoxicillin and is sold under the trade name Augmentin6.

However, the API is not the only component of a drug. A drug also contains various other components called excipients which play other roles. There are various kinds of excipients7. Vehicles, for example, help the active ingredient reach the site of action when it cannot do so for any reason whatsoever. Binders help the different components bind while disintegrants cause the tablet to break apart under specific conditions, such as the extremely acidic conditions in the stomach. Flavours, sweeteners and coatings make the drug more palatable, with the latter causing the added benefit of protection of ingredients from moisture in the air, while colours improve the tablet’s appearance. Enterics control the rate at which the active ingredient is released. Depending on the mode of administration and nature of the disease, some of these excipients are combined with the API to form a dosage.

Drug Production Value Chain

The raw material that starts the value chain would be a compound extracted from a natural source. The earliest drugs as we would know it would often comprise of such compounds. Examples would include penicillin which is produced by moulds of various fungi of the genus Penicillium and quinine which can be extracted from the bark of the cinchona tree. However, today’s APIs are mostly produced by performing further reactions on a naturally-occurring compound to produce a more efficient compound.

The conversion to API from a naturally-occurring compound is a process that make require one or more steps. If it requires more than one step, then the product of every step apart from the final step that becomes the reactant in the following step is called an intermediate. In some cases, an intermediate can be a compound that is already synthesised in industrial quantities for other uses. For example, the anti-inflammatory drug ibuprofen was first synthesised from propionic acid8 which, while available in small quantities from natural sources, was available in large quantities through the reaction with ethylene as it is commonly used as a preservative9. The final step would see the conversion of the final intermediate into the API.

In making the final drug, it has to be ensured that every dosage, such as a tablet, should have the correct composition and the exact amount of the API. In case of tablets, this is done by making a homogenous mix of ingredients through blending and granulation10. The tablet is then made using powder compaction and are subsequently coated with a suitable coating10. In case of capsules, the powder containing the API and other excipients is encapsulated in gelatine or hypromellose11.

The final step of converting the API to form a drug dosage is something Indian pharmaceutical companies are adept in. The problems that arose during the COVID-19 crisis arose from the unavailability of APIs and intermediates. The global API market stood at $182.2 billion in 2019 and is estimated to reach $245.2 billion in 2024 at a CAGR of 6.1%12. As Indian pharma would be hopeful for more APIs and intermediates being made in India, the CAGR of the Indian market would be much higher and massive opportunities lie here for APIs and intermediates to be made in India.

Examples of drug value chains

Hydroxychloroquine

Hydroxychloroquine is perhaps the most talked about drug in the country at this point of time. The drug that has been tested to work as a treatment for malaria, lupus and rheumatoid arthritis is now believed to be capable of treating COVID-19. As a result of this, the global hydroxychloroquine market is expected to grow at a CAGR of 33.47% from $542.36 million in 2019 to $5415.23 million in 202614. Today, India is the market leader when it comes to manufacture of the hydroxychloroquine drug, amounting to 70% of global production, with major players being Zydus, IPCA and Cipla14. However, China is the leader in the global hydroxychloroquine API production.

There are various patented processes for the synthesis of hydroxychloroquine molecule. In one of the processes, the final intermediate that is reacted to form hydroxychloroquine is 4,7-dichloroquinoline15. 4,7-dichloroquinoline can be produced in four steps from an array of readily available compounds such as benzene and acetic acid16,17,18,19. Therefore, while producing hydroxychloroquine drug is untenable for a new entrant thanks to both strong players in the Indian market and the huge number of regulations in the pharma sector, production of the final hydroxychloroquine compound or any of the intermediates such as 4,7-dichloroquinoline, 3-chloroaniline or diethyl ethoxyethylenemalonate using existing or newly developed pathways is always possible and subject to fewer regulations.

Lopinavir

Lopinavir is an antiretroviral that is used in the treatment of HIV/AIDS. It works as a protease inhibitor. It is often used in combination with a low dose of ritonavir, another protease inhibitor and this combination is present in the World Health Organisation’s List of Essential Medicines20. Recently, this combination drug also made the news as Yusuf Khwaja Hamied, the Chairman of Cipla, is repurposing this drug to combat coronavirus21. While there are no available reports with quantitative data on lopinavir’s market size, it is safe to say that the market size will grow at a tremendous rate if it does turn out to be effective against coronavirus.

There are various resources available online which mention how lopinavir is synthesised. One of them mentions how lopinavir was developed in multiple steps using the readily available amino acid L-valine as a starting material22. Production of lopinavir compound or any of the intermediates in the process which is considered the most efficient is extremely valuable as there are plenty of buyers looking to buy it to complete the remaining steps.

Atorvastatin

Ever since it was approved for medical use in the United States in 1996, atorvastatin has been one of the biggest selling drugs in the world23. One of several statins, it is used to prevent cardiovascular disease and treat dyslipidaemia, or an abnormal amount of lipids in the blood. In 2017, this was the second most prescribed drug in the United States, with the number of prescriptions exceeding 104 million23. Sales of atorvastatin from 1996 to 2012 exceed $125 billion23, making it one of the best-selling drugs of all time. The atorvastatin API market is expected to reach $425 million in 202324. While currently United States is the market leader primarily because it is the country with the maximum demand for atorvastatin, the demand for this drug will increase in other parts of the world including developing countries due to the increased sedentary lifestyle in these places.

There are various routes possible for the synthesis of atorvastatin. One of them, which was mentioned in a research paper, uses readily available 3-fluorobenzaldehyde, isobutyric acid, an amine and an isocyanide as starting materials. The commercial method, as used by Pfizer, uses the Paal-Knorr reaction. Production of the final atorvastatin molecule or the intermediates for any of these routes or any other route which is considered the most efficient is valuable as buyers would look to use this to complete the remaining steps.

Conclusion

Opportunities in the Indian pharmaceutical sector with respect to active pharmaceutical ingredients (APIs) and intermediate compounds were looked at by taking the example of three highly profitable drugs and their value chains. The opportunities are certainly not limited to the examples mentioned above, and this would allow anyone looking to enter this space aspire to make a plethora of APIs and intermediates that can be used to make drugs that perform different actions on the human body.

Many companies in the speciality chemicals sector and other chemicals sectors already have the experience in synthesising large amounts of organic compounds. With a little expansion of their knowledge bank, they can enter this exciting space with assured customers in the form of drug manufacturers. This will not only help pharmaceutical production in India be protected from factors happening in other countries, but also provide many manufacturing jobs to Indian people and bring prosperity to the country.

Many drug manufacturers are also in the API production business, but the amount of API they produce is not enough to match its drug production capacity and therefore, in the current scenario, they are forced to import from countries like China. Backward integrating into the API business and further increasing the capacity of the APIs for the drugs that they are already manufacturing would be a major risk minimising tool for these pharmaceutical companies and help them maintain consistent level of production.

Given this current business environment, it is imperative that the government grabs this opportunity with both hands and helps make India the new global API and intermediates hub. It has been reported that India’s API industry was ahead of China in the 1990s, but thanks to the latter providing various benefits such as free land, cheap utilities such as water and power, and negligible financing costs, China took the lead and soon became the global leader in APIs, thereby making Indian pharmaceutical companies dependent on Chinese API manufacturers for raw material3. In order to make India the new global API hub, the API and intermediate parks will have to be set up where companies get benefits when it comes to utilities and financing. Many companies in the chemical sector are unwilling to enter this space due to the large number of regulations in the pharmaceutical sector and lack of knowledge. The government will have to ease regulations and make it easy for companies to set up an API or intermediate manufacturing plant. To address the latter problem, an economic body like the NITI Aayog can help start conversations between Indian pharmaceutical companies and chemical companies, where chemical companies can identify how their capabilities can help them enter this exciting sector.

Limitations

For the examples, the processes described were taken from various chemistry websites and research articles that have been referred below. This blog does not definitively mention which process is the most feasible both financially and chemically, or which process is used by industrial players today for the synthesis of intermediates and APIs. This blog does not vouch for the chemical and financial feasibility of the processes explained, and separate research would have to be undertaken to identify what is the most efficient and profitable route to synthesise a given compound.

References

Authored by: Abheek Dasgupta, Associate

Contact details:

abheek.dasgupta@intueriglobal.com

About Intueri: Intueri Consulting is a management consulting firm with nearly 100 man-years of experience in managing organizational challenges, including managing firms and clients through some of history’s biggest crisis periods such as the 1997 Asian Financial Crisis, 9/11 led crisis, 2007-08 global financial crisis. This vast repository of organizational management experience, accrued by senior management, over decades of managing large multinational firms and clients enables Intueri to develop effective, efficient crisis management strategies and provides it with a unique perspective into events and decisions that take into consideration all important aspects of a firm, including assessment of primary, secondary and even tertiary order potential effects on the firm on account of implementation of strategies. Intueri has been helping organisations enter new areas within the chemical sector in order to diversify their product mix with the help of existing players who are looking to buy something they need or to sell something that they make. The firm has consultants with extensive domain knowledge both in the chemical and pharmaceutical sector.

Fundraising action plan for startups amidst the Covid-19 induced uncertainty

Objective

Introduction

Post the 2008 recession, three recently founded startups decided to brave the superlatively bearish sentiment of the economy and developed a blue ocean strategy to enable consumers to try their innovative services. Consumption was remarkably low, translating to restrictive spending and ‘wise’ usage of capital. In such a period, investors and fund houses were difficult to approach for fundraising applications. A significant portion of investors fell short of wealth and even the ones ‘open for business’ were stringent in their due diligence or demanded a higher stake in the ownership. Despite all odds, these three firms stuck to their core value proposition and kept a continuous focus on user satisfaction and strived hard to keep the ‘wow’ factor alive in their product. Post their first funding rounds in late 2008 or early 2009, they have been hunted around by the most glamourous of the fundraising community. At present, quite a few of the mightiest global financial sponsors have parked their funds with them.
Spotify, AirBnB and Uber, thus, acts as pillars of inspiration for businesses to sail through an economic collapse and raise capital during uncertain times.


The above diagram represents the journey of fundraising for an organization from foundation stage to IPO. As depicted, although revenue correlates with the accumulation in funding, the revenue curve gradually flattens with time, till the firm surfaces for an IPO. So, the Early Stage phase (primarily up to Series B phase) behaves as a chief architect of its growth.

Amidst the ongoing crisis, the number of seed deals and early-stage funding deals fell 37% to 228 in the first quarter of the year that ended March 31, as compared to the same quarter the previous year . Several deals under process have been abruptly stopped with the implementation of the “force majeure” clause.

In the first quarter of 2020, the number of Series A deals plunged to 32, the lowest level since the beginning of 2015. This compares with 42 deals struck in the October-December quarter and 60 deals recorded in the same quarter in 2019.

The number of Series B and C deals decreased to 31 in the first three months of the year from 44 in October-December and from 35 in the same period last year.


As quoted to the Economic Times, a Bengaluru based Fintech firm’s founder describes his experience to raise 5 Million USD. He says: “We were in the due diligence stage and most things were done. Suddenly, I received a joint call from both funds to understand my take on the Covid-19 virus outbreak and its impact on our startup”.

COVID-19 spread in India has pushed the banking sector to one of the darkest phases of business lending in its history. Corporate leadership across sectors, irrespective of the size of the organization, has requested an extension of the current 3- month moratorium period. In March 2020, financial sponsors such as major PE/VC firms have collaboratively issued a statement of caution for the registered startup founders in the country. The focus has shifted from growth to cost minimization, and runway extension.

A pessimistic, unfavourable scenario has thus emerged in the fundraising community and this may persist, as far as current expectations, for at least a couple of quarters ahead.

