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PERFORMANCE EVALUATION OF RURAL INSURANCE IN INDIA 

Raja Babu Puppala 

ARE FEMALE WORKERS MORE PRODUCTIVE THAN MALE WORKERS? AN EMPIRICAL STUDY IN 

BANGLADESH 

Munshi Samaduzzaman, Masoom Ahmed, Fazluz Zaman 

A COMPARATIVE STUDY OF NPA OF STATE BANK OF INDIA GROUP & NATIONALISED BANKS 

Tanmaya kumar pradhan 

AGRICULTURE CRISIS AND SUSTAINABLE ECONOMIC DEVELOPMENT : A GLOBAL PERSPECTIVE 

Geetanjali Singh 

BUSINESS INCUBATOR FOR LOCAL ECONOMIC DEVELOPMENT 

Sukumaran Sankaran 

THE LAW OF WASTAGE – A CONCEPTUAL THOUGHT FOR SUSTAINABLE ECONOMIC DEVELOPMENT 

Vijay Anand Venugopal, Dr. S. Sampath 

ECONOMIC ANALYSIS ON THE MARKET PARTICIPATION DECISION OF THE RED ONION FARMERS IN 

JAFFNA DISTRICT, SRI LANKA. 

Shylanthi Thangarajah 

RURAL INFRASTRUCTURAL DEVELOPMENT THROUGH RURAL ROADS: WITH SPECIAL REFERENCE TO 

PRADHAN MANTRI GRAM SADAK YOJANA (PMGSY) 

Rajasekaran Sampath, Damodaran Murugan 

FINANCIAL PERFORMANCE ANALYSIS OF GOHE COOPERATIVES SAVINGS AND CREDIT UNION IN 

BURE WOREDA, ETHIOPIA 

Sambasivam Yuvaraj, Biruk Ayalew Wondem 

SIGNIFICANCE OF ASSET QUALITY OF STATE CO-OPERATIVE BANKS IN INDIA AND IMPACT OF NON- 

PERFORMING ASSET ON THE LIQUIDITY, SOLVENCY AND PROFITABILITY 

Tarasankar Das 

BOARD COMPOSITION, OWNERSHIP STRUCTURE AND FIRM PERFORMANCE 

Jyotsna Ghildiyal Bijalwan, Pankaj Madan 

CORPORATE SOCIAL RESPONSIBILITY: ETHICS AND CHALLENGES IN INDIA 

Vandana Gupta 

A STUDY ON IMPACT OF URBANIZATION ON AGRICULTURE AND URBAN SPRAWL - SPECIAL 

REFERENCE TO CHIDAMBARAM TOWN 

Govindarajan Vedanthadesikan, Uthirapathy Mathivanan 

BARRIERS TO INNOVATION ADOPTION: A STUDY ON SMES OPERATING IN THE KNITWEAR CLUSTER 

OF TIRUPUR DISTRICT 

Savitha Nair, Poornima S 

ROLE OF SELF-HELP GROUP IN SOCIO-ECONOMIC DEVELOPMENT OF INDIA 

Dr. A. Sundaram 

STANDARD OF LIVING OF RURAL FISHER FOLK IN SOUTHERN COASTAL DISTRICTS OF TAMIL NADU 

Ramesh Kumar S

Performance evaluation of Rural Insurance in India 

Dr. P. Raja Babu, Associate Professor, KLU Business School, 

KL University, Vaddeswaram, Guntur District, Andhra Pradesh, India 

Abstract: Rural insurance has to play important role for the sake of weaker section of the 

society as well as encouragement of saving in rural households as a result for the development of the 

economy. In this article the author has to highlighting rural business and potentiality for expansion of 

insurance companies in rural areas have to be highlighted. 

Introduction: Insurance is the protection of the economic value of assets. In case of destroyed 

asset through an accident or other unfortunate event the owner of the asset will get the benefit through 

insurance. And it will be helpful sudden death of insurer in that position income would normally cease. 

With the help of insurance those people who are dependent on the income through the insurance to 

meet their needs. The scope of bringing more individuals into the life insurance net is undeniable, 

provided the right type of products and services are made available. The level insurance penetration 

being positively correlated to the level of economic development must take place, but it should be 

wide spreads for any dramatic increase to take place in the insurance penetration. 

In India more than seventy percent of the population lives in rural areas. The impact of risks 

associated with life is far severe on rural population as compared to the urban population because of 

with their higher levels of income. In the decade of 2000 some of private companies were started 

different rural schemes to the rural populace of India. With changing times and with increasing 

variable incomes in rural areas, the public and private sector companies improving their solutions to 

the rural population and launching different insurance products which are terms and return of premium 

products. The policyholder has to pay premium amount with flexibility days between 30 to 180 days. 

The rural insurance has to refer the protection provided to the rural class is specified and customized 

according to their needs. Through a multiple channel system we not only provide agricultural 

protection but also health, motor and other covers. Various products offered in rural insurance are: 

Health Insurance: It has to provide protection to the health of the rural folk through our 

comprehensive Family Health Insurance plan, which covers the entire family in one policy. 

Home Insurance: This policy protects much more than just the home. Through the network channels, 

ensure that the houses in the rural sector are insured against natural and other perils. 

Tractor Insurance: Tractors are one of the most precious assets to the rural folk. The package of this 

policy has to covers not just own damage but also third party liability and personal accident. 

