Why do rural enterprises remain small ?

I was reading yesterday an article by Mr. Sanjiv Phansalkar: What stops rural enterprises from growth and prosperity?. Mr. Sanjiv Phansalkar has written a good article but I find the article quite limited in explaining the scenario. The factors contributing to the failure among rural enterprises as per him are: Lifestyle obstruction, Modes of thinking, Sticking to schedules and Patterns of living. I propose ten better reasons on what stops rural enterprises from growth and prosperity. I have referred rural enterprises as micro-enterprises at several places in the current article.

1. Rural Enterprise Sector: Rural enterprises works in the segment where entry barriers are low and it is easy for these new entrants to enter the market. This poses a threat to the micro-enterprises already competing in that market. With an easy entry, all micro-enterprise tends to produce identical or nearly identical products – both in terms of quality and design, without offering significant product differentiation. This has implications for the pricing power and subsequently on margins as well of the rural enterprises. The customers always command an upper hand in pricing in the absence of clear product differentiation. More competition and increased production capacity without a concurrent increase in consumer demand – means less profit to go around.

2. Horizontal Growth: Rural entrepreneurs grow businesses by starting multiple businesses (known as horizontal growth). This seems tacitly a weak strategy when compared to the norm of linear growth of a single business. They prefer to start a variety of micro-enterprises rather than develop an existing business into a small enterprise. The establishment of complementary businesses is done to build on the breadth of family resources, tap on the competencies available, and also help to diversify risks. The main reasons behind this are “risk aversion”, and not “growth-orientation” of the business owners. The establishment of different businesses with different seasonal markets and cash flow requirements is needed to build a consistent annual income for the household. Mostly rural enterprises are run by women have limited business vision with their main aim being to earn an income – frequently labeled as “supplementary” in nature. This approach reflects a greater extent the reality of women’s lives, as opposed to the norms of economic models which tend to be derived from the experiences of western firms.

3. The Business Ecosystem: Rural enterprises are under-capitalized and generate limited profits; hence they have little opportunity for surplus accumulation and are vulnerable to the slightest changes in their business environment. Closely linked to the issue of business ecosystem is the fact that the majority of rural enterprises operate in restricted locally-based markets which by their nature are limited in size. Entrepreneurs engaged in business largely confine themselves to local markets where access, mobility, and networks are easier for them to negotiate. Also, locally made products are increasingly in competition with a growing range of branded and well packaged goods coming into the market at all levels. The already established brands and the markets they have captured are the biggest threats to these
rural enterprises.

4. Enterprise Trait:It is necessary to differentiate rural enterprises into opportunity and necessity type micro-enterprises. Necessity type enterprises began operations as they are forced into entrepreneurial activities because the entrepreneur had to find a means to survive and are less likely to succeed. While opportunity type micro-enterprises are more able to grow because entrepreneurs have the knack to identify and tap into an entrepreneurial opportunity.

5. Education and Financial Literacy: Many entrepreneurs lack the necessary education and skills associated required for maintaining internal systems and negotiating with clients. They face both practical and social problems in grasping the new opportunities. Information and financial literacy problems are likely to be particularly as schooling levels are low, sheer neglect of book-keeping, and little experience with the formal financial institutions.

6. Marketing: Rural enterprises finds it difficult to identify or discover markets beyond localized markets. This can be attributed to lack of information, both on part of consumers and manufacturers, to discover each other. It is difficult for consumers to learn about the existence and quality of different enterprise outputs. As a result, consumers often buy exclusively from a local producer, and producers sell mostly to local customers. The limited size of their potential customer base limits rural enterprises’ ability to grow. Often rural entrepreneurs want to limit themselves to operations, while leaving sales to some other person.

7. Access to Finance: Access to finance is one of the leading operational challenges that obstruct the sustainability and growth of the rural enterprises. The credit is available to SHG/JLG as the risk appetite and credit worthiness of individual borrowers in risky for financial institutions. Micro-finance offer entrepreneurs ease in credit facilities but the interest rates are on the higher side (22 % - 26%). The higher interest rates eat away the surplus generated in the business leading only to lower margins. Low levels of literacy limit entrepreneur's ability to produce the sort of written business plans and loan proposals that are required by banks. Even if B-Plan is facilitated by any organization, either they don't want or don't have farm land to put as a collateral security to the banks.

Most of the business works with Cash Credit Facilities that provides instant credit to business for the working capital requirement. Most of the rural enterprises resort to term loan facilities from SHGs for the working capital needs. That is complete mismatch of the credit product. Also, surplus credit from term loan is consumed in unproductive activities. There is no insurance product specially customized to need of rural enterprises in unorganized sector dealing with accidents, natural disasters, death and business related exigencies.

8. Capital Investment: Most of the rural enterprises have exhibited a low level of capital investment. They tend to operate with simple tools and equipment for production, which means lower fixed costs and lower maintenance costs. Investments in better machines would require significant capital, skill up gradation and a strong visibility of order pipeline that would economically justify capital-infusion. The decision to invest additional capital is triggered on the basis of visibility of order pipeline rather than need of the better quality and design of the end product. Successful business relations with a vendor on wholesale scale and risk appetite for expansion is rarity in rural enterprises. Entrepreneurs also do not possess substantial business history and credit history to avail unsecured loans from conventional channels and resort to high interest loans from money lenders.

