Mini-Loans to Small Rural Businesses can Reduce Poverty

There is considerable publicity these days about micro-credit as a tool against poverty. There is no doubt that a loan of $100 to an impoverished person can help him or her tide over personal emergencies such as payments toward dowry for a daughter’s marriage, a medical surgery or fixing a leaky roof. In some cases, micro-loans to local merchants might help them overcome temporary financial difficulties. However, there is no substantiated evidence that micro-loans are creating sustainable businesses run by the poor (whose daily income are below $1 a day, or family income below $2 a day). Further, micro-loans barely add any significant new employment among the poor.

It is not possible for even a very small fraction of the 3 billion living in poverty (below $2 per day in income) to become successful entrepreneurs. Most of them do not have any education, business skills or financial resources. In countries like India, the poor are both illiterate and socially disadvantaged; there is little chance that micro-credit or even larger funds can help them plausibly start and run businesses. The present generation of impoverished people can only hope to earn a living by working in the fields for landlords or at businesses nearby.

If vibrant business activity and the associated new employment opportunities are what will reduce poverty, we have to think of ways to promote existing small businesses. In my social work in rural Tamil Nadu, India, I frequently get to meet owners of local businesses – furniture manufacturers, auto repair shops, welding and fabricating facilities, and so on – each employing a few workers. With meaningful financial assistance, many of them will be able to expand their businesses, while hiring several more employees. These are businessmen with the proven skill-base and sales ability to successfully run enterprises. As they employ more workers from nearby villages, poverty is correspondingly reduced.

Micro-credit is inadequate to meet the needs of businesses that have the potential to expand and add new employees. They require significantly larger credits – mini-loans of $1,000 to $10,000 or more for each activity – for such things as new machine tools, additional hardware and supplies, or a vehicle to transport the merchandise. Small contributions from individuals and institutions may be combined to offer such mini-loans. With additional capacity to meet the needs of a wider customer base, these small businesses have the potential to grow.

Hardly any venture can be expected to sustain itself when financing costs are exorbitant. If small businesses are to be helped, they must be able to borrow at reasonable interest rates. Regardless of the justifications given by lenders for charging 24-36 percent annual interest rates, there ought to be a realization that such practices are simply not viable if the goal is to help small businesses succeed. The business of credit to the poor cannot ride on exploitation.

Combined with efforts to attract large businesses to rural and other economically deprived areas, mini-loans at modest interest rates to small businesses with good track records can be an effective tool in addressing poverty. When the poor gain the opportunity for income generation from employment, they will one day become self supporting and in turn, their children will have expanded opportunities. Until then, the goal of poverty programs ought to be the delivery of basic services (such as education and healthcare) at affordable prices and the creation of employment.


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A Lesson From Climate Change: Grapes are Sweeter!

Ever since The George Foundation started its operations in 1995 in Tamil Nadu, India, we have been working toward generating internal sources of income to fund at least part of the expenses for our various humanitarian projects. Baldev Farms is one such effort -- to empower poor women who work on our farms, while generating profits. In the initial two years, the farm was growing vegetables - tomatoes, beans, gherkins, etc. We even tied up a marketing arrangement with a French company in Bangalore. Despite high crop output, we couldn't make a profit. For example, tomatoes prices fluctuated between Rs.0.50 to Rs.4.00 per kg every year. One has to be lucky to harvest the crop when the price is high; usually prices are high only when the crop is out of season.

We switched to bananas in early 2000 when the rains were predictable and sufficient. It is one crop that maintains fairly steady prices – between Rs. 4.50 and Rs. 5.50 per kg most of the year (though prices haven't risen in these 6 years). The fact that bananas are the poor man's fruit was an added attraction. We knew that it needs plenty of water daily. Hence we joined forces (technology transfer) with Natafin (an Israeli company) to find ways to reduce the need for water. The techniques used were drip irrigation, mulching, compost (which holds water), and use of "good" bacteria. With these, one acre required around 7,000 litres of water daily. That quantity of water is only 1/3rd to 1/4th of what is usually given under flood irrigation (without drip -- 28,000 litres). Yet we were getting excellent quality bananas, with bunch weight mostly between 25 Kgs and 35 Kgs.

With nearly 200 acres of land under cultivation, the daily need for water was still 1.4 million litres. Since there are no rivers around, we drilled dozens of ground wells for water. We thought we could capture sufficient rain water each year to recharge the underground water. A check-dam was built, and nearly 100 collection pits were made. But with rain shortages in almost all the years since 2000 (30-60% less than the average rainfall in previous years), we were experiencing significant declines in ground water levels. We laid pipelines for a distance of 7 kms from wells in a dry lake-bed elsewhere, but this was still not enough.

Finally in 2006 we decided that we couldn’t wait any longer for a favorable climate change. If we are to believe in recent climate forecasts based on global warming, the chances are that rains will only decrease over the coming years. We decided to switch over to grape vine.

Vine is a semi-arid crop. It doesn't like much water. Watering once or twice a week is enough . Again, with drip, proper mulching and compost, water consumption can be kept to a minimum. If it starts raining as it used to 10 years ago, our vineyard will be in trouble!