So, here we address the question of how to raise interim capital for startups in the trough cycle.

Inclusion in various schemes of RBI or the Government

The commerce minister Mr. Piyush Goyal met several industry stalwarts and venture capitalists to discuss on a startup relief package to fight the economic downturn caused by the pandemic. Businesses may need to be registered under the Department for Promotion of Industry and Internal Trade (DPIIT) to avail of the much-needed benefits. A significant portion of the Fund of Funds (FoF) corpus of Rs 10,000 crore may be provisioned for disbursement. A petition has also been filed to the government to reimburse 50% of the salaries for a month and to be offered a 20-lakh grant each.

RBI, on the other hand, has received proposals from ministry officials to release a separate bailout package for startups and MSMEs and hopefully, they might be in the rollout planning phase. The decrease in repo rate by 75 basis points shall increase the supply of capital. Although industry believes catering to demand is an arduous task in such extraordinary times.

There might be a silver lining though.

Small Industries Development Bank of India (SIDBI) has launched a Covid-19 Startups Assistance Scheme (CSAS) where government defined startups, based on the below-mentioned eligibility criteria, can receive up to INR 2 crores each for Working Capital Term Loan. Amidst the current crisis, SIDBI has pivoted from equity financing to credit financing.

Startups must scrutinize the various terms and conditions mentioned here before applying for the scheme.

Moreover, the Indian Private Equity and Venture Capital Association (IVCA), the representative body for risk capital in India, has proposed that SIDBI increase the maximum limit of loan amount up to Rs 5 crore, from the currently proposed Rs 2 crore,reduce the interest rate, and ease the criteria that currently allows only unit economics-positivestartups to be eligible to apply for CSAS, along with a longer payback duration.


The loan tenure has been provisioned for up to 36 months with a moratorium period of maximum 12 months. But the new IVCA proposal has requested for a tenure up to 48 months and moratorium period of 18 months.
Businesses may soon avail eased out policy waivers in export expenses, logistics and shipping costs, regulatory compliances and hopefully, tax reductions. These may immensely help business models extend their runway without slashing jobs or salaries.

Venture debt financing

Venture debt firms are specialised institutions catering to debt financing needs for startups. In India, Innoven Capital, Alteria Capital and Trifecta Capital occupy the lion’s share of this market with a collective deployment of 300 Million USD in 2019.

Besides runway extension and a hefty tax shield based on interest paid on debt, founders and leadership team can leverage the freedom of not having to dilute the ownership for a temporary crisis. Moreover, a deferment of EMIs may be granted if the situation worsens to an unprecedented level. Post crisis, the funds raised from equity can be restructured into a preferential arrangement to pay off the debt, easing financial distress between the lender and the lendee.

Venture debt expect a cumulative return of 12-25%, including loan interest and capital returns.

Typical loan terms seen in the industry are as follows:

• Repayment: ranging from 12 months to 48 months. Can be interest-only for a period, followed by interest plus principal, or a balloon payment (with rolled-up interest) at the end of the term.
• Interest rate: Primarily dependent on the yield curve and the MCLR plus the adjusted spread. In India, typically financing may be offered between 14% and 20%.
• Collateral: venture debt providers usually require a lien on assets of the borrower like IP or the company itself, except for equipment loans where the capital assets acquired may be used as collateral.
• Warrant coverage: the lender may request warrants over equity ranging between 5% to 20% of the total loan value. A certain percentage of the loan’s face value can be converted into equity at the per-share price of the last (or concurrent) venture financing round. The warrants are usually exercised during company acquisition or IPO listing in the exchange, yielding an ‘equity kicker’ return to the lender.
• Rights to invest: On occasion, the lender may also seek to obtain some rights to invest in the borrower’s subsequent equity round on the same terms, conditions and pricing offered to its investors in those rounds. It is expected that Convertible Debt market will significantly rise in the future.
• Covenants: borrowers face fewer operational restrictions or covenants with venture debt. Accounts receivable loans will typically include some minimum profitability or cash flow covenants.

Private placements and HNIs

Capital markets, currently, are not an attractive option to park funds for growth. So, investors such as corporate firms present in the incumbent’s value chain, HNI Investors and even Limited Partners (LP) can probably push funds into startupss and MSMEs to diversify their portfolio and leverage strategic advantages to their favour. Larger firms working with the incumbent may propose a board member position as a return value of their funds. Be it upstream or downstream, they may see the incumbent’s business model as a potential target for acquisition and would want to be at the driver seat in managing the startups.

Experienced mentorship and limited dilution are the major positive angles for the startups planning to raise funds from these investors. But the promoters should also stay beware of financial frauds and keep a strong check on legal requirements. As per regulatory compliances, funds raised from less than 200 investors qualify for private placement whereas that from more than 200 investors would push it to a crowdfunding platform and enable a separate set of compliance.

Crowdfunding

Business models that have either a component of societal welfare attached to its value proposition or solutions to help the society in the crisis are ideal for availing crowdfunding opportunities. Crowdfunding doesn’t involve complicated financial risks as an investment for retail investors generally is significantly small as compared to institutional players. Moreover, the campaign could go viral and thereby, reduce marketing and advertising expenses from the P&L statement. The campaign itself acts as a testimony to the business model.

Moreover, the promoters don’t dilute their share in the firm as the beneficiaries can be rewarded back later with various forms of rewards.

But founders also need to keep in mind the effort and time required to increase the appeal of the model as well as generate sufficient PR content in quick succession. Sensitive assets such as tech algorithms, IP, trade secrets governing the model need to be protected with trademarks, copyrights, and patents. Otherwise, the campaign runs the risk of losing its competitive advantage due to imitation.

As a rule of thumb, the promoters should also consider a 5-8% of funds raised as crowdfunding expenses as both the funding platform and payment gateways shall place their own charges.

Conclusion

Public source of funds over private funds:Government of India may deploy the second round of stimulus package targeted exclusively for the MSME sector and startups. There has been a global wave, across national funds, to aid startups and small businesses thrive in the current situation. In a bearish market, private investors impose extraordinarily conservative or stringent measures to fund startupsand put a strong push to focus on profitability instead of growth. In the Early Stage, even if it sounds attractive, this may be severely detrimental in the long run.

Moreover, raising funds from such schemes imperatively offer benefits beyond monetary terms. Firstly, the access to key policymakers and decision-making units of planning bodies and the cushion to stay ahead of the curve for alignment with governance procedures. Moreover, the funding may achieve a significantly lower cost of capital. It shall help to re-model the capital structure of the business for a healthy financial scorecard.

Venture debt financing over equity financing:Venture debt ensures that founders need not comply with an over-dilution as the pandemic suppresses business valuations. Venture debt can be used as a temporary bridge to maintain or improve growth models and operational scalability until the onset of a bull market. The up-cycle inevitably attracts equity financiers and a healthy business model reaps the maximum benefits then. The Cost of capital is also lower than equity financing and thus, shareholder returns don’t get affected much.

On a cautionary note, venture debt firms will look for the relevant risk as compared to the asset class, so unit economics and asset utilization shall play a critical role in the capital deployment decision.

Authored by: Rajarshi Chowdhury, Associate
Contact details:
rajarshi.chowdhury@intueriglobal.com

About Intueri: Intueri Consulting is a management consulting firm with nearly 100 man-years ofexperience in managing organizational challenges, including managing firms and clients throughsome of history’s biggest crisis periods such as the 1997 Asian Financial Crisis, 9/11 led crisis, 2007-08 global financial crisis. This vast repository of organizational management experience, accrued bysenior management, over decades of managing large multinational firms and clients enables Intuerito develop effective, efficient crisis management strategies and provides it with a unique perspectiveinto events and decisions that take into consideration all important aspects of a firm, includingassessment of primary, secondary and even tertiary order potential effects on the firm on account ofimplementation of strategies.Intueri has been helping organizations of a different scale to raise funds in a hyper-competitive ecosystem and has prepared an end to end value offering for an investor roundtable. The firm has consultants, well balanced with the domain knowledge and cross-sectoral industry analysis approach and possesses a strong network of financial advisors.

Feel free to reach out to us for a detailed discussion.

Reference:

Navigating the Ongoing Paradigm Shift in the Indian Education Sector

Part 1: The current scenario & responses by offline and ed-tech players

The Indian government announced the nation-wide lockdown on March 24, 2020, bringing thousands of educational institutes’ operations to a halt for at least 21 days, and hence preventing India’s 260 million school and college going population from receiving their education. Several students are in the last stretch of their preparations for national competitive examinations such as JEE and NEET or their board exams, making this an extremely crucial time for both students and their families as well as schools and coaching institutes. Other individuals who were preparing for higher education examinations such as GRE and GMAT have also been thrown for a loop. Further, there is a sudden additional pressure on parents, especially of younger students, to ensure that their child’s studies are not disrupted, while at the same time manage their own work obligations.

There doesn’t seem to be any respite in sight anytime soon. According to the Union HRD Minister Ramesh Pokhriyal, the Indian government will take a decision on reopening of schools and colleges on April 14 after reviewing the Covid-19 situation in the country. With demands to keep the country in lockdown for a few more weeks after April 14, increasing every day, the situation appears bleak and indicates that the duration of these closures is still unknown.

With this uncertain background, both offline and ed-tech players have chalked out different priorities for themselves and have responded in different ways.

Offline players’ response

Offline players, such as pre-schools, primary and secondary schools, colleges and universities, and brick-and mortar coaching institutes, began by shifting their classes online. They bought video conferencing and webinar software such as Zoom and Webex to continue holding classes online. They are using a combination of live classes, recorded videos, online tests and assessment, in conjunction with physical textbooks to impart lessons.

On the other side, to keep the faculty and staff engaged and motivated, schools are using tools such as Microsoft Teams to hold frequent meetings. Some schools have also managed to bring other essential activities such as scheduling, vendor payment, and admission online through the usage of ERP systems. To equip faculty with the right hardware, some schools have purchased laptops and iPads and distributed them amongst teachers. They have also been given an allowance to purchase webcams and upgrade their data plans.

Brick and mortar coaching institutes have also made these changes. Several of these institutes had already begun their migration to online and therefore, had already put in place mobile applications, which students could use to attempt assignments and mock tests. These applications also have a Parent Connect version that parents can use to monitor their children’s progress and performance.

Ed-tech players’ response

Ed-tech players such as BYJU’S, Vedantu and Unacademy, on the other hand, have been on an advertising spree in a bid to acquire as many new customers as possible. To get maximum people to sample their courses, several ed-tech companies such as BYJU’S, Vendantu, Unacademy, Toppr, Testbook, and Upgrad have made their courses free for all. These courses include live classes, recorded videos, doubt resolution, and online assignments and tests. This strategy has allowed ed-tech companies to onboard customers from Tier 2 and 3 towns, where the schools may not have the required IT infrastructure to deliver classes online.

This strategy has also been followed by global players such as Coursera. Coursera has mentioned that it would provide every university in the world, including India, free access to its course catalogue through Coursera for Campus till July 31, 2020.

In addition to making their content library available for free, companies such as Vedantu are also engaging with students over social media. It has launched a #21DayLearningChallenge under which influencers are challenging people to learn something new and then post about their experience on social media.

In order to meet this increased demand, these companies are also hiring more faculty. For example, Lido Learning has decided to hire over 500 online tutors across the country for the month of April to ensure continuous services to their customers.

It is fair to say that the Covid-19 pandemic has accelerated the acceptance rate of ed-tech solutions among the Indian population, and both the offline and online players need to adjust to this new reality.