9. Lack of Market Research: There is no recognition of the value of the market research among the rural entrepreneurs. There is a complete lack of appreciation of customer needs. The core strategy is to form the micro-enterprise on what they can produce, and not what the customer wants.The individual investment decisions are not made in isolation but the choice for the business is driven by the herd behavior. The short term success of one entrepreneur leads to mushrooming of several entrepreneurs replicating the same model. This frequently leads to excessive competition, under-pricing and even failure of many micro-enterprises.

10. Government Aid: The traditional government response to the credit needs of micro-enterprises has been subsidized interest rate programs. This becomes costly, corrupt, politically directed, and damaging to the incentives for the financial sector. There has been assistance from National Rural Livelihood Mission (NRLM) for the credit but the impact is quite limited in scaling up. Even the trainings provided by the government is supply driven rather than demand driven.

Reflection document on Social Entrepreneurship Saturday

Social Entrepreneurship movement is considered as next big thing and start ups of the development sector. The time needed to solve the social issues is vast, but thanks to the social enterprise movement, these issues are finally being fixed using sustainable business models and market forces. One of the most important tasks for the entrepreneur is to gain clarity about customers’ needs and willingness to pay. This helps in establishing a sustainable business model and create social impact alongside profits for external shareholders. That makes the social entrepreneur different from persons involved with Charity, For Profit Business and Government.

I will quote these three articles as a source of my brief understanding:

• Dream Bigger, Plan Better: 7 Tips to Keep in Mind Before Starting a Social Enterprise
• Is social enterprise becoming a reactionary force?
• If the Goal is Scale, Promote Theft

I attended a lecture on Mr S K Shelgikar on 25th November 2017. Mr S K Shelgikar, Advisor for Yunus Social Business Fund was the speaker for the talk at Transforming India Initiative - ALC that was revolving around the concepts of Social Entrepreneurship. The target audience were TII Fellows and internal team of consultant at ALC India.

Social enterprise as per me is applying a market-driven approach to addressing social issues and creating positive community change. The fundamentals of social enterprise became more clear today. The best part of the class was three principle on which social enterprise is based : Not for profit maximization, Serving the unserved and Done by personal choice while enjoying the invested time.

Mr. Shelgikar gave a lot of emphasis on mental experiments. They are the good intellectual exercises that drives people towards setting up the goal. I was intrigued on hearing about: Harm Principle, Theory of Regulation and Lexical ordering of virtues. There was so much quoted from Bhagvad Gita, Adam Smith, John Stuart Mill, and Immanuel Kant. This was heavy philosophical stuff that has bounced above the intellectual capacity. He also defined two uncharacteristic traits of Social entrepreneur: Fully convinced in disconnect between inputs and outputs & Empathy for others.

I personally assume the challenge remains in making social entrepreneurship rewarding. Perspectives from employee is different from the perspective of the social entrepreneur. Still, there is good amount of information that has to be reflected and may help me grow as Intrapreneur.

Street Entrepreneurs - 2

The informal economy in India is run by entrepreneurs providing products and services to the customers. These low-skilled occupations require low financial investments and thus have a relatively low threshold for entering. The street vendors have created a carefully constructed beehive of economic activity in the public space. They have created a functional system for themselves without waiting for government to provide them the legal permission, space and subsidy. In the series of street entrepreneurs (first part), I am presenting here a blog post by Anishok Mishra from the 2016-18 batch of XIMB:

The Cost behind the Taste - The Chaiwalas of Bhubaneswar.

Tea, or as we fondly call it "Chai" is one of India's most preferred hot beverages. Almost every person in our country has had a sip of this drink once in their lifetimes. Some prefer it black, some with milk, some with a splash of lemon and those looking to get healthier by drinking it prefer it "Green". No matter the variety or the recipe used to brew, this drink has only grown from generation to generation.

A big contribution in the same can be attributed to the numerous vendors who are situated on the streets in shops and "thelas", sporting aluminium kettles and gas stoves, serving tea to all who pass by their shops in glasses, earthen "matkas" or sometimes in plastic cups too. They all have their ways of working and their ways to making ends meet. This article attempts to take a closer look into the lives of these "Chaiwalas" and attempts to analyse how they recreate the same taste every day and the rewards they earn for their efforts.

At the outset, during the course of our short study we observed the following average trend in the expenses that surround a tea vendor:

Monthly sales (Rs) 24600
Montly Cost (RS.) 15193
number of cups per month 4920
Quantity of tea sold (liters) 388
quantity of Tea used (as input IN KG) 12
Cost of Tea Purchased per month 2898
Milk used (litres) 318
Cost of milk 9432
Electricity /Gas 587
Other Expenses 2276
Profit per month 9407

Let above figures not lead you astray. The same are simply an average of the shops that were surveyed at random and follow no patterns as such. Not every tea vendor makes more than Rs. 9000 as profit in a month. Besides this does not consider the expenses such as the cost of his equipment (Stove/Fridge/Utensils etc.) or the support staff. This means that the profit gets trimmed down even further and comes within a range of 4 to 7 thousand a month. This figure gives an insight into the hard lives that these vendors have to endure.