So here it is. For us, grapes are sweeter than bananas. We are switching from a poor man's crop to a rich man's crop. While there is no revenue for the next 3 years until fruiting starts, we expect that grapes will soon cover some of the costs incurred for our other projects, and still employ lots of people. May be, we will get into the liquor business one day to help the poor! But it is no easy task. Vine requires lots of care -- grafting, pruning, etc. Diseases, termites, rodents and birds are problems to handle. Hopefully it is still a wise strategic decision not to fight mother-nature.


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Rain Shortfall Bodes Severe Hardships and Dangers for India

Experts are predicting that the worsening climate change from global warming will result in lesser rainfall in regions close to the equator. India, Bangladesh and Pakistan are among the South Asian countries that are likely to be severely impacted. These countries depend on rainfall for much of their crops, and they have not utilized major rivers that run from the Himalayan ranges and other rain-dense sources for supplying water to interior areas. For many years there has been talk about diverting rivers like the Ganges and the Brahmaputra, and building dams, but thus far nothing has been initiated. There are no major projects underway to supply water from rivers to water-scarce areas through large pipelines. These projects take anywhere from several years to decades to complete, even if a plan is agreed upon by all parties. Successive central governments have been less than transparent about their plans, and only those private companies who might be beneficiaries of the potential work on design and construction seem to know what is being contemplated, if anything.

Water shortage is already affecting crops in many areas within several states in India. Pressured by money-lenders, some farmers have abandoned their land in search of immediate income from employment in the cities. Stories of farmer suicides are now heard more frequently. Government assistance by way of subsidies and employment guarantees is increasingly becoming their last main hope. With over 700 million people living in India’s villages, and most of them depending on agriculture, it is far from certain that handouts are sustainable. It appears that the projection made two decades ago by a major research institution in Los Alamos, U.S. that climate change and rain shortfall might be among the five gravest dangers to hundred of millions of people is beginning to come true. The report went on to add that desperate rural population might be forced to move into prosperous urban areas, occupying even five-star hotels!

The other day I read an op-ed column by Thomas Friedman of the New York Times about drought in some of the tall-grass lands of Africa where wild animals have for centuries made their habitat. I wrote to him about the drought conditions in Hosur Taluk, Tamil Nadu, for the past 5-6 years. When I first started our humanitarian projects in that area some 11 years ago, I was told that rains were fairly predictable in April, June-August, and November-December. The lake close to where we built Shanti Bhavan, the residential school for children from poor homes, was literally overflowing when I came to purchase the land for the school. Today, this lake and others in the area are mostly dry. There has been very little rain in recent years, and our attempts to gather ground water with collection pits (a major check-dam constructed and over 100 collection pits made in an area of 100 acres) don’t seem to be sufficient. Small farmers who depend on raggi grain grown once a year are not able to support themselves.

To make matters worse, farmers who depend on well water and free power for the pumps find both in short supply. Without sufficient rain for several years, ground water levels are going down, forcing many to dig deeper wells and use more powerful pumps. With little water outflow, pumps have to be run around the clock to meet the needs. As every well is pumping, the result is power shortage and lower voltage. Many pumps don’t function properly when voltage falls, causing even further depletion of water pumped for the crops. Today, power cuts for several hours in a day are common, and we are forced to run diesel generators to meet the needs of our school and farms. Unless sufficient rains come this year, the situation is likely to worsen to levels that might cause severe hardships and social unrest.

I do not know what the state and central governments are planning to do in addressing water and power shortages in rural areas. Today nothing appears on the horizon, except some passing clouds.


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Who can “fix” poverty?

For long, we have been relying on the government to fix the problem of poverty. Then we thought that NGOs will somehow solve the problem. Now we think private companies, through their “corporate social responsibility” (CSR) programs, will significantly reduce poverty.

Many companies in India have formed CSR departments that make donations and involve themselves in initiatives designed to help the poor. But for the most part, the CSR movement appears to be a public relations campaign or a “feel good” effort, and less of any major assistance to the poor. The little that the companies do is somehow tied to publicity and favors to politicians, and often an indirect way to sell their products. Companies have figured out ways to extract government grants for their CSR activities, and hence, minimize their own contributions. Regardless of all these, if even small benefit goes to the poor, it is well and good.

I like to see corporations investing in the rural sector. They must be required to pay wages that allow families to support themselves. They must offer at least minimum benefits for employee healthcare and educational support. They must not damage the environment. If they would do just these – be socially conscious citizens --, it is more than sufficient. Unfortunately, even those companies that have CSR programs do not adhere to these simple principles.

Governments must offer sufficient incentives for companies to invest in the rural and deprived communities by way of soft loans, infrastructure improvements, tax breaks, etc., and keep out of the process except for enforcement of labor laws, worker safety and environmental protection. Market forces will automatically take hold. The trouble is that neither the government nor the companies do their part.

We are under the illusion that poverty can be solved by NGOs and the government. Now we are beginning to think that the CSR movement will. Both NGOs and governments have roles to play, but the real solution is in creating vibrant economic activity. This is the lesson I have learnt from our Baldev Farms and other work in Tamil Nadu.


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