Part 2: Recommendations for offline players

Due to the speed at which things have changed, offline players have had to adjust almost overnight. We have provided some recommendations that will facilitate these players to provide remote learning.

1. Conduct an audit of your existing capabilities and resources: School, college, and coaching institutions should first take a note of their existing capabilities and resources to go online or provide remote learning. This should include an evaluation of the available technologies and delivery mechanisms. The evaluation should be done in two phases: one, to check the organization’s readiness to respond in the short-term i.e. when the country is in lockdown; second, for when the schools can re-open. To understand about external solutions, organizations should consult with ed-tech start-ups and the Ministry of Electronics and Information Technology representatives. Ensure that the solutions consider the digital savviness of the target audience. For example, if the students are based in a Tier 2 or 3 city, remember to consider that your students may not have access to high-speed internet or sophisticated smart devices.

2. Check which part of your curriculum can be migrated online: During the audit, also check whether the teaching content in your curriculum can be migrated online. Further, plan how you can translate offline content (in the form of physical notes) into online content (for ex, videos and audios). If possible, equip your teaching faculty with the audio-visual tools (such as laptops and smartphones) that they can use to record themselves explaining concepts, which can then be circulated amongst the students. Organizations should also reach out to digital content creators such as BYJU’S and partner with them to provide content to fill in the gaps. There are also several government of India initiatives that can be investigated. For example, India’s National Repository of Open Educational Resources has content curated from CIET and NCERT, India. Schools and colleges can also consider Khan Academy, which offers question banks and videos for learning purposes, covering a gamut of topics including languages, arts, STEM, social studies, and humanities.

3. Organize the order in which the online content should be delivered: It might be the case that the content that has been sourced from external parties, does not fit exactly with your existing curriculum. It is extremely important to decide the order in which this content as well newly developed in-house content be delivered to the students to ensure that the educational objectives are met.

4. Create an online helpdesk for students, parents and faculty: Since this mode of delivery is new for all stakeholders, it is extremely important to set-up an online helpdesk that can answer queries as and when they arrive. This is required to keep all stakeholders engaged during the entire process and to ensure the required results.

5. Provide a onestop-shop for all the content: The organisations should create a central learning system that can provide a consolidated view of all the content and tools available, as well as act as a place where the organization can post general notifications. Schools and colleges that already have learning management systems in place can further integrate them with technologies such as the video conferencing tools such as Zoom and Google Hangouts. For example, Moodle is a free open source platform that is used for blended learning, distance education, flipped classroom and other e-learning projects in schools, university, workplaces and other sectors. Another tool that is available is Google Classroom. This tool, developed by Google, supports online classroom experience for teachers and students. It allows other features as well such as online assessments, administration, scoring and feedback.

6. Ensure that content is mobile-friendly: If possible, the organization should ensure that the content can be viewed on mobile-devices such as smartphones and tabs. This is because a vast majority of people would be having smartphones or tabs rather than laptops or PCs. Ensuring that your content is mobile-friendly would allow it to be viewed by a larger population. Simple tools such as WhatsApp can be used to deliver lessons (in audio or video format), share assignments, and provide real-time doubt solving.

7. Support low-bandwidth / offline solutions: Schools and colleges should focus on creating low bandwidth requiring solutions, for example PDF documents that can be downloaded once and can be viewed offline or test and assignments that can be downloaded and attempted offline and later the attempt can be uploaded online, hence ensuring that the student does need to be online throughout the activity. For example, ePathshala is a portal for ebooks for school education for all subjects. It is available provided by NCERT and is available offline.

 Part 3: Recommendations for ed-tech players

As offline players are scrambling to migrate online, ed-tech players have been using this opportunity to market their products aggressively. Many are wondering whether the Covid-19 pandemic will be for ed-tech companies what demonetization was for digital payment companies. Below we have provided some recommendations on how online players should be approaching the current situation.

1.  Focus on building long-term partnerships along with short-term gains: Online players should use this opportunity to build long-term partnerships and capabilities, instead of just focusing on increasing their top lines. Most of the ed-tech companies have already started investing in increasing their brand awareness and market share through advertising and PR campaigns. One area that companies can focus on is getting an in-depth understanding of the needs and wants of all the stakeholders in the education sector, from schools and colleges to parents to policymakers These companies should be engaging with government ministries, and industry associations to understand how they can upgrade their products to better satisfy the needs of students, parents, and teachers.

2. Invest in educating people about their platforms: Since currently, most of the ed-tech players are competing using similar strategies of aggressive marketing and free access to content, one area that might act as a differentiating factor will be educating people on how to use their platforms. It is fair to assume that in these turbulent times, people will gravitate towards the platform that is easiest to use. Hence, it is essential for companies to put in the effort to familiarise people with how to operate their platforms and apps. This can be done through ads that provide a basic understanding of how to operate a platform or app or through personal discussions with school and college management followed by a virtual webinar with the students. This hand holding in the beginning will go a long way in building trust and familiarity with the company.

3. Onboard teachers and counsellors: As there has been a sudden surge in the number of users on these platforms, companies should invest in onboarding additional teachers and counsellors to ensure comprehensive lectures and content. It may be particularly important to onboard staff who can communicate in vernacular languages since these platforms are witnessing new users from India’s tier 2 and 3 cities.

4. Respond in an agile manner: This recommendation once again comes from the fact that schools and students will continue to engage with companies who respond in a quick and agile manner to their needs and queries. Since it’s highly probable that once finalized, schools will stick to the platforms till the end of the academic year or maybe even the beginning of the new academic year if the lockdown continues for long, ed-tech companies should put in effort to ensure high quality results in the first go.

5. Offer a one-stop-shop solution: A company that offers end-to-end solutions, including delivery course material, assessment, result declaration, and feedback sharing, would be preferable to students, parents, and teachers. This would also increase the probability of the platform being adopted post the Covid19 situation as well.

6. Provide your platform and resources for use by school faculty: Companies can offer their platforms and tools to schools and colleges faculty, who can use them to create their own content and videos. For example, Vedantu has partnered with schools in Bengaluru, Hyderabad, Delhi and parts of Kerala to facilitate teachers to conduct live classes from their homes. The company is allowing schools to create their own content, use their own teachers and conduct end-to-end classes through its platform. Similarly, Unacademy has allowed education institutes to use their platform to conduct classes for free, without any limitations on the hours or number of classes. Unacademy is also providing support to these institutes to set-up their live classes on Unacademy’s platform.

7. Ramp up security infrastructure and processes: With such a surge of new users, both individual and institutional, ed-tech companies need to ensure that their cybersecurity infrastructure and processes are robust. This is especially important keeping in mind that there is a large amount of children’s data involved. Additionally, schools who conduct their classes through third-party platforms would want their curriculum content and delivery videos to remain secure.

Part 4: Impact on the future

It is safe to say that once the Covid-19 pandemic gets over, the education sector as well as people’s learning habits would have been transformed. We believe that the following three areas will be majorly impacted:

1. Change in people’s mindset: This period of lockdown will give people enough time to play around and familiarise themselves with online learning. They will be able to judge for themselves the areas in which online learning was beneficial to In a way, this has and will continue to break down the psychological barrier in people’s minds that online learning is not as good as face-to-face learning. What is most important is that the parents, who are the purchasers of these services, would be able to see the effectiveness and ease of usage of ed-tech platforms as well as the vast range of content that their children can learn from.

2. Digitization of offline players: This lockdown has forced offline players such as schools, colleges and coaching institutes to digitize their entire student journey. Beginning from enrolment to class scheduling to conducting classes to assessments and feedback, all the steps are being conducted in an online set-up. These players are also becoming familiar with the types of tools and contents that are being offered by ed-tech players and in a way awakening them to the competitive threat that these players pose to them. On the other hand, they are also realising how these ed-tech companies can act as allies in some areas and overall enhance their offline offerings.

3. Personalization of ed-tech offerings and marketing: As mentioned above, ed-tech companies are witnessing a surge of new users on their platforms. This brings with it new customer data – data from the type of customers that they hadn’t served before. This customer data can be analysed and mined to reveal new customer segments and patterns. Companies can use this data to identify how students are behaving on their platforms and update their offerings to serve them better. On the other side, the vast amount of contact details that would be collected during this period, can be used to push targeted marketing campaigns that will have a reach across India.

In conclusion, we believe that by the time this pandemic ends, the entire landscape of the India education sector would have transformed and the need of the hour is for all stakeholders to take proactive steps to build their capabilities, so that they are prepared to take on the challenges of this “new normal” scenario.

References/citations:

Authored by: Aranya Kalia, Assistant Consultant

Contact details:

aranya.kalia@intueriglobal.com

About Intueri: Intueri Consulting is a management consulting firm with nearly 100 man-years of experience in managing organizational challenges, including managing firms and clients through some of history’s biggest crisis periods such as the 1997 Asian Financial Crisis, 9/11 led crisis, 2007-08 global financial crisis. This vast repository of organizational management experience, accrued by senior management, over decades of managing large multinational firms and clients enables Intueri to develop effective, efficient crisis management strategies and provides it with a unique perspective into events and decisions that take into consideration all important aspects of a firm, including assessment of primary, secondary and even tertiary order potential effects on the firm on account of implementation of strategies. This article is consolidation of the experience and knowledge gained by Intueri’s consultants while working with education sector clients and is a demonstration of Intueri’s understanding about the Indian education sector and the paradigm shift it is going through.

Developing an effective workforce restructuring strategy amidst a global crisis

Introduction:

Covid-19 has delivered a severeblow to an already fragile global economy,crippling global supply chains&adversely affecting every firm, sector & nation in its wake. Recovery hopes, at least for the short term appear grim: the economy is expected to go into recession through 2020-21, with the economy expected to contract by as much as 1% of GDP, according to the analysis by the UN Department of Economic and Social Affairs (DESA). This is a sharp downward revision from the previous estimate of 2.5% global growth.As for India, its economic growth is likely to slow down to 4 per cent this fiscal on the back of the current global health emergency according to Asian Development Bank (ADB), with a negative GDP growth for the final quarter of Fy20.

Under these circumstances a number of firms have currently found themselves in a bleak economic landscape, with sharp slowdown in demand, with recovery nowhere in sight and a cost structure that is unsustainable.

For now, the financial markets have taken the brunt of the global risk-off sentiment. However, as time passes, the effect of demand slowdown and drop in consumption will be felt by the majority of the industries and firms, with a number of these firms already precariously placed even before the covid crisis began.

Statistics and figures bear out the difficult predicament of Indian corporates. A survey by FICCI stated that over 50% of Indian companies have experienced negative impact on their operations and nearly 80% have witnessed a decline in cash flows due to the pandemic.

Further, Indian companies are under severe stress to service their debt obligations, according to McKinsey & Company on the indebtedness of Asian corporates.The share of debt with interest coverage ratio of less than 1.5 times of operating profits stood at 43%, even before the covid19 led crisis took hold. The low interest coverage ratio shows that a large part of the earnings is going to service debt and as such decline in operating earnings and operating cashflows could rapidly constitute an existential crisis for the firms in questions

Need for a Workforce restructuring strategy:

Given such a perilous situation and given that recovery appears to be beyond the immediate horizon, a number of Indian corporates are either facing or imminently about to facea series of cascading emergencies requiring urgent interventions, with layoffs and workforce restructuring being one of the many importantdecisions required as firms battle for survival. Under these circumstances, there is often a need for fast decisions, generally translating to rushed, poorly thought out, inefficient, inadequate decisions which then require subsequent corrections, in the process hemorrhaging firm reputation across the workforce community and decimating workforce morale across surviving members.

