INFOCUS | INDIA-CHINA | SME | ENVIRONMENT
Indian SMEs need green policy
Going Green now to avoid Going Red later Greening SMEs require technological innovations and learning from other countries that have successful and cost efficient technologies which can be imported by SMEs at an affordable price.
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Shawahiq Siddiqui
U
nder the global climate negotiations, India assumes a significant role due to its inflating economy, soaring population and compelling development needs. Owing to its responsibility towards reducing carbon emissions significantly under global climate deals, India has formulated a series of sector specific Missions under the National Action Plan for Climate Change (2008). The NAPCC envisages building India’s capacity to reduce carbon emissions. In addition to this a number of new regulations on environment protection and amendments in existing laws are being brought to reduce environmental impact of developmental activities particularly related to industries. Ban on gutka sachets in plastic is a recent example. Further, as per the current government estimates SSIs and SMEs are known for inefficient production and management processes. Government estimates also reveal that MSMEs and SSIs contribute major amount of carbon emissions leading to adverse environmental impacts, especially at the local level. Being energy intensive, inefficiency in production and management process, leads to greenhouse gases (GHG) emissions. Given their small size and scale of operations, their GHG contribution (and energy saving potential), though considerable, is often ignored. Thus, at the unit level the emissions may be small but the collective emissions in SSI clusters are quite high. So these emissions are significant from climate change perspective. The Industrial Survey Report (2009) showed that small scale and medium enterprises though may be small on scale but are significant energy users having considerable carbon emitting potentials. At the same time they also have considerable energy saving potential. Following this there is a possibility that SSI and MEs may have to go through stricter norms of compliance. Under the new regulations, violations attract both pecuniary and penal consequences at a much increased level than ever before. Further, there are
new mechanisms that have been put in place for the green rating of industries and these are becoming increasingly popular and quintessential even for a small business to stand “green” in its practices. In this scenario it becomes extremely important for the SSIs and MEs to be aware of the legal norms and regulatory environment in place and display their green awareness and sensitivity to contribute to India’s endeavour on climate change. Environmental impact of SMEs While it is widely accepted that SMEs play a significant role in the economic development in India, they also exert considerable pressure on the environment, not individually, but collectively. SMEs are voracious consumers of resources and energy and the result is a significant generation of waste byproducts. There are a number of problems that deprive SMEs from achieving
at the unit level the emissions may be small but the collective emissions in SSI clusters are quite high. So these emissions are significant from climate change perspective.
their full potential: the use of obsolete technology; lack of finance; lack of access to export markets; lack of market information; resistant to change; and decision-making at the hands of owners of these companies. These problems contribute to environmental degradation. For example, the large number of motor repair workshops is estimated to dispose 460,000 litres of kerosene directly into the soil without concern for the likelihood of serious contamination of the water supply. Issues with performance Small and Medium-sized Enterprises (SMEs) are commonly recognized as one of the leading groups of economic activity globally, and pose enormous impacts on social issues. Most companies are currently categorized under SMEs and the goods and services that SMEs offer are diverse. Moreover, SMEs are suppliers for large enterprises. It is said that SMEs’ performance, both positive and negative, in India may be more influential than any other region in the world because of the rapid economic growth of the country. The importance of SMEs in society can be recognized by looking at the recent institutional arrangement and policy development on the environmental front. With their strong influence on economic and social matters, environmental impacts attributed to SMEs’ activities are certainly significant, not only the magnitude but also the diversity. In spite of the fact, however, measures undertaken so far have not yielded impressive results, especially when compared to those of large companies. Thus, the environmental performance of SMEs remains weak in many parts of the region and it is believed that the environmental damage caused by SMEs will grow unless innovative strategies are devised. As threats to the environment by SMEs increase, immediate measures to improve conditions are necessary. Nevertheless, SMEs are incapable and/or indifferent to conform to environmentally-friendly practices due to financial constraints, lack of proper information and a lack of motivation. Under the current situation, international organizations, along with local and national governments, must play important
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INFOCUS | INDIA-CHINA | SME | ENVIRONMENT
