By Anirudh Agrawal and Ashish Tyagi
Economic problems of India were not addressed either in the 2019 electoral debates or in the recent annual budget. Markets are showing a deep imbalance between demand and supply, leading to a significant rise in loan defaults, banking crises and job losses.
MSME has not shown a tendency to grow or create jobs along expected lines despite a nationwide program of targeted lending. Indiscriminate lending in the past has increased Non-Performing Assets (NPAs) in the banking sector. The industry is still adjusting to the new GST regulations while the real estate sector has still not recovered from the demonetization shock. On top of all this, pollution is at an all-time high and climate change is manifesting itself in the form of droughts and floods in different parts of the country.
In such a slowdown, a knee-jerk policy reaction is to spur investment and growth through any means possible, including reversals on climate and Sustainable Development Goals (SDGs). Quite recently, the government allowed 100 percent FDI in the coal mining sector to spur a revival.
But in this article, we argue that a renewed focus on Sustainable Development Goals (SDGs) presents an opportunity to revive the economy, create a new wave of jobs and potentially increase the competitiveness of Indian economy vis-à-vis the SDG laggards. The discussion that follows is in the context of India but is equally relevant for the rest of the developing world.
NPA crisis and an opportunity towards SDG oriented portfolio
The main reason for a steep rise in credit default rate is that while industries expanded capacity over time, domestic and global demand has slowed down considerably, stranding the new assets. The lack of market demand causes firms to default on loans. This increases the stress on the banks, which consequently, stall the liberal credit lines to firms, further weakening the economy.
One of the significant factors causing the NPA crisis in India is the MSME loan portfolio. MSME is the backbone of any economy. In developing countries, MSME account for 90 percent of job creation and economic activities. Over time, through hard work, market and government support, these MSME entrepreneurs are able to grow, engage in employment creation, disruptive innovation and ultimately become unicorns, which are nascent businesses with high market valuation and growth potential.
>>>However, despite the important role in job creation and liberal credit lines, MSME entrepreneurs in developing countries generally remain poorly skilled, lack proper business support, access to markets and are many times bullied by bigger firms. In the end, a great deal of capital channelled to MSME is not converted into higher value. <<<
To transform the MSME sector, government and other business-sector actors must treat MSME as students who need to learn and adopt skills related to competitive management, sustainability, marketing and financial reporting so that competitiveness and sustainability become inherent within the firm. MSME entrepreneurs can aspire globally through exposure from government-sponsored programs to attend MSME events in Denmark (for their dairy and animal industry), Germany (manufacturing), Italy (leather and fashion). They can learn more about international market trends and technologies where the bottom lines are firmly grounded on SDG compliance.
Unlike bigger players which are slow, suffer from legacy issues; MSME is flexible enough to embed elements of sustainability and SDGs in their supply chains and value creation processes.
To survive and grow in a world with increasing climate change regulations, better cooperation is required between public institutions, banks and MSME entrepreneurs to work hard in sync, learn new practices and standards. Long-term growth requires MSME to make sustainability and SDG compliance inherent in the business plan, business model, management structure and type of service and product offered.
>>> Indian banks must actively focus on new industries creating products with lower environmental footprints. <<<
For example, instead of providing loans to typical plastic manufacturing SMEs, they must provide loans to entrepreneurs setting up green-materials factories, alternative plastic (biodegradable) factories, bio-diesel, or EV vehicle factories, which are environmentally efficient, follow international standards and are helping the nation achieve its Paris Agreement targets. The growth of competitive, innovative and greater SDG compliant MSME would make Indian economy stronger and mitigate job crises.
SDG focused Real-Estate Sector Regulation
Another cause of NPA crises in India is the rising real-estate inventory. Real estate sector was one of the largest employers during the 2004-2016 boom years of India (which is also true for most of the developing world). The assumption among investors during that period was that the real-estate will continue to grow and their investments will remain secure and ensure above-market returns. However, in the boom period, real-estate prices far exceeded their value, causing market failure in the current economic downturn.
But during economic downturns, it is relatively easier for politicians to make difficult decisions (as the public mandate is easier) and enforce innovative policies.
To address the issue of real estate inventory, the government must introduce regulations in the real estate market with quality controls, sustainability measures, green building codes, controls on the number of floors constructed, the green area within the apartment, restrictions on distance from the essential public services like a train station, police station, college, hospital, schools.
The regulations must forcefully move the industry towards significant sustainability goals (like those in Western Europe) with higher compliance on long-term sustainability, energy efficiency, and reliability. In addition to explicit sustainability actions like certification, greenified surroundings; firms and the government must focus on developing the real-estate sector, which is firmly embedded in a social, cultural and artistic milieu. Research has shown that housing where the communities have active social and cultural interaction tends to have higher value and lower crime.
Specific SDG driven controls would decrease the supply, increase the quality offered, and would significantly increase the value of the real-estate sector. If the buyers feel that their real-estate investments have greater value for a more extended period, the buyers and sellers will invest in the sale and purchase of the real estate, which would relieve the banks from possible NPA risks. The increased transactions in the real estate market would generate liquidity in the market that would further spurn growth. This suggestion on regulating the market stands in contrast to current appeals for liberalizing the real-estate sector. The liberalization of the real-sector has led to a rise in indiscriminate investment, increased half-built and abandoned sites which are causing a rise in water pollution, dust pollution and even dengue.
Pollution and Climate Change
Extreme climatic events and increased pollution are related to externalities that are threatening the sustainability of the Indian economy. The winter smog around the national capital Delhi significantly reduces the productivity of the city while putting residents under severe health risks. Lengthening of summer and unpredictability of monsoon is increasing water stress, as well as floods, which is putting households under stress and decreasing the overall national productivity.
To address these challenges, research-based and region-specific adaptation and mitigation investments will enable different regions to transform towards climate-resilient economic societies.
The government must invest in energy-efficient, global standard-compliant power plants to reduce smog around North India.
In addition, the government and private sector must invest significant capital in solar panel production, the infrastructure of EV automobiles, greener-sustainable materials, circular economy and responsible consumption. The green climate fund (GCF) has a specific mandate for adaptation finance for climate resilient agriculture and flood resilient infrastructure. The GCF is an interesting and evolving repository of knowledge which should help governments in designing and implementing climate mitigation and adaptation policies and investments.
Businesses around these emerging technologies are most likely to generate the next wave of job growth in the manufacturing sector.
Economic downturns are stressful times, but it is also said that “never let a crisis go to waste”. The downturns offer opportunities to re-write innovative policies as the public mandate is stronger for a change. India must use its current economic downturn as an opportunity to re-write public policies by incorporating elements of SDGs at each level of conception and decision and transform towards a greener, climate-sensitive and sustainable space. Sustainability at each level is the new competitive advantage and the emerging nations must capitalize it.
About the authors
Anirudh Agrawal is a doctoral fellow at CBS. His research interests are MSME finance, impact investing, social entrepreneurship and organizational 4.0. He is a chief strategy officer at Tvarit AI GmbH focusing on sustainable AI driven IT solutions and a visiting professor at Flame University India and formerly Assistant Professor at Jindal Global University.
Ashish Tyagi is currently a post-doctoral fellow and lecturer at Frankfurt School of Finance & Management. He completed his PhD from Penn State University. His research interests are environmental economics, climate change policies and sustainable transformation.
Photo by Sudha G Tilak