Consider NerdWallet. It started 2017 as a San Francisco Business Times Best Place to Work. Then it administered three rounds of layoffs. It ended 2017 with a tarnished employment brand and a Glassdoor profile filled with comments about how having three rounds of layoffs in one year “has crashed the company morale.”

Additionally, executives tend to delegate such unpleasant, often thankless decisions to individual business units/verticals and lower level managers instead of developing a comprehensive, coordinated approach across the company and group companies. As a result, it is not uncommon to find a firm laying off an employee and then hiring for the same skill set in another part of the organization, in the process wasting additional time, money and resources for no net gain.

Nearly all of this can be avoided through the development and implementation of a cogent, structured workforce restructuring strategy that is in alignment with the firm’s immediate and medium-term goals. It can mean the difference between survival and collapse. It can also mean the difference between disgruntled employees, emotionally scarred workforce and a dignified separation. This article looks at the key factors to consider when developing a workforce restructuring strategy.

Key factors to consider

Develop a comprehensive strategy for the crisis period and beyond:

There is a strong temptation to think of workforce restructuring in isolation. Typically, firms turn to episodic restructuring based on short sighted strategy, or even on hope, prayers and wishful thinking as the basis of workforce restructuring.This is especially true in periods of crisis, when executives are firefighting a series of emergencies, which has the effect of narrowing the field of vision away from the big picture and strategy towards the individual decisions and the tactical.

Consider the case of Nokia. At the beginning of 2008 senior managers at the Finnish telecom firm were celebrating a one-year 67% increase in profits. Yet price-based competition from low-cost Asian competitors, and increase in labor costs by 20%convinced management to layoff the German plant’s 2,300 employees, angering employees over perceived injustice, ultimately costing Nokia €200 million—more than €80,000 per laid-off employee—not including the ripple effects of the boycott and bad press. The firm’s market share in Germany plunged; company managers estimate that from 2008 to 2010 Nokia lost €700 million in sales and €100 million in profits there.

There was no real long term or well thought out strategy as the bedrock for this corporate decision. Workforce restructuring became the end in itself, as opposed to being the means to an end. It is entirely possible that a well-developed, well thought out corporate strategy might have led to the same conclusion regarding workforce restructuring strategy. However, odds are such a broad level strategy would have recognized the dangers and risks of the plan, and managed the situation better, mitigating the needless fallout.

It is the view of Intueri that any workforce restructuring decision must further the firm’s broader strategic goals and objectives, and that workforce restructuring strategy is the means to an end.  This requires that the restructuring strategy be in alignment with firm strategy, which in turn requires a cogent, comprehensive strategy for the firm, both for the crisis period and beyond.

An effective, well thought out broad level strategy will enable decision makers to develop restructuring strategies that best meet the objectives and goals of the strategy and thus by extension, have the best possible impact on a firm’s battle for survival.

Centrally assess resource requirements and develop restructuring strategy at a central level

Construction GMBH (name changed) is an Indian EPC firm. A few years ago, one Business Unit of the firm conducted a major workforce revision, resulting in the layoff of several thousand employees, mostly for reasons of redundancy. Roughly at the same time, other verticals of the firm were conducting large scale hiring. There was no coordination between the different vertices of the firm on the question of employee management. Consequently, roles that could have been filled up with internal transfers had to be hired externally. Competent employees with years of organizational knowledge, core expertise and on whom the firm had spent several hundred thousand rupees were lost to the firm. This also caused resentment among the employees, and poor optics for the firm.

This could have been avoided by conducting a workforce requirements audit at the central/firm level before moving ahead with the layoff. Intueri understands that a detailed audit of the workforce may not be possible or feasible in the current crisis. However, a quick and dirty assessment, carried out by mid-level line managers and below, when aggregated and utilized to guide workforce decisions could be substantially effective in optimizing workforce internally, saving the firm time, money and resources that would have otherwise been spent on external hires. It would also keep individuals with firm specific skills, thus avoiding the cost of training up the new hires.

Consider Alternatives to layoffs

Workforce restructuring is not without its own risks. There is no guarantee that the objectives the executives set out to meet through layoffs will be met, or that the firm will benefit from layoffs. Often, the end results are entirely in opposition to expectations.

In a 2012 review of 20 studies of companies that had gone through layoffs, Deepak Datta of Arlington University, Texas discovered that after layoffs a majority of companies suffered declines in profitability, and a related study showed that the drop in profits persisted for three years. (HBS)

Additionally, companies that shed workers lose the time invested in training them as well as their networks of relationships and knowledge about how to get work done. Valuable time is lost as surviving employees reorient themselves and reestablish these networks. This can have real consequences in a crisis scenario, where time is at a premium. Further, while short-term productivity may rise because fewer workers have to cover the same amount of work, that increase comes with costs in terms of quality and safety, as also the heightened danger of risk creep in operations as fewer people manage much more resources andresponsibilities. The increased workload and low morale following a layoff has been known to cause increase in workforce attrition and turnover amongst survivors. There’s also the question of the effect on a company’s reputation: E. Geoffrey Love and Matthew S. Kraatz of University of Illinois at Urbana–Champaign found that companies that did layoffs saw a decline in their ranking on Fortune’s list of most admired companies. (HBS)

On the other hand, innovative, long term vision-based workforce restructuring can provide real gains. ConsiderAmazon: it will invest US$700 million to retrain 100,000 employees—a third of its U.S. workforce—in new technologies.  This way, the company protects the knowledge and the internal networks the employees have developed while bringing the workforce up to speed. AT&T is another example. It retrained over 100,000 employees who were stuck in jobs in danger of becoming redundant. The results seem very positive: 18 months after the program’s inception, the company had decreased its product development cycle time by 40% and accelerated its time to revenue by 32%. Since 2013, its revenue has increased by 27%, and in 2017 AT&T even made Fortune’s 100 Best Companies to Work For list for the first time.

Intueri believes that firms should, unless absolutely necessary, avoid the temptation of layoffs and focus on alternative workforce restructuring strategies. In the long run, the benefits could substantially outrun the incremental costs.

Ensure dignity to workforce

Layoffs are difficult, unpleasant, unpopular, thankless,even highly risky decisions to communicateto the workforce and as such most managers tend to take a hands-off approach, with as little emotion as possible, completely avoiding the often devastating psychological impact on the workforce, both on the ones being let go as well as the survivors. Often managers are so fearful of erring on the wrong side, they will read out a prepared corporate speech, or even send an impersonal mail, dispassionate in tone and dehumanizing in approach, making employees feel like they were just anotherstatistic. This dehumanization at times is compounded by other humiliating experiences, such as having guards escort employees off the campus, denying employees their basic dignity.

Even the employees who survive the restructuring do not escape unscathed, with a large number demoralized by the loss of friends and colleagues due to the restructuring, and worried abouttheir ownjob security in the days to come. This is particularly true in case of a poorly executed, rough restructuring exercise where employees feel their dignity was denied. Consequently, according to Harvard, survivors on average experienced a 41% decline in job satisfaction, a 36% decline in organizational commitment, and a 20% decline in job performance.University of South Carolina found that downsizing a workforce by 1% leads to a 31% increase in voluntary turn over the next year.

(HBS)

Studies have shown that when firms take their employees into confidence, and when firms take measures, that show they care, they reduce the anger, the hostility and negative emotions and even soften the extent of the psychological blow associated with the layoff. Taking a more human-like approach not only minimizes survivor guilt, but it helps with morale, productivity and makes those let go feel like they were truly cared for (HBS)

1.Take the workforce into confidence: it is astonishing as to how many firms are loath to take their own employees into confidence. There is almost a juvenile tendency to keep information away from employees, leading to nervousness and restlessness amongst the employees, the ideal breeding ground for rumors and conspiracy theories which only serve to enrage and bring down the morale of the workforce.

Taking employees into confidence, from an early stage, would ensure that employees have sufficient information on the situation. When workers understand the why behind a company’s decision it increases their trust in the company and doesn’t take a toll on their self-confidence.

2. Communicate effectively & decisively: it is crucial that the entire management team is on the same page and has developed and implemented a comprehensive communication strategy. It is important that the firm be honest,transparent, open and timely in their communication, and avoid impersonal communication methods like email. In fact, according to a number of experts, the worst thing a company can do is blindside their workers and conduct layoffs through an email.

3. Help Employees move on in their careers: Firms should consider assisting employees beyond the legal mandate: a severance package or other benefits. Managers should offer to write letters of recommendation for their reports. Firms could and should offer to assist the employees being let go in finding their next jobs. These gestures help show to the employees that the firm cares.

4. Show Empathy: The process of layoffs, designed to protect the firm, can feel very mechanical and impersonal, at a point in time when employees are going through a stressful, emotionally vulnerablephase.

Empathy costs the firm nothing but can reap rich dividends if done right. Employees talk amongst their colleagues and friends across firms. if they feel they are treated in an undignified manner, word will travel across their networks and through online reviews about the company and their experience. Empathy can make the difference between a tarnished reputation and a trustworthy reputation in the recruitment market.

5. Securesurviving workforce morale: Layoffs, even when executed in the best possible manner, can cause employees to feel they’ve lost control: The fate of their peers sends a message that hard work and good performance do not guarantee their jobs.This could have the impact of reducing long-term productivity, causing a deterioration in Quality,safety and supervision standards and increase of employee burnout and turnover rates. It is essential that firms do all they can to ensure morale of the survivors remains high. The very survival of the firm depends on these chosen employees. Practices such as having counsellors to help employees deal with the fallout, guilt of restructuring , having an open organizational culture where information is freely shared, and taking the employees into confidence regarding the firm’s condition are among the vast set of measures that management should consider to secure workforce morale.

Be Aware of the Danger of risk creep: Risk creep is a term that describes the insidious and unrecognized increase in risk that occurs despite every effort to mitigate risk or avoid it. Risk creep is one of the most difficult aspects of the risk management process to truly understand and manage. It is also rarely considered when planning workforce restructuring despite the potential for catastrophic losses from an inadequate management of risk creep.

Consider Boeing: Dennis Meulenberg demanded price concessions from suppliers, heaped more cost demands on engineers, and cut the workforce about 7 percent while making many more planes during his tenure as CEO.

Employment in the flight crew operations team, the team that  managed how pilots interacted with the plane’s software and controls—the very issue suspected of flummoxing crews in the Lion Air and Ethiopian Airlines tragedies,  had been cut in half, from 30 to 15 over 5 years.  Employees testified to intense low morale because of all the layoffs—constant, grinding layoffs, year after year, forcing them to watch their step and be careful about what they said. Similar cuts were carried out at key engineering teams, all under the implied assumption that the reduced team would lead to increased efficiency while risks remained manageable. Unfortunately, the reduced workforce, combined with increased responsibilities and targets meant that corners had to be cut by the teams. Each step of cost cutting, and workforce restructuring caused an incremental rise in operational risk to the firm and its products, i.e. risk creep, which went unnoticed by the workers and management until the final catastrophic failure. It does not mean that risk creep was solely responsible for the events that led up to the twin Boeing 737-Max crash. But risk creep did play a major role in it.

FAA (Federal Aviation Agency) is itself another example of a firm inflicted with risk creep brought about by continuous workforce restructuring and cost cutting. The workforce was reduced to the extent that it became impossible for FAA to conduct necessary checks on its own, and they began to rely on Boeing for assessments that should have clearly been conducted internally. This in large part contributed to the lack of effective oversight that could and should have prevented the twin crashes.

History is full of company examples where this philosophy of operating risk creep follows through, often silently, to the point of putting the company at legal, reputational and financial risk beyond the likelihood of recovery. The biggest challenge with managing and mitigating risk creep is that it can be almost impossible to measure incremental risk of individual decisions, and thus be undetected until failure. As such, it must be considered integral to decision making such as workforce restructuring.

