Failing Financial and Training Institutions: The Marginalization of Rural Household Enterprises in the Indian Punjab

Abstract

The tiny, family-owned and managed household enterprise is the overwhelmingly dominant form of private, non-farm, economic organization in the developing world. Harnessing the latent potential of these own account enterprises (OAEs) is now widely acknowledged as a legitimate policy objective to generate productive employment and to promote sustainable long-term growth [ILO 1995; World Bank 1995]. The design of appropriate institutions, and the reform of existing ones, is recognized as occupying a key part of this process now that the market-versusstate dichotomy has been replaced by the more pragmatic market-and-state approach. Such a program assumes particular urgency in rural areas. In the countryside, entrepreneurs face daunting hurdles relating to both the startup and consolidation of business. Two of the most significant are raising finance at affordable terms and acquiring necessary skills. The purpose of our paper is to highlight, through a village study, these constraints in the populous Indian economy. We argue that problems of administative complexity, limited information, discrimination and gender bias, and stymied access to formal institutions have helped to create and perpetuate a culture of corruption. The result is that entrepreneurs are forced to fall back on a weak local resource base and to rely heavily on informal avenues of finance and know-how. This condemns the majority of OAEs to operate on the margins of viability and the households to remain in poverty [World Bank 1997].