Note from the editor: This paper is part of a series of 3 articles focused on the circular economy in India. This series follows the report “Circular economy in India: Rethinking growth for long-term prosperity” led by the Ellen MacArthur Foundation with the support of ClimateWorks and UNCTAD as knowledge partner. It shows how a circular economy development path in India could create economic benefits for business and households, and reduce negative externalities*. Read the first article: Is India on the eve of a new development path.
The authors Apoorva Arya and Arpit Bhutani, have been working alongside the Ellen MacArthur Foundation in India, and have been actively involved in the report as contributors.
India, the fastest growing major economies also houses 1/3 of the world’s extreme poor with the highest demographics of children suffering from malnutrition. With 1.2 billion people, India accounts for around 18 percent of the world population and is ranked third in global carbon emissions. Any positive or negative change in the country’s development path could have a tremendous impact both at a social and an environmental level globally.
As per the Chief Executive Officer of the National Institution for Transforming India (NitiAyog), policy think-tank of the Government of India, the country’s current per capita income is $1,652. If India continues to grow at the current rate of 7 per cent per annum, by 2032 per capita income will be $4,000 in real terms. Moreover, if the economy grew by 10 percent annually, the per capita income would reach $6,800 and India would be largely free from poverty by 2032. It is important that India embarks quickly on a positive model of development, uses its resources efficiently and becomes more inclusive, while harnessing the growing potential of the small and medium-sized sectors, which includes the informal economy.
India has the potential to achieve its development goals by adapting a circular economic model of growth. To achieve this, we need to include all sectors of the economy, both formal and informal, on this path towards circularity.
Micro, Small and Medium-sized Enterprises (MSME) form the backbone of the national economic structure, from family run shops to small factories. The capacity of the MSME sector to drive change in India, through economic growth and development, is generally underestimated, but with a wide range of services and manufactured products ranging from traditional to hi-tech items, the sector is very dynamic.
Table 1 below provides the number of registered and unregistered Micro, Small and Medium Enterprises in the country.
Table 1: Registered and Unregistered Micro, Small and Medium Enterprises
As per the last estimates of the Ministry of Micro, Small and Medium Enterprises only 4.3 percent of MSMEs are registered in the country which means that 95.7 percent falls into the informal sector. Furthermore, among the registered MSMEs, 94.9 percent comprise of micro enterprises, small enterprises account for only 4.9 percent and medium enterprises for only 0.2 percent. An important example of the informal economy in the industrial sector is Dharawi, Mumbai, which is the largest slum in the world and has an annual economic output ranging from $600 million to $1 billion.
Table 2: Performance of Small Scale Industries/Micro, Small and Medium Enterprises
Source: Ministry of Micro, Small and Medium Enterprises, Government of India
Table 2 depicts the increase in total registered MSMEs, employment as well their market value from 2001 – 2013, which is a positive graph for the economy. However, Table 3, on the other hand, shows how despite the increase in number the total manufacturing output declined between 2006 and 2012.
It should not be overlooked that the figures in table 2 and table 3 do not consider the unregistered MSME sector as well as the informal economy in India. Even though the MSME contribution of 7.28 percent to the GDP of India is substantial, therefore, it is worth investigating why the MSME share has fallen? These statistics clearly depict that MSMEs and the informal sector form a major part of the Indian economy and cannot be ignored while undertaking any policy shift towards a transformation of the Indian economy.
Table 3: Contribution of Manufacturing Output of Micro, Small and Medium Enterprises to Indian GDP
Source: Ministry of Micro, Small and Medium Enterprises, Government of India
There is a need for Indian development policies to place much more emphasis on harnessing the potential of MSMEs and the informal sector by engaging them in business models that are regenerative and desirable while ensuring that ease of doing business makes it easy for a multitude to thrive. This could help in arresting the decline of MSME growth in the country, which has the potential to play an important role in social and economic restructuring of India.
In this endeavour, a circular economic system could play a pivotal role in increasing the revenues of MSMEs by making them more competitive while creating socio/economic and environmental prosperity for millions of people. The emphasis should be on business models, which promote waste reduction and pollution avoidance. A circular economic approach can provide India with many benefits such as resource, energy, material efficiency and related cost cutting, reduction in pollution, employment generation, forward and backward linkages of informal with formal sector among others.