Summary

The Global and Indian corporates are in a difficult predicament; supply chains have been disrupted; economic activity battered. The world economy has ground to a halt and slipped into recession. The end of the COVID-19 crisis appears nowhere in sight and even thoughts of recovery stretch well beyond the immediate horizon. In these circumstances, a number of firms find themselves in an existential crisis. For a number of these firms, some form of workforce restructuring, even the dreaded layoffs, will be inevitable. For others, layoffs will be a strong temptation as cash inflows slow and costs begin to bite. Intueri advises that workforce restructuring be part of a larger corporate strategy, aimed at managing the firm through these difficult times and through the early recovery period. It is the belief of Intueri that workforce restructuring is the means to an end and must not be considered an end in itself. Intueri further advises that firms avoid workforce layoffs unless absolutely necessary given their pernicious effect on the firm and its employees. If layoffs are inevitable, Intueri asserts that such a decision and strategy be devised at a centralized level, taking into account the requirements of the entire firm/group company. When layoffs must be carried out, Intueri strongly advocates that the firms must treat their workforce with the dignity and empathy they deserve. Finally, Intueri warns of the dangers of risk creep arising as a consequence of workforce layoffs.

References/citations:

Authored by: Bikash Sarkar, Associate Consultant

Contact details:

Bikash.sarkar@intueriglobal.com

About Intueri: Intueri Consulting is a management consulting firm with nearly 100 man-years of experience in managing organizational challenges, including managing firms and clients through some of history’s biggest crisis periods such as the 1997 Asian Financial Crisis, 9/11 led crisis, 2007-08 global financial crisis. This vast repository of organizational management experience, accrued by senior management, over decades of managing large multinational firms and clients enables Intueri to develop effective, efficient crisis management strategies and provides it with a unique perspective into events and decisions that take into consideration all important aspects of a firm, including assessment of primary, secondary and even tertiary order potential effects on the firm on account of implementation of strategies. Intueri has been helping organisations enter new areas within the chemical sector in order to diversify their product mix with the help of existing players who are looking to buy something they need or to sell something that they make. The firm has consultants with extensive domain knowledge both in the chemical and pharmaceutical sector.

Effect of COVID-19 on Indian Manufacturing Sector and Opportunities for Future Growth

Introduction

While the 2019-20 novel coronavirus pandemic has had several economic effects around the world due to various reasons, one of the major reasons comes from China being the world’s manufacturing hub. As the virus spread across China, which was the origin of this outbreak, factories across the country have shut down and logistics has been severely affected. As a lion’s share of many of the manufactured goods used around the world come from China, this meant reduced availability of goods around the world due to reduced production in the country and delayed arrivals due to logistics issues.

This has also affected India as many of the products consumed by customers as well as several raw materials, intermediates and components used by businesses in the country come from China. As a result, while the country’s authorities have done a phenomenal job in containing the spread of the virus within the country, the country’s economy has been hit as severely as other countries where the virus has spread a lot more. Most of India’s manufacturing units concentrate on making finished products for customers, whereas raw materials, components and intermediates are imported, and as a result, these units could not function either.

However, this pandemic has provided a major opportunity for India to increase its manufacturing capabilities as companies would look for production opportunities outside China. The manufacturing industry is also a massive job provider. It is estimated that every new job in the manufacturing sector has a multiplier effect and create 2-3 new jobs in the service sector [1]. This is invaluable for a country like India, which not only has an unemployment rate of 7.78% [2], but a high disguised unemployment rate especially in the primary sector and a large number of people working in a role they are overqualified for. Apart from this, India’s massive young population means that a million people enter the workforce every month and they all need new jobs. Therefore, India should grab this opportunity to bolster its manufacturing sector by both hands. However, in order to do this, India will need to make some policy changes that makes the country more business-friendly so that businesses pick India over other countries as their next manufacturing destination.

Pharmaceutical and Chemical Sector

India has often been labelled as the pharmacy of the developing world. This is because India is the largest producer of cheap generic drugs globally as well as one of the leading producers of low-cost vaccines. The Indian pharmaceutical industry was valued at $36.7 billion in 2018 and was expected to grow at a huge CAGR of 22.4% to reach $55 billion in 2020 [3].

However, the ongoing COVID-19 pandemic has severely affected the Indian pharmaceutical industry. This is because Indian pharmaceutical companies import several intermediates and active pharmaceutical ingredients (APIs) from China, which was the origin of the pandemic. While things are now improving in India’s eastern neighbour as the number of new cases is declining, leading to the re-opening of factories and restarting of production of these products, Indian pharma companies now have to rely on inventory and are in some cases, forced to reduce production. This can have long-term consequences as Indian pharma can lose out on market share to companies that are less dependent on Chinese intermediates and APIs.

Nine of India’s nineteen major pharma manufacturers have their own API manufacturing facilities, and only one of these companies produces intermediates [4]. In such a scenario, one of India’s best performing industries is heavily exposed to external factors not under its control for production. It is reported that around 70% of the country’s total API requirement is met by imports from China, which is the world’s leading manufacturer of APIs.

This can provide a massive opportunity for industries upstream of the pharmaceutical industry, such as the biotechnology industry, specialty chemical industry, petrochemical industry as well as the agriculture and agricultural products industry, the latter in case the active compound or an intermediate is sourced from a plant. At the same time, it also makes it necessary for pharmaceutical companies to backward integrate and set up more facilities for the manufacturing of APIs and intermediates. The benefits for companies upstream of the pharmaceutical industry such as the specialty chemical industry are immense, as they have ready buyers in the country who would purchase their products in large quantities and the cost to transport the goods would be minimal.

However, there are several challenges in this process. Building a large plant for performing chemical reactions is one that requires high initial capital expenditure and is also heavily regulated. Apart from that, India has major challenges when it comes to doing business that affect all businesses alike. This includes the large amount of red tape as a result of which businesses need to follow several procedures before they can begin operations, as a result of which India performs poorly in the Ease of Business index.

The Indian pharmaceutical industry has not only given the country significant revenues through exports but also brought the country goodwill, as millions of lives were saved around the world thanks to affordable medicine developed by Indian pharma companies. The best example is of Cipla developing their own combination of HIV antiretrovirals which would cost $1 a day [5], thereby making it affordable for several patients in sub-Saharan Africa which was the epicentre of the disease. In order to consolidate India’s position and reputation as the pharmacy of the developing world, the government will now have to incentivise production of chemicals and compounds across the entire pharmaceutical value chain in order to ensure the steady production of life-saving drugs by Indian pharma companies at affordable prices.

Electronics Sector

India is the second largest manufacturer of mobile phones in the world, behind China. This happened due to the massive jump in the number of manufacturing units for smartphones and allied products from 3 in 2014 to 268 in 2018. The low labour cost and abundant skilled labour has attracted several mobile phone companies such as Samsung and Xiaomi to set up shop in India. 82% of smartphones used in India are manufactured domestically. The Ministry of Electronics and Information Technology has set an ambitious target of $400 billion turnover in electronics manufacturing and producing one billion mobile handsets by 2025 [6].

However, this apparent strength in the manufacturing of mobile phones, this industry has been massively affected by the outbreak of COVID-19 in China. This is because while mobile phones are produced in the country, 87 per cent of the components are imported. Of these imported components, nearly three quarters comes from China [7]. For certain components like mobile phone display, nearly 90 per cent of it is imported from China. In most Indian manufacturing units, these components are imported and assembled to form the finished product. As a result, Indian mobile phone production is in dire straits as components are not arriving from China. This led to increase in price of many mobile phones and more delayed launches. This problem is not limited to mobile phones only, but also for other electronic gadgets such as laptops, set top boxes, printers and inverters. As important components such as printed circuit boards are primarily produced in China, manufacturing of all electronic appliances in the country were affected. Raw materials like aluminium and copper are also sourced from China [8].

One of the challenges of the electronics industry is that innovations happen at a rapid pace which makes components that are barely a few years old obsolete. This means that either Indian manufacturers will have to improve their R&D capabilities to industry standards or that industry leaders in electronics components will have to open manufacturing units in India, with the latter appearing more likely. In order to attract such companies to start manufacturing in India, not only should the ease of doing business in the form of reduced red tape be improved, but also the logistics sector as many of the raw materials like aluminium and copper need to be imported. A strong aluminium and copper recycling industry can also be built around the electronics industry in order to reduce the dependence on imported metal.

Mobile phones and other electronics items are extremely complex and require the assembly of hundreds, if not thousands, of components. India’s massive population and increasing digital penetration means that many of these products will eventually be used as finished products within the country. With the final assembly of mobile phones and other electronics goods happening in this country due to its large population, anyone who decides to manufacture electronics components will find a massive demand. Incentivising companies to produce electronics components in the country will lead to a huge increase in the number of manufacturing units and a significant jump in the number of jobs available to India’s young population.

Automobile Sector

India is the world’s fourth largest automobile market as well as the fourth largest automobile producer. Over 26 million automobiles were sold in FY19 while over 30 million automobiles were sold in the country [9]. This number includes all kinds of motorised vehicles including two-wheelers, three-wheelers, passenger cars and commercial vehicles.

However, not only do many motor vehicles companies, but also several Indian original equipment manufacturers (OEMs) source some of their components from China. 27 per cent of India’s auto component imports come from China. This number increases for more high value-add and customised components as commoditised components have alternate suppliers [10]. Passenger vehicles, two-wheelers and commercial vehicles were affected by the closing down of Chinese factories. Vehicles like tractors have high localisation levels and are therefore, less dependent on imports. The components that OEMs source include magnets, fuel injunction pumps, turbo chargers, LEDs, steering system components, air bag components, electronic components and electric vehicle components.

The coronavirus outbreak happened around the same time Indian OEMs were transitioning to BS-VI emission standards. Various new components, which were to be sourced from China, were required for transitioning into the new emission norms. The new emission norms would have increased costs and this along with the already reduced demand has led to a decrease in production which has now been amplified by the delay in arrival of components from China.

While there has been a slight decrease in automobile demand in the last one year due to lesser economic growth, this is expected to change in the longer term. Furthermore, with governments across the world including India planning on having only electric vehicles on the streets in ten years’ time, vehicles that run on fuel will have to be replaced with electric vehicles. India’s economic growth in the long term will lead to an increase in disposable income, and with that comes increased automobile sales.

In such a scenario, it would be extremely beneficial to the country if the entire value chain of the automobile sector is made in India. A company planning to produce auto components that are currently not produced in India will have several Indian OEMs willing to buy from them. However, in order to convince leading auto component manufacturers to set up shop in India, there should be provisions by the government to provide land where a manufacturing unit can be built and ensure that operations can be started without any excessive regulation and procedures.

Conclusion

A pandemic like COVID-19 is naturally expected to damage the economy the world over, as governments across various continents have issued lockdowns. However, it is necessary to ensure that Indian businesses are less exposed to disasters happening elsewhere, as that would minimise problems related to production. As China is getting back up with no local cases reported on March 19, factories are restarting operations and that is great news for Indian businesses since they were exposed to China and depended on Chinese factories for their raw materials. But as the disease is wreaking havoc in Europe and the United States, Indian businesses are worried about the reduced demand in these markets.

On the raw material side, the solutions involve developing more raw material in India and getting into relationships with multiple sellers from many different parts of the world, so that even if one important seller is affected due to a disease outbreak or any other disaster in that part of the world, a production unit in India will suffer less as it can procure raw material from a seller elsewhere. On the market side, the development of India as a market should be a long-term objective. As India’s disposable income increases, Indians will consume more than what they do now. This will only happen when more Indians have jobs that utilise their skills and growing the manufacturing sector would lead to this in the longer term.

