The success of any business in todays competitive world depends upon how

well it is able to capitalize upon its core competencies. Indian handicraft

industry, too, cant be any different. So it is natural to ask ourselves what
are these core competencies of this sector?

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

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

The Knowledge Pillar,

The Linkages Pillar, and
The Environmental Pillar.

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

The second pillar of business success is the linkages pillar and this stems
from the fact that every business today is linked with other businesses in the
economy. It draws from others and supplies to others. Thus an entire supply
chain is formed and constraints arising anywhere in this chain may hamper
the development of this business. In our framework, this supply chain
includes the forward linkages, the backward linkages, the infrastructural
linkages and the capital linkages. Here the questions we ask are is the
business able to reap the rewards of its venture and sell its output profitably
or are there other players in the supply chain who cream off all the profits
leaving little for our business? Are the poor infrastructural amenities driving
up the costs too high so as to nullify any advantage arising out of our core
competencies? Or despite having everything else, the business just cant get
enough capital to make it big?

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

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

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

needs to probe deeper and into each of the pillar. Since the current state of
affairs is not particularly an exciting one, let us begin by seeing why it has
come to what it is today.

To see the weaknesses / challenges in the knowledge pillar first, it is

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

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

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

Finally in the environmental pillar as well, the challenges are not any less
daunting. The government policies no doubt appear to be favoring the
handicrafts. But for a long time they suffered from over emphasis on
reservations for the sector or we can say were anchored in a Keynesian
framework. The logic was simple that reservations would create enhanced

demand and thus enhanced production. But Keynesian policies alone are not
found to be as effective in the traditional sectors of developing countries due
to the presence of the large number of market distortions. So there is a need
for supply side enabling measures in such cases and such a need was felt in
our case as well. Then we took some supply side measures like cheap credit.
But we failed to address the ground level problems effectively and such
measures as the cheap credit remained an illusion since credit itself was
simply not available. The 4th Census of small industries (2006-07) reveals
that over 92% of such units dont have access to any form of credit
(institutional or otherwise)! In the international front also the OECD countries
accounted for a large market share and when the financial crisis struck, the
demand for the luxury items from India crashed as well. Then the sector
also became victim to the various environmental regulations genuine or
otherwise imposed by the developed countries such as the REACH
regulations by EU on leather works.

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

As we have already highlighted the strength of the industry is the rich

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

Indian villages are unique in having immense social capital. True they may
be lacking in finance capital but finance capital can easily flow in from
outside if the conditions are appropriate. We saw how the informational
asymmetry and diseconomies of scale prevented this and led to the denial of
capital and crowding out. But if we utilize the social capital of the villages to
form self help groups such information asymmetry and scale problems can be
effectively addressed. We can then train these SHGs to adopt modern
management practices, we can incentivize them to get credit ratings done
from standardized agencies which will then address the informational and
scale problems and thus the capital will flow in (and there will be no need to

dedicate public capital here as private capital specially the micro finance
groups have shown to effectively step in such cases). Banks too have found it
useful to lend to such SHGs via the new Business Correspondents model and
if we amend some laws, these SHGs may have the potential to raise capital
directly from the markets via SME exchanges. By creating viable SHGs of
critical mass, we are also doing away with the bargaining weakness problems
since the entrepreneurs will be able to negotiate better terms. Thus the
inefficiencies in the supply chain will be weeded away by a market based
process and the entrepreneurs will now be able to generate capital, invest in
technology and skill training and thus be able to create a virtuous cycle out of
the vicious one. Also, importantly, we already have seen that the SHG model
works in real life as well (NRLM, Kudumbshree in Kerala, NE-RLM in Assam).
Similarly while it may be a tall order for the government to provide
infrastructural facilities to every village, the cluster based approach can help
us overcome the infrastructure barrier and can also increase the bargaining
power of the entrepreneurs.

Another important challenge which we saw was how these entrepreneurs are
forced to be risk averse out of socio economic disabilities. Definitely we
need to remove the impediments to their risk taking ability. And such
impediments as we saw were the chronic poverty, health and educational
insecurities and social injustice. This is where the fundamental right to
education (implemented via Sarv Sikhsha Abhiyan), providing food security
(proposed under National Food Security (Draft) Bill, 2012) and universal
health care (Planning Commission high level group recommendations) step
in. Once such unfreedoms (to borrow from Prof. Sen) are removed, there is
no reason why cant unleash the enterprising potential of the handicrafts
sector in India as China has already done.

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

Finally in terms of improving the international environment, we need to

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

Thus we see step by step, how there is a genuine viable case for the
handicrafts here. We dont need to ape other countries and spend huge sums
of public money, rather just need a change in approach and follow a unique
model to utilize our own core competencies and we can turn our handicrafts
around.