roles in stimulating SMEs to improve their environmental performance. Environmental challenges Because of their unique characteristics, SMEs face a variety of problems. The problems need to be examined in connection with two stages of environmental performance improvement, namely, awareness and implementation. Raising awareness is significant as it relates to the establishment of a solid foundation for SMEs to move towards environmental improvement. Some of the challenges on these two aspects are noted below: Lack of knowledge and information Basically, a fundamental obstacle to improving environmental performance of the SME sector is a lack of knowledge and information concerning environmental issues. SMEs generally have a perception that the only driving force to improve environmental performance is legislative compliance. Moreover, SMEs tend to believe that their processes have little or no impact on the environment due to their small-scale production. This perception is derived from the fact that they have limited information on the operational losses in their production processes. Hence, this mental block prevents a great number of SMEs from realizing the hidden costs of inefficiencies in production. Accordingly, SMEs keep running their businesses as usual and resist change. In order to motivate SMEs to improve their environmental performance, critical information on costbenefits can illustrate the benefits of environmental improvement and help to develop a positive attitude regarding environment. However, it seems that such information is not widely disseminated in the SME sector.
Weak external pressures and incentives Development of an environment policy in India began with commandand-control (CAC) measures. Accordingly, regulatory instruments were applied to force polluters to comply with regulations and standards. However, due to the large number and distribution of SMEs, the command and control approach became less efficient due to resource limitations in terms of monitoring and inspecting of personnel and budget allocation. While public pressure regarding environment conservation and requirement by global markets on environmental standards increase, most companies are carefully watching the International Standard Organization (ISO) certification and the introduction of Environmental Management System (EMS) within their corporate and manufacturing facilities. Most industries, particularly those producing goods for export, are focusing on developing environmental-friendly products. However, most SMEs, unlike large-scale industries, are not fully aware of the trend in the international market since they are often isolated from it. In addition, voluntary approaches, such as ISO 14000, green labeling, and clean technology have become other means of management of natural resources and the environment as the market created was stimulated by consumer demand. However, compared to the SME sector, large firms are more active in taking voluntary initiatives. Lack of internal capacity Even though a number of SMEs are moving towards better performance, they are limited by constraints from taking action. The major obstacles are their weak capacity and limited resources in terms of: Financial resources – One of the
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major obstacles is the limited financial resources of SMEs since the majority is pursuing a survival business strategy. They suffer from financial problems, such as late payment of bills and lack of access to loan financing. They find it difficult to adapt to changing markets and lack capability to attract new financial resources. As a consequence, the adoption of full-scaled EMS, such as the ISO 14001 model, or the installation of pollution abatement technologies, seems to be too costly for SMEs. Moreover, investment capital for major process improvement is another issue of concern since accessibility to financial resources is a major problem as SMEs tend to lack self-capacity to attract funding from local, regional and national financial institutions and also from international institutions and organizations. The problem has a supply and demand component. From the supply side, SMEs face difficulties in obtaining loans due to bank perceptions of high associated risks. On the demand side, SMEs often have inadequate financial statements and lack accounting records, business plans and the necessary knowledge to present their business case in a realistic and favorable light to financial sources. In order to address this problem, there is, therefore, a need for better information flow among the financial providers, the SMEs and the concerned government agencies. Human resources – Lack of trained and qualified human resource is another barrier that requires improvement. Generally, human resource allocation in the SME sector is limited to essential business functions, such as technical, accountancy, sales and marketing. In most cases there are no environment personnel in the SMEs to undertake related tasks effectively. Technology – Utilization of outdated technology, as a result of limited