It has been seen that coronavirus has especially affected those manufacturing industries that India is relatively stronger at such as pharmaceuticals, electronics and automobiles. This is because while the country does well in producing the eventual finished product, it does so by importing an intermediate or a component from China, and therefore, production has been affected by the unavailability of raw material.

This calls for the government to develop a new manufacturing strategy where not only finished goods are made in India, but also the entire value chain so that the country’s production units are not exposed to setbacks happening in other countries. In the case of pharmaceutical industry, that would include the active pharmaceutical ingredients and intermediates. In the case of electronics and automobile industry, that would include all the various components that need to be assembled in order to produce a functional gadget or vehicle. The production of these several new products in these value chains will lead to several new jobs that would reduce the unemployment level of the country. For those sectors in which India is not a strong manufacturing player, the country should ensure that in a strategy to develop manufacturing in that sector in India, the entire value chain is built and not just the final product.

This can be done by developing special economic zones catering to particular industries, in which the entire value chain will be manufactured. This will be extremely attractive to companies planning to set up new manufacturing units due to the ready availability of raw material and buyers of their finished goods.

References

Authored by: Abheek Dasgupta, Associate

Contact details:

abheek.dasgupta@intueriglobal.com

About Intueri: Intueri Consulting is a management consulting firm with nearly 100 man-years of experience in managing organizational challenges, including managing firms and clients through some of history’s biggest crisis periods such as the 1997 Asian Financial Crisis, 9/11 led crisis, 2007-08 global financial crisis. This vast repository of organizational management experience, accrued by senior management, over decades of managing large multinational firms and clients enables Intueri to develop effective, efficient crisis management strategies and provides it with a unique perspective into events and decisions that take into consideration all important aspects of a firm, including assessment of primary, secondary and even tertiary order potential effects on the firm on account of implementation of strategies. Intueri has been helping organisations enter new areas within the chemical sector in order to diversify their product mix with the help of existing players who are looking to buy something they need or to sell something that they make. The firm has consultants with extensive domain knowledge both in the chemical and pharmaceutical sector.

Research Paper: Connecting Rural Dots Touching Lives

The Structural Shift from traditional farm sector to allied farm and non-farm sectors in Rural India focussing West Bengal

Rural economy of India

India is the world’s second largest agrarian economy accounting for 7.4% of total global agricultural output. It is also the world’s 3rd largest producer of food. A bumper harvest of winter crops and higher production in livestock and fisheries sectors aided a 5.3% growth in agriculture GDP in the first quarter of 2018-19, up from 3% in the same period last year. Production of rice, wheat, coarse cereals and pulses registered growth rates of 15%, 1.2%, 15.6% and 17.3%, respectively, during the Rabi or winter season in the agricultural crop year of 2018-19. About 45% of the gross value added or GVA in the agriculture sector was contributed by livestock, forestry and fisheries, which registered a combined growth rate of 8.1% in the first quarter of 2018-19. Agriculture GDP grew at 3.4% in 2017-18, lower than 6.3% in the previous year.

Rural transformation-an essential part of structural transformation-entails greater interaction along the rural-urban spaces, thereby promoting agricultural productivity and greater marketable surpluses. Over time, from predominance of farm sector, non-farm activities have gained importance. Alongside, with agriculture being commercialized, a large share of the country expected to be urban by 2050. Declining contribution of agriculture to the national income from 18.2% in 2014-15 to 16.5% in 2019-20, reflecting
the development process and the structural transformation taking place in the economy. This further has given rise to growth of agricultural allied sectors, non-farm activities and even self-employment opportunities and rural tourism.

As part of allied sectors-Animal Husbandry, Dairying andFisheries activities, along with agriculture,continue to be an integral part of human life.Livestock income has become an important secondary source of income for millions of rural families and has assumed an important role in achieving the goal of doubling farmers’ income. Livestock sector has grown at a compound annual growth rate of 7.9 per cent during last five years.

Milk Production and its growth rate is depicted below:

India continues to be the largest producer of milk in the world. Milk production in the country was 187.7 million tonnes in 2018-19 and registered a growth rate of 6.5 per cent over the previous year. Egg production in the country, which was 95217 million numbers in 2017-18, increased to 103318 million
numbers in 2018-19.

Fisheries, another important source of food, nutrition, employment and income in India. The sector provides livelihood to about 16 million fishers and fish farmers at the primary level and almost twice the number along the value chain.The sector has been showing a steady growth in the total GVA and accounts for 6.58 per cent of GDP from agriculture, forestry and fishing. The fish production in India has registered an average annual growth rate of more than 7 per cent in the recent years. The sector has been one of the major
contributors of foreign exchange earnings with India being one of the leading seafood exporting nations in the world.The total fish production in the country stood at 13.42 million metric tonnes (provisional) during 2018-19. Of this, the marine fisheries contributed 3.71 million metric tonnes and the inland fisheries
contributed 9.71 million metric tonnes.

Fish Production over the last five years for Major Producing States (in ‘000 Tonnes) is depicted below. West Bengal is the second highest in fish production after Andhra Pradesh.

With this natural process of development in shifting activities to non-farm in rural India, it is crucial to take note of the thrust areas which have emerged as newer sources of income, employment, alleviating poverty and thus creating sustainable living.

Rural India-Focusing on Non-farm Activities

The Rural Non-Farm Sector (RNFS) encompasses all non-agriculture activities: mining and quarrying, household and non-household manufacturing, processing, weaving, artisans, craftsmen, etc.As per the tenth agricultural census, the average size of agriculture landholding declined to 1.08 hectare in 2015-16 from 1.15 hectare in 2010-11. This explains the rise of employment in non-farm sector. It is observed that 64% of rural employment is in the agriculture sector, while the share of agriculture in rural output is 39%.
Hence, reducing the dependence of rural masses on agriculture as a source of income will help improve the overall income of the rural population.

Another identified means of rural livelihood generation and sustainable living is through Self Help Groups and Self Employment. The National Bank for Agriculture and Rural Development’s (NABARD) Development Policy Department defines Self Help Group (SHG) as-“Voluntary organization of people operating within a frame work of rules and regulations for common economic and social objectives with an approach of participatory decision-making and sharing of benefits in an equitable manner”.

SHGs may be registered or unregistered groups of micro entrepreneurs, preferably having homogenous social and economic background, who choose to come together to mutually support each other and find ways to improve their living conditions.

Challenges in Rural Non-Farm Sectors
  • Infrastructure: The most significant bottleneck is the quantity, quality and reliable of infrastructure.
  • Regulatory restriction on small sectors:

1. In the initial stages, capital investment restrictions were imposed to protect the small-scale sector, from predation by large industry.

2. Reservation of products for the sector was initiated to create a domestic market and quantities restrictions imposed to protect them from competition from imports.

3. Capital investment limits have discouraged economies of scale, and concessions offered to small industry have created adverse incentives against re-investment. Reservation of products for the small-scale sector has gradually reduced in significance.

4. The decision of the government to put all the reserved items in the open general license category from April 2005 meant free import of such items at the prevailing tariff rate.

5. With the latter slated to come down over time to around 20 per cent as per the WTO norms, this will effectively signal the end of protection for the small-scale industry.

  • Education and Awareness: High levels of illiteracy in rural India have hampered the growth of the rural non-farm sector.
  • Migration of skilled laborers from rural to urban regions also creates shortfall of workforce in the rural small-scale industries.
Government initiatives supporting non-farm activities
  • The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 2005: It provides one hundred days of guaranteed wage employment in every financial year to every household whose adult members volunteer to do unskilled manual work.
  • Deendayal Upadhay Grameen Kaushal Yojana: It is implemented by the Ministry of Rural Development to drive the national agenda for inclusive growth, by developing skills and productive capacity of the rural youth from poor families. It funds training projects benchmarked to global standards, with an emphasis on placement, retention, career progression and foreign placement.
  • DeenDayalAntyodayaYaojana-NRLM: It seeks to seeks to alleviate rural poverty through building sustainable community institutions of the poor.
  • Aajeevika Grameen Express Yojana (AGEY): It is related to operating road transport service in backward areas by the SHGs which provide an additional avenue of livelihood for SHGs.
  • Pradhan Mantri Mudra Yojana (PMMY): Under this scheme collateral free loans are provided by Banks, Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs) to small/micro business enterprises in the non-agricultural sector to individuals to enable them to set up or expand their business activities.
SHGs and Ses

Currently there are 57,42,515 registered Self-Help Groups in India of which 86,974 have less than 5 members in their groups. In West Bengal there are 7,89,731 registered SHGs of which, 19,733 have less than 5 members in the groups. Typically, a SHG consists of 5-20 members. However, there are a few SHGs that have less than 5 members.SHGs are usually formed by NGOs and other agencies, such as micro-finance companies, and financial support is provided by banks. In certain cases, banks take the lead towards formation of SHGs and also provide required financial support.

Major roles of SHGs
  • SHGs facilitate members to become self-reliant and self-dependent,
  • SHGs aid the economically weak and marginalized people, especially women, realize their entrepreneurial and business management skills through training and access to capital,
  • Provides collateral free loan with terms decided by the group at market driven rates,
  • SHGs help reduce vulnerability of the poor during times of crisis (sickness, death etc) and promote economic self-reliance and SHGs also facilitate community coherence

Specific to SHGs, the Central Government has support initiatives such as:

  • Multiple programs facilitate bank linkages for SHGs. The Self-Help Group – Bank Linkage Programme (SHG-BLP) is a key program that has evolved to be a cost-effective mechanism for providing financial services to the marginalized people. This is now the world’s largest microfinance programme (in terms of client base and outreach) that link SHGs to formal banking institutions.

  • The SHGs that follow the Panchsutras of the DAY NRLM, viz., conduct regular group meetings, practice regular savings within the group, regular internal lending based on the demand of members, timely repayment of loan and maintenance of proper books of accounts are considered to be good SHGs and over years have proved themselves to be good customers of Banks.

Thus, the SHGs play a key role towards livelihood generationand thereby facilitates eradication of rural as well as urban poverty. One of the major reasons for rural poverty in our country is low access to credit and financial services. The SHGs enable poverty alleviation by providing financial support to the members through micro credit.

Allied Farm and Non-Farm Sectors of West Bengal

West Bengal is a predominantly agrarian state withagriculture contributing 18.8% to the state’s GSDP in2014-15.As the rural economy of West Bengal is very vibrant comprising of 2.7 percent of India’s geographical area but supporting nearly 8 percent of its population,it has resulted in high population
density and a low average landholding size (0.77 Ha per household). Among an estimated 71.23 lakh rural households, 96 percent are small and marginal farmers.Increasing population pressure with a low percapita landholding base has resulted in diversification of earning activities outside the farm sector.

Allied sectors such as animal husbandry, fisheries, food process and horticulture and SHGs and SEs have been growing rapidly. The significance of the livestock sector in the economy of our State can be attributed from its contribution of 4.41% to the total SDP and 18.6% of the agricultural SDP. It is pertinent to highlight that employment opportunities in traditional agriculture sector are shrinking rapidly and there is virtually no scope for employment of rural unskilled youths in capital intensive industrial units. On the other hand,
demands for milk, meat, egg & other livestock related products are growing exponentially due to population explosion, high GDP growth, growing urbanization and change in the food habits of the middle & upper strata of the society. Animal Husbandry and Dairy sectors therefore have the seminal potential to open up new vistas for large scale employment generation.