During our survey we approached each of these vendors with a set of questions. Although our intent was strictly academic at the start of the project, we could not help but indulge ourselves into the brimming cups of tea as they shared the information with us in a forthright manner. Be it their sales or their expenses, the "Chaiwalas"seemed as relaxed sharing this information as Toyota inviting people to study its Just In Time systems. Though the comparison may seem far fetched, the same is precisely what transpired.

During the time spent at the stalls asking for information, we observed the plethora of customers that these stalls catered to. Ranging from students who were headed back from tuition to tired office staff blowing off steam after a hard days work; or even the rickshaw drivers when they take a break. Somehow, these "Chaiwalas" have established their presence in all our lives as focal points where people meet and socialize irrespective of their occupation or status. The experience reinforces the importance of these vendors in the social landscape in maintaining a delicate balance between the lives of individuals.

Selling averagely 5000 cups a month and making only a rupee of profit per cup is a grim situation for any business. But the "Chaiwalas" have endured for the better part of a century and continue to do so serving us with a smile across their faces and the amazing fragrance of brimming tea filling our nostrils.

Street Entrepreneurs - 1

India’s most enduring heritage since independence is poverty. Poverty can't be fought by throwing doles and subsidy in the name of government schemes. It can only be done by creating suitable ecosystem for innovative and risk taking individuals. These persons need not to be engineering and management college students. A street vendor with no education is taking more risk and still pursing business is an entrepreneur. Entrepreneurship is more prevalent and still damn difficult to pursue for people working in unorganised sector. A NCEUS report estimates that in 2005 out of the 485 million persons employed in India, 86 percent or 395 million worked in the unorganised sector, generating 50.6 percent of the country's Gross Domestic Product.

Someone once told me to understand how businesses runs, interact with an entrepreneur, even if it is a pawn shop. I didn't get the point back then. Once in the college, I had read few chapters of book Grassroots entrepreneurship : entrepreneurs and micro-enterprises in rural India by Ajit Kanitkar. That became an inspiration for pursuing an interview with a street entrepreneur. I didn't record the facts like an official interview but collected it gradually in chit chat over a time of two months. What I understood of Street Vendors previously was a little value until I interacted with Mr. Binay Pradan. Our main protagonist, Mr. Binay Pradhan, is a Street Entrepreneur without any big degree and runs a Paanipuri Shop. Mr. Binay can't bear the idea of sweating tears for another person who will get profit on his hard work. He stated : "When one works for oneself, then one really puts the heart in the whole business." One of his wisdom lines remain with me - "A person must be good listener when working on the street. And, these days it has became more important to speak good & sweet rather than selling good products."

Family background - He has studied till 10th and family is located in Nayagada, Odisha. He is the eldest of 6 brothers. He was involved with farming. He also had worked in UP, Bihar and Mumbai for total of 10 years before starting his own venture. He was visiting to Harishankar temple as Bol Bam Kanwariya 11 years ago. That was the tipping point for him. He decided to start own business and migrated to Balangir. Hunch rather than market research, was the basis for opening a shop.

Business Model - Mr. Binay earn maximum upto Rs. 15,000 in a month. Cost of raw materials vary upto Rs. 200 to Rs.500 per day. While profit can fluctuate between Rs. 500 to Rs. 1000 on any given day. Also, he procure the raw material from a local trader since the inception of the business. Half the payment is given on the spot while remaining is done on credit. Payment is done as per cash flow obtained through sales. He takes day off on Sunday and rainy day. And he takes long leave for home in summer holidays.

He is married and blessed with three children. Girls are doing good in Class 6th and 9th while son is studying in class 2nd. He wants to impart best education to his children as this is only chance for next generation towards prosperity and respect. I agree with him completely. Education gives us skill to survive in economy and opening of minds. Those who dream about India becoming an economic superpower must support education and entrepreneurship around us.

Grassroutes: Developing Villages through Rural Tourism

Inir Pinheiro is a MBA in Rural Management from XIMB of 2004 – 2006 batch. He skipped placement offers to start up his own company, Grassroutes. Grassroutes is based on the concept of responsible rural tourism wherein tourism is run, managed and owned by local village communities. Today, it is a sustainable and profit making venture transforming unknown small villages, near the metros, into viable tourist destinations; sustainable for him and giving livelihood opportunities to the villagers. There is enough Media Coverage of this rural tourism venture.



The best part in his story that he is a "typical city boy", born and brought up in Mumbai. Inir learnt about the realities of village India much later. Inir proves that one need not to belong to villages to work in rural areas. He described once his work in the words of Regina Spektor -

“It started out as a feeling,

Which then grew into a hope,

Which then turned into a quiet thought,

Which then turned into a quiet word

And then that word grew louder and louder…….

'Til it was a battle cry !”