However, a transition to a circular economic system entails deep-rooted systemic challenges relating to governmental support, tax structures, profitability, education, lack of technical skills and financial barriers, among others. As is often the case, it will be within these challenges that pioneering leaders will find opportunity to drive the circular economy transition.
Barriers and Drivers to a circular economy in India
Project based information technology industry – IT solutions and mobile technology are a good way to harness the potential of digital technology towards a transition to a circular economy. However, for a long time there has been criticism that the jewels of the Indian IT industry innovate, but not for India. The focus of the Indian IT industry has been on quarter-to-quarter numbers instead of disruption in the Indian market. Out of the box digital solutions that go beyond “just making applications” as a solution for everything is needed. The industry should also deliver the same quality services as abroad and promote financial and business sense out of IT solutions.
Micro, Small and Medium Scale Enterprises (MSMEs) and the Informal Sector – Before we consider the informal sector as a barrier to a circular economy we must first understand the reason why the informal sector exists, it is because there is high cost for the formal sector to comply with public regulation and requirements and yet make a profit. As stated above, in order to accelerate India’s development path towards a circular economy it is important to make it inclusive of MSMEs and the informal sector.
Growth and Profitability – For a circular economic system to be effectively adopted, the system must ensure that India’s growth is not reduced and the concept should be profitable for businesses. Long-term prosperity with high growth rates can be a big driver for a circular economy in India.
Policy Support – By the time policy catches up with technology; a new innovation is almost ready to enter the market. A regulatory framework for the future should be designed in a way that specifies explicit ends but leaves the means open for innovation. Rigid regulations will become outdated very fast. Policy support can be the biggest driver for a transition towards a circular economy. Policy support can create necessary structure, which has the potential to facilitate a circular economy for everyone. Governments can create a system wherein incentives like tax breaks or infra-structural support can be given for enterprises to move to a circular economic business model.
Moreover, if the government favours a circular economy in its procurement of goods and services it can set a precedent for the private sector.
Financial and technical capacity – Another major barrier could be the lack of finance as well as technical know-how to transform business models towards a circular economy. Especially when lots of small companies are proprietorships and managed by single individuals who then spend a considerable amount of their time in complying with confusing and complex regulations.
Education – One of the reasons for India’s low ranking position in innovation is due to the current education system, which is grade oriented and not focussed on practical solutions to problems. There is a definite need for concepts like circular economy to be part of the curriculum from a young age and for students to embrace the concept. Conscious students become conscious citizens, consumers and manufacturers.
Consumerism – The current economic model relies on economies of scale, and feeds on materialism. India has traditionally been an economy that focussed on recycling, repair and reuse. However, recently, India has been following the western path of linear economic production as well as consumption. Manufacturers factor costs of replacement into the original price of products, especially in the technology sector. Materialism within a linear economy can only worsen the current situation whereas conscious consumerisms can become an important driver as manufacturers gradually adopt circular economy principles. We should keep in mind our original economic system of recycling, repair and reuse while moving a step forward towards a circular economic revolution.
A transition to a circular economy would require a structural shift with appropriate level of material prices so that recovery, reuse or recycling is profitable with cheap and trained labour force, as circular economy is labour and service intensive.
On the policy perspective, there is a need to have circular economy friendly reforms like ecological taxation systems or introduction of financial incentives, which is an uphill task due to the federal structure in India Moreover, the reforms should make sure that the growth is not hampered, which is one of the biggest challenges.
Governmental support is especially important for MSMEs and the informal sector because large corporations can move ahead and adopt the circular economy with little or no government support. On the other hand, we should not underestimate the role these large corporations can play in transitioning to a circular economy. They often create an over-arching system of circular economy along with compliant MSMEs that can feed into the supply chain.
As our understanding of regional development of the circular economy deepens, it’s increasingly clear that the transition to a restorative, regenerative model will look different around the world. In the Indian context, progress will be found not via a trickle down sector-specific approach, but rather circular economy principles should be followed as a way of life from business, to homes, farms, schools. The effort has to be made both from the bottom as well as from the top of the pyramid.
Click here to download the Ellen MacArthur Foundation report Circular economy in India: Rethinking growth for long-term prosperity