Similarly, West Bengal is endowed with fishery resources, water bodies and most congenial aqua climate for fish farming making the fisheries sector one of the crucial industries of the State. 40% of water bodies (brackish waters) in West Bengal are used for cultivation of shrimps majorly Vannemei type of shrimps.The annual estimated fish production in the State in 2015-16 was at 16.71 lakh ton as compared to 14.72 lakh ton during 2011-12 (registering a growth of 13.5%). Shrimp production in 2015-16 has been 1.18 lakh ton compared to 1.06 lakh ton in 2011-12. West Bengal contributes around 21-23% to India’s fish production.

Agro and food processing industries form a very important part of the state’s economy. The West Bengal government is setting up a number of policies and plans to focus on the selected areas like vegetables, fruits, fisheries, rice, poultry, dairy and floriculture.entrepreneurship for processing of fruits, vegetables & horticulture items etc. The State Govt. is encouraging the farmers for mechanization through the use of modern agriculture implements and machines form timely farm operation and reduction in the cost of production.

In the state, the main processed products in the Fruits and vegetables category are jams, jellies, pickles, sauce, canned sliced fruits and squash. Agro Food parks are being developed in the state with the intention of providing support to small & medium entrepreneurs by assisting them financially in setting up capital intensive facilities like cold storages, warehouses, quality control labs, effluent treatment plants etc.

Also, as an alternative means of livelihood generation, SHGs and SEs have flourished in West Bengal. Various Departments under the Government of West Bengal have formulated schemes and policies to enable livelihood generation, facilitate Self-Employment (SE) and support activities of SHGs. The support includes providing skill building trainings to SHGs and Ses.

The Department of SHG & SE, Government of West Bengal also provides multiple platforms through which SHGs & SEs can market their products. The Department organizes district level as well as state level fairs and exhibitions for SHGs and SEs, such as Sobola Mela and also facilitates participation of SHGs & SEs in the annual India International Trade Fair and exhibitions. Other Departments under the Government of West Bengal also organize fairs that allow SHGs and SEs to market and sale their products.

The SHGs & SEs produce several handloom and handicraft products, artifacts, cane and bamboo products, metallic products, imitation ornaments, incense sticks, handmade paper bags and others. They are also engaged in floriculture, organic farming, embroidery works (such as Zari and Zardouzi works), kantha stitch works, terracotta works, dokra art and several others.

However, the SHGs & SEs often experience challenges in terms of marketing their products, competing with organized enterprises (MSMEs and large industries) and contending with popular brands. In this respect as well, the Government has taken initiatives to promote products and help market them such as Karmatirtha is a flagship programme of the West Bengal Government. Training-cum-Marketing Complexes are being set up in districts and sub-divisional headquarters to facilitate training of SHGs for Skill Development and marketing of their products and SHGs receive skill development support to market their products from the Government under the scheme. Also, the West Bengal Swarojgar Corporation Limited (WBSCL) has opened two marketing outlets at Bhawanipur, Kolkata & Purulia District Magistrate Office. One Common Facility Centre at Diamond Harbour, South 24 Parganas has also been set up, where SHGs are able to process, produce & sell different products under one umbrella.

Conclusion and Policy Suggestions

Coupled with the Government initiatives, organizations such as NABARD too play an eminent role in shaping the rural economy today. Policy interventions by the Centre and State Governments mostly remain sub utilised creating institutional challenges. The most important issue however is to channelize
the assistance schemes to the farmers’ doorstep through appropriate institutional arrangements. In such context therefore, often collaboration with suitable partners could help reap better results.

For instance,

  • Small and efficient Farmers’ Groups (FG) comprising of 10-15 farmers are to be promoted similar to women’s Self-Help Groups in each Gram Panchayet area. Such FGs should be provided with funds in larger quantity and with longer repayment period compared to women SHGs.
  • For effective delivery of the various ongoing assistance and farmers’ welfare schemes, experienced Non-Governmental Organizations and/or specialized professional agencies are to be engaged purely as facilitators for helping the lowly educated farmers in availing various schemes’ benefits.
  • West Bengal is characterised by extensive cultivation of vegetables, most of which are presently not covered under PMFBY. Thus, PMFBY should have much wider coverage in crops across different seasons in States and for West Bengal, effects of Bangla Fasal Bima Yojana (Bengal pulled out of PMFBY in 2019) is yet to be seen compared to the present provisions PMFBY.

  • The assistance schemes for livestock (free distribution of livestock and fodder) needs to be more concentrated towards the Lateritic zone as the households in this zone have a better ongoing practice in livestock maintenance and related activities.
  • Krishi Vigyan Kendras (KVK) in each district need to be funded to set up their own extension units in each block of the district and scale up their successful demonstration projects and create a larger pool of local progressive farmers.
  • Farm insurance scheme- National Crop Insurance Programme (NCIP) / Rashtriya Fasal Bima Karya kram (RFBK):

Based on our research we identified certain areas, addressing which could help achieve greater heights in agriculture as well as allied sectors such as animal husbandry, food processing, dairying and fisheries to provide an assured secondary source of employment and income especially for the small and marginal farmers.

  • Encourage alternative farming and diversification of agriculture– Growing dependence on potato cultivation and inadequate (55%) storage facilities for the same is diverting attention towards opting production of other items like pulses and lowering reliance on potato. Also, 90% of the potato grown are of table variety. There is a need to allow diverse varieties of potato production. This would lower risk of wastage of potato and generate revenues from another shifting crop production as well.
  • Increase farmer income– Facilitate better credit facility and improve infrastructure including transport, cold storage facilities, irrigation, etc. Around 95% farming households are formed by small, marginal and sharecropper farmers. They lack financial support to adopt enhanced farming
    techniques and market their products.
  • Post-harvest management– One of the biggest challenges that lies with perishable agricultural items is that of wastage and crop loss. This is prevented with the help of suitable post-harvest management techniques which provides enough storage, curing, drying and infrastructural
    facilities. Suggesting proper measures of post-harvest operations and cold chain infrastructure to ensure minimum loss of fruits and vegetables would be the focus in this section.
  • Enhanced promotion of agri business– With increasing pressure on farmers and agri business to be more profitable and competitive. This requires better management, decision-making, improving the efficiency of resource use, and strong marketing. In order to enable this, specialised agribusinesses such as extension and advisory services, consulting and input services, marketing
    and trade organisations, and those bringing the benefits of the latest information and communication technology to agriculture and the rural economy is required.
  • Exportability of agricultural items– Given the inherent conducive natural soil, climate and terrain, the production is of superior export quality and in surplus quantities. This provides ample scope to explore the overseas market for exporting items. By identifying suitable markets for such commodities expansion in exports could be further facilitated.

Also, an inclusive approach to provision for agricultural credit has to be undertaken to address the issue of skewness in its regional distribution. While Government measures are in operation aimed at improving productivity and its marketing, efforts of farmers need to be supplemented with better coverage of direct income/investment support. The West Bengal Government has undertaken an effective measure in which payment for government procurement of rice is being directly made to the farmers’ bank accounts. Similar steps are to be further initiated and implemented to create an efficient and smooth ecosystem in terms of income and institutional support reforms to provide healthy living.

Thus, in line with India’s vision of inclusive growth, economic growth is necessary for substantial poverty reduction and for the growth to be sustainable in the long run, it must be broad based across sectors and
inclusive of large part of a country’s labour force. As a key element of inclusive growth, agricultural development is essentially eliminating the macro problems of low agriculture growth, low quality employment growth, low human development, rural-urban divides, gender and socialite qualities, and
regional disparities from a nation. Hence, as inclusive growth considers the pioneer as the Government, policy actions and structural reforms in this sector is broad based yet critical.

In today’s scenario, amidst the challenging global happenings we pause to look at the domestic prevalent factors for a sector which serves as the building block of our nation and State feeding 70% of rural population and 50% of urban population with primary source of livelihood for 58% of India’s population.

Union Budget 2020: Expectations & Reactions

The Union Budget 2020 was one of the most anticipated one in the recent history. From tweaks in long-term capital gains to GST rate-cuts in daily used items, this budget has a multitude of aspects associated with it. Today, we are sharing our experts’ view on the budget expectations and their reactions to the Union Budget 2020. Everything is compiled for your convenience.

The consolidated post: Budget 2020

Expectations

The union budget 2020 needs to urgently address the economic slowdown issue, boost consumption and increase GDP. One would also expect increase in 80C deduction limit to increase investments and leave more disposable income in the hands of individuals – Kasturi Ghatak

Expectations from the Union Budget 2020-

Focusing on current slowdown and maintain fiscal discipline

1. Fiscal reform measures to stimulate consumption and growth

2. Relief in the form of change in tax slabs, raising standard deduction limit to boost demand and household savings (giving more money in the hands of the taxpayers)

3. Government funding through issuance of sovereign bonds in the international markets

4. Measures to boost rural demand

5. Banking sector reforms by addressing NPA issues and NBFC crisis to ease credit flow to boost demand. – Antara Mukherjee

The union budget 2020 needs to urgently address the economic slowdown issue, boost consumption and increase GDP.  – Kasturi Ghatak

This Union Budget slingshot will whizz, whir and bring down income inequality, stimulate spending and boost cross country and industrial activities – Nidhi Sinha

A Saturday that shall mark the onset of India’s rise to dominance in the global capital markets over the next decade. Sensex to mount 47K by Mar 21. #Budget20 – An Intueri consultant

Increase in public spending, cheaper credit availability, revive rural consumption, increase healthcare spending to prepare for global health emergencies #budget2020 – Akhil Ashok

Expectations from the budget to include GST rate cuts on items of daily use and important sectors such as the automotive sector – Aranya Kalia

Ambarish Dasgupta’s Budget expectations: My expectation is more from Budget speech than the budget per se.

Those are:

a. Come out of denial mode on the situation of the economy and transparently explain to common Citizens like us if anything has really gone wrong in economy in the eyes of the government and if they admit so then explain  what are those factors that caused the slump and where did our policies, measures go wrong or fell short. Why has this stagflation come in, why has growth slowed, why has unemployment increased , why has consumption and private expenditure decreased, why has private investment slumped – what are the answers to those immense number of why going across the minds of all people. Let there be a very transparent, open explanation of the macro situation as of now as against our expectations which were there while Last budget happened and the identification of the causes which might have caused the variation of actual from estimates.

b. What should follow then is the outlining of policy changes, reforms, measures that Government should take to address those causes which stymied the growth in 19-20. What would prevent recurrence of that in 20-21 – even if we don’t expect a turnaround  in short term we need to know what alternate steps are being taken to arrest that rather  than wishing the malaise away and thinking market will automatically correct the financial parameters and nothing needs to be done. Please note this budget has a different significance as many of the parameters have gone back to the numbers which we had 30 years back , and therefore against such backdrop an usual budget speech proclaiming future investment numbers as we usually hear in all Budgets will possibly not be a very welcome one.

c. Then one can move into the usual bunch of financial stimulus packages for sectors and schemes that Government usually does in every budget but without addressing the points above if they again move into the usual budget speech, I think trust of people on Budget process and speech which is certainly declining and looked at with some cynicism, can’t be restored.

d. Lastly I will have an interest in what Govt does in a completely apolitical way for the States which have different ruling parties than in centre. Number of such states have increased since last budget and therefore this point comes up – to have an egalitarian growth all around the country, they will certainly have to focus on each and every state and create packages suited to their strengths and weaknesses ,  needed for a sustainable  growth in those states and therefore in India. Will be interested to hear that and in particular for my own state Bengal.

Reactions:

The jury is still out on whether #Budget2020 will spur investment and consumption, too early to tell in my opinion.