Opportunities Need for SSIs or SMEs to demand cleaner technologies with climate policies: SSIs fare strongly on two accounts. First, they have huge ramifications for national and local benefits and their sustainability is of critical importance. Second, the SSIs constitute a sector where there is inactivity on its own in terms of pollution control and climate change and needs an external impetus. As there is an understanding at the national and global scale that small scale industries and medium enterprises account for major portion of carbon emissions in India, diffusion of cleaner technologies for these industries may help. The Mission on Energy Efficiency within the National Action Plan on Climate Change has identified small-scale industries as one of the focal areas for improving energy efficiency and also reducing transaction cost. However, much of the emerging performance and trade mechanism focuses on large industrial units. It is in this context that the SSIs can view climate change policies and policy instruments not as a limitation but also as opportunities for accessing technology, finances and knowhow. Some key questions are: Can these opportunities help SSIs? Can they use these opportunities and contribute to GHG reduction? This needs to be explored and shared with SSIs through a dedicated analysis
capital investment, makes the SME sector less competitive. The majority of SMEs is relying on dated technologies that cause pollution and are inefficient. In addition, inappropriate pollution abatement technologies result in inefficiencies in pollution treatment. Business-as-usual – Normally SMEs function in a business-as-usual mode. They are not fully aware of new business environment, for example, non-tariff barriers, new trade and technology. The nature of the SME establishment is a major problem affecting improvement of SMEs in terms of infrastructure as the physical distribution of SMEs tends to be haphazard. Many SMEs are located in concentrated commercial and residential areas, thus, they are unable to expand their sites and install pollution treatment facilities. Moreover, the scattered distribution prohibits the development of shared treatment facilities, while the stand-alone treatment system of SMEs is not in an economy of scale to operate efficiently. Weak institutional arrangement – Linkages among agencies involved with SME development have not been strengthened. The network of institutions that is supposed to deliver supporting programmes to SME development is fragmented and cannot offer
of current policy instruments with the focus on SMEs and SSIs. Need for creative use of global climate finances: A demand for fiscal and financial incentives under global climate fund may also help as so far all major climate policy instruments at the national level have not provided fiscal and financial support or incentives for SMEs to either encourage them to take such initiatives or extend government support. While other sectors accounting for major energy consumption such as solar and energy efficiency projects have benefited from government support, such support has not been discussed or thought about for SMEs at the national or global level. Given the significant contribution and stake that SMEs have in the national economy and growth, there is thus a need to voice these concerns in a collective way with an informed view on the regulatory and policy environment in the country. Learning from international experience: Greening SMEs require technological innovations and learning from other countries that have successful and cost efficient technologies which can be imported by SMEs at an affordable price. Needless to say this will require a thorough analysis of the clean technologies available in other countries including China.
corresponding services effectively. Lack of SME-focused programmes – Many developing countries previously pursued a strategy of accelerated industrialization based on large-scale enterprises. Accordingly, development programmes and investment schemes were established in the light of large industry promotion while limited focused programmes are devoted to SME development. Missing links – Even though there have been a number of organizations that support SME development, including academic and financial institutions and NGOs, the development goals tend to be haphazard since the network of major governmental agencies and other organizations has not been strengthened. Gaps between international support and local implementation – Even though the greening of SMEs has drawn the attention of international organizations, international support for SME development cannot reach local SMEs effectively. The major barriers include language and adjustment of programmes to the local context. SMEs have been struggling with these problems for many years and their challenge becomes more severe when they wish to improve their environmental performance.
Regulatory framework Current set of laws provide a complex picture that is not easy to understand. Further, the regulations have undergone a dramatic change from prohibitions to norms with the “Polluter Pays” pays principle and the principle of “Intergenerational Equity.” Initiatives have been successful only in cases where the push has come from external sources (eg. judicial order for change over to natural gas based furnaces in the glass industry in Firozabad and closure of iron foundries in Agra were a result of the public interest litigation against polluting industries to save the Taj Mahal). The piece-meal approaches, more often, benefit only a select few. Therefore there is a need that decision makers for the industries plan and strategise in such a way that leads to lesser carbon footprint and better compliance. For this an increased awareness of current regulatory environment, norms and standards in place would be required.
Shawahiq is an Advocate in the Supreme Court and is part of the team drafting the Renewable Energy Law
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