Direct tax announcements were directed at making investments domestic/foreign easier in Indian companies and the lives of investors/entrepreneurs much easier –

for example, the abolishment of Dividend distribution tax, 100% tax concession for sovereign funds to invest in Infrastructure, tax holiday for startups have been extended, etc.

Sadly the healthcare sector did not see any game-changing announcement which was expected in light of a global health emergency that emerged from right next door- Akhil Ashok

Gutful transition to wisdom of ancient Indian philosophies in Union Budget, kudos! Analytics, quantum computing, IoT, 3D printing and AI got rightly highlighted, however tangible plans and policies to harness these emerging technologies for the economic rejig was expected- Nidhi Sinha

Expectations from Union Budget 2020

My expectation is more from Budget speech than the budget per se. Those are:

a. Come out of denial mode on the situation of the economy and transparently explain to common citizens like us if anything has really gone wrong in economy intheeyes of the government and if they admit so then explain what are those factors that caused the slump and where did our policies , measures go wrong or fell short. Why has this stagflation come in , why has growth slowed , why has unemployment increased , why has consumption and private expenditure decreased , why has private investment slumped – what are the answers to those immense number of why going across the minds of all people. Let there be a verytransparent, open explanation of the macro situation as of now as against our expectations which were there while last budget happened and the identification of the causes which might have caused the variation of actual from estimates.

b. What should follow then is the outlining of policy changes,reforms, measures that Government should take to address those causes which stymied the growth in 19-20. What would prevent recurrence of that in 20-21 – even if we don’t expect a turnaround in short term we need to know what alternate steps are being taken to arrest that rather than wishing the malaise away and thinking market will automatically correct the financial parameters andnothing needs to be done. Please note this budget has a different significance as many of the parameters have gone back to the numbers which we had 30 years back , and therefore against such backdrop an usual budget speech proclaiming future investment numbers as we usually hear in all Budgets will possibly not be a very welcome one.

c. Then one can move into the usual bunch of financial stimulus packages for sectors and schemes that Government usually does in every budget but without addressing the points above if they again move into the usual budget speech, I think trust of people on Budget process and speech which is certainly declining and looked at with some cynicism, can’t be restored.
d. Lastly I will have an interest in what Govt does in a completely apolitical way for the States which have different ruling parties than in centre. Number of such states have increased since last budget and therefore this point comes up – to have an egalitarian growth all around the country, they will certainly have to focus on each and every state and create packages suited to their strengths and weaknesses , needed for a sustainable growth in those states and therefore in India. Will be interested to hear that and in particular for my own state Bengal.

– Ambarish Dasgupta

Impact of International Trade on Indian Grassroots: Why India dissented from RCEP

A reluctant participant in the dragged out RCEP negotiations that began in 2012, India gradually warmed up to the idea of greater economic integration to move up the global value chain. Although protectionist forces opposed the RCEP since its inception, liberal advocates of laissez-faire pushed for the free trade agreement.

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement originally devised to consist of 16 countries across the Asia-Pacific region. At the RCEP’s administrative core is ASEAN: an intergovernmental grouping of 10 Southeast Asian countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. It was proposed that the ASEAN bloc will be joined with six member-states: China, Japan, India, South Korea, Australia and New Zealand.

While the RCEP is administratively built around ASEAN, the main mover is China. The world’s largest trading bloc was pushed by Beijing starting 2012 to counter a free trade agreement that was in the works at that time: theTrans-Pacific Partnership. The US-led Trans-Pacific Partnership excluded China and hence the RCEP was Beijing’s balancing act. The Chinese government inculcated ways to expand its market through this regional trading bloc. For example, there is no coconut cultivation in China, but the Chinese import them from other countries and then process and export.

Indian diplomat, counsels, farmers and politicians dissented from joining the RCEP. Trade deficit, unemployment, decrease of domestic produce in the country, anti-dumping measures are a few reasons for this opposition.

Areas of disagreement with the RCEP member-states: Why India opted out

1. Base Year: There is a disagreement between India and the RCEP members on fixing the base year. The base year is the first of a series of years in an economic or financial index. For example, to find the rate of inflation between 2013 and 2018, 2013 is the base year or the first year in the time set. The base year can also describe the starting point from a point of growth. India opposed to the proposal that 2013 be treated as the base year for reducing tariffs, effectively implying that member countries should slash import duties on products to the level that existed in 2013. India is pushing for 2019 as the base year, given that import duty on many products such as textiles and electronic products has gone up in the last six years.

2. Rules of Origin: Rules of origin are the criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports. As per RCEP, China and Korea may be using countries like Indonesia and Thailand as “proxy” countries from where, the good which is actually originating in China or Korea, will be imported to India. Countries like Indonesia and Thailand are getting involved in the Chinese and Korean markets by staging that they qualify as the Minimum Value-Addition Criteria as Assembly Plants, from where the export to international markets will take place. Hence, such an act may lead to India becoming a dumping ground.

3.Trade Deficit: India registered a trade deficit in 2018-19 with as many as 11 RCEP member countries. China is India’s largest trading partner while we are China’s 11th largest trading partner India had a trade deficit of $104 billion with RCEP countries. More than half of this was with China at $53 billion. This raised worries about India being flooded with Chinese goods once the RCEP deal takes effect.

4.Indian sectors facing the consequence of RCEP: Various domestic industries including dairy, textile and automobiles have raised serious concerns and opposed the pact over tariff-related issues, especially with China. Pharmaceutical, steel, and chemical industries are also impacted.

5.Import Tariff imposed on countries: India wants exemptions built into the ratchet obligations as part of the pact. A ratchet obligation implies that a member country cannot be raising tariffs once the pact comes into effect. An exemption would imply that a country will be able to erect restrictive measures later on grounds of protecting the national interest. Under RCEP, India would have been required to eliminate tariffs on 74% of goods from China, Australia, and New Zealand, and 90% of goods from Japan, South Korea, and ASEAN. Amidst an economic slowdown, India faced the risk of becoming a dumping ground for foreign goods.

6.Protection of domestic data: There is also the issue of data localisation under the RCEP deal. India wants all countries to have the right to protect data. This would imply that countries can share data only where it is “necessary to achieve a legitimate public policy objective” or “necessary in the country’s opinion, for the protection of its essential security interests or national interests”.

7.Impact on specific products: Natural rubber, cardamom, tea and coffee, spices, rubber, coconut and oilseeds, milk, groundnut, oil palm, mustard, sunflower, soybean will be affected adversely. The idea is to understand that if the import of such products increases in the market, rural India gets hit.The RCEP would allow the dairy industry of Australia and New Zealand to compete with our resource-strapped farmers.

IMPACT OF RCEP ON INDIAN FARMERS

India’s farmers were worriedthat they would be unable to compete on a global scale.For example,the milk industry is a huge source of income for crores of farmers and they will be unable to face off against the highly developed dairy industry of New Zealand and Australia.Both these countries are eyeing the huge market in India.

It is notable that New Zealand exports 93.4 percent of its milk powder, 94.5 percent of its butter and 83.6 percent of its cheese production. Removal of tariffs, which at present are 60 percent for milk powder and 40 percent for fats, will allow the dumping of these products.  The presence of China, Australia, New Zealand, and Japan in RCEP will also affect sericulture, horticulture as well as floriculture in India. The farmers are also fearing that the RCEP might allow cheap imports of palm oil from Malaysia and Indonesia and rubber, tea, cardamom and vanilla from other Southeast Asian countries.

Some of the Indian sectors effected by the RCEP are listed in this article:

1.Dairy: Farmer group representatives said that dairy cooperatives in India earn about Rs 280 to Rs 300 a kilogram of milk powder. They are worried that milk powder from Australia or New Zealand might become available at Rs 180 to Rs 200 a kilogram.

2.Spice: The India-Sri Lanka FTA’s impact was high on spice farmers. Pepper started coming from Vietnam through Sri Lanka. In 1999, the price of pepper was 720 per kg, which has now reduced to 330 per kg. Today, Lankan nutmeg, pepper and other spices are still coming to India and impacting our farmers.

3.Coffee: The price of raw coffee beans was Rs 63 per kg in December 1999. This got reduced to Rs 18 per kg in 2004. Hindustan Lever and Tata, both processing companies of processed tea and coffee, were the beneficiaries, while farmers were biggest losers. Tata transferred their plantation asset to some other company, because they could now import tea from outside and sell it India.

4.Fisheries: Another sector coming under threat is fisheries. Some of the countries are interested to open up the sea for Deep Sea Fishing (DSF) vessels. When the new DSF vessels enter the Indian Exclusive Economic Zones (EEC), they will go dry in a short span of time. If huge vessels operate in our fragile fisheries zone, our fishing resources will be exhausted within no time. This will displace 7.5 million fisherfolk.

5.Sugar: Farmer agitations are going on in most of the sugar producing states. Nowhere are farmers getting the due MSP. Sugar factory owners complain that retail prices of sugar have come down to Rs 40-42 per kg. This is due to import of sugar. Even though we increased import duty to 100 per cent, import is increasing, and export is decreasing.

6.Wheat: Wheat production provides livelihood to more than 6.7 crore Indians. There were bulk imports on account of the Indian government and the private sector manufacturers of bread, biscuits and noodles. These lead to a price crash of Rs 2.65 in the market.

WAS OPTING OUT OF RCEP THE CORRECT DECISION?

However, many corporates and economists still believe that India’s manufacturing industry needs the pressure of external competition to secure global competitiveness it lacks.Without access to trading blocs, Indian industry would be limited to the home market, denying the growth of international expansion.It was being argued that the RCEP would facilitate India’s Micro, Small and Medium Enterprises (MSMEs) to effectively integrate into the regional value and supply chains. Moreover, RCEP can bring reforms in business competitiveness and policy reforms for India from these nations.

The exports category of T-shirts and singlets demonstrates how staying out of trade pacts is not sustainable. The US, a key market for India, imposes 32% tariff rate on India’s exports in this category, but nothing on exports from South Korea, as it enjoys zero tariffs under the US-Korea FTA. South Korea, a key competitor of Indian apparel exports, also enjoys zero tariffs under the EU-Korea FTA.

As per the Ease-Of-Doing-Business Index, except for Cambodia, Laos, and Philippines, all other RCEP nations rank higher than India, and hence can boast of better business conditions for attracting investments.

As India has now opined to step out of RCEP, foremost alternative is to engage with the RCEP nations bilaterally. In no circumstances, should India give out any impression that we are withdrawing from one of the most dynamic regions of the world.India has an existing trade agreement with the ASEAN and bilaterally with Singapore, Malaysia, Thailand, Indonesia,Japan, and South Korea. Clearly, the inclusion of India in the RCEP could have given more market access to the rest of the three countries namely, China, Australia, and New Zealand.

It is equally important is to see how Indian institutions are meeting with global commitments that have geo-strategic and geo-political implications. If India wants to arrive at a solution for RCEP soon much more diplomatic efforts are required with the RCEP nations.Production and post-production competitiveness of Indian products must be boosted to promote exports, which remain critical to maintain a favourable balance of payment situation and create jobs.

If Indian grassroots are marred, domestic surplus is fed to cattle and unemployment moves up because of such FTAs, then what is the purpose of advancing in global trade? By implanting innovative solutions, there are various ways of positioning domestic produce in global value chains. The focus of the Indian economy needs to be on how surplus from the farmers can reach places which are unfed, and national value chains. This will help us achieve optimum allocation of resources. Filing intellectual property rights on domestic produce will protect and help in international market expansion. As the seedling of commerce is growth of revenue, India should focus onexport-oriented strategies than reducing tariff barriers on imports and improve FTAs with RCEP nations.