Weather Insurance: Weather Insurance is an insurance cover against losses incurred due to 

uncertainties in climatic conditions. It can be used to hedge any vulnerability of assets or any other 

damage incurred due to erratic and irregular weather. 

Shop Insurance: Shop Insurance is a comprehensive policy that covers both the structure and the 

contents of a shop and protects it against any financial loss in case of an unfortunate incident. 

Rural insurance: Need and potential’ has highlighted that the Government should pay serious 

attention to the rural areas. In fact, Life Insurance Corporation of India (LIC) stipulates that a 

considerable percentage of its business should be from rural areas. And it has some social security 

schemes covering the rural and urban poor, landless labor, and so on. Yet it was not possible for it to 

penetrate into the interiors to tap the rural business. Two main reasons were the cost involved in 

www.theinternationaljournal.org > RJEBS: Volume: 02, Number: 06, April-2013 Page 11

servicing, and the policies not meeting the credit requirements of the farmers. They were accustomed 

to old methods of borrowing etc. Crop insurance was also a failure because of misuse and false 

claims. And agents as well as insurers are not interested in policies of small sums assured and 

premiums. So, the Insurance Regulating Authority should insist that the business of every insure r 

should have a particular percentage of rural business and of small policies. The insurers LIC as well as 

the new entrants -- could introduce cost-effective collection methods by involving post offices. They 

should introduce innovative schemes such as `Crop linked life insurance', with proper credit facilities, 

easy claim settlement methods. 

PERFORMANCE OF LIC IN BUSINESS FORCE AND NEW BUSINESS BEFORE 

LIBERLIZATION (FROM 1981-82 TO 2000-01): 

The rural new business of LIC as a percentage of its overall new business has grown well during 

the 1980s and 1990s. The penetration in the rural areas was more pronounced in the 1990s than in the 

1980s. The number of policies 6.9 lakhs in 1981-82 out of 21 lakhs policies as against 109.1 lakhs in 

2000-01 out of 196.6 lakhs policies. As such the sum assured in rural areas were Rs.927 crores out of 

Rs.3, 479 crores as against in 2000-01 total contribution of rural area Rs.59, 641 crores out of Rs.1, 

24,772 crores. It is half of contribution than one third contribution in 1981-82. The following table has 

been shown that the Performance of LIC of India during the period of 1981-82 to 2000-01. 

YEAR 

PERFORMANCE OF LIC OF INDIA BEFORE THE PERIOD OF 2000-2001 

Business in Force – All India 

No.of No.of 

Offices Policies 

(Rs. In 

Sum 

Assured 

(Rs.Cr) 

All India – 

No. 

Policies 

(in Lakhs) 

New Business 

All India – 

Sum 

Assured 

(Rs.Cr) 

Rural No. 

of Policies 

(in Lakhs) 

Sum 

Assured 

(Rs.Cr) 

Lakhs) 

1981-82 889 236 23,998 21 3,479 6.9 927 

1982-83 958 243.8 26,264 22.3 3,974 7.3 1,038 

1983-84 1,023 252.7 30,266 23.7 4,387 1.26 1,260 

1984-85 1,107 264.8 33,785 27 5,376 9.5 1,570 

1985-86 1,197 279.9 40,404 32.9 7,056 12.2 2,177 

1986-87 1,280 298 47,906 38.7 9,068 14.8 2,916 

1987-88 1,353 323.5 58,798 46.9 12,435 18.3 3,997 

1988-89 1,427 360.8 74,129 59.8 17,223 24.1 5,818 

1989-90 1,528 403.4 94,408 73.9 23,220 30.5 8,086 

1990-91 1,651 455.1 1,18,651 86.5 28,139 36.8 10,295 

1991-92 1,774 508.6 1,45,929 92.4 32,064 41.3 12,440 

1992-93 1,906 566.1 1,77,268 99.6 35,957 44.4 14,085 

1993-94 2,008 608.7 2,07,601 107.3 41,814 48.6 16,680 

1994-95 2,021 654.5 2,53,333 108.7 55,229 49 21,571 

1995-96 2,024 708.8 2,94,336 110.2 51,816 52.6 21,264 

1996-97 2,023 776.7 343,018 122.7 56,741 60.3 24,279 

1997-98 2,046 849.2 3,98,959 133.1 63,618 68.4 27,551 

1998-99 2,048 916.4 4,57,435 148.4 75,316 81.2 35,373 

1999-00 2,048 1,013.00 5,34,589 169.7 91,214 97 44,169 

2000-01 2,048 1,130.20 6,43,241 196.6 1,24,772 109.1 59,641 


AREA-WISE INSURANCE OFFICES: 

Another remarkable feature for the life insurance offices is their distribution over different 

areas of the country. The growth in life insurance offices is observed to be not confined mainly to 

metropolitan centers and cities. The insurers have opened their branch offices in semi-urban and rural 

areas as a way to spread insurance service to these areas. This indicates clearly that the insurance 

industry has widely campaigned the insurance service in all areas and developed accordingly. 

The following Table shows the details on the area-wise distribution of life insurance offices as 

on 31 st March, 2010. The total number of offices established by the life insurers is 12,018. Out of 

which 8,768 offices are established by the private sector insurers and the remaining 3,250 offices are 

established by the LIC. As regards the number of offices established in metro and urban areas taken 

together, both the public and private sector players spread only a 28 per cent their branches. But, there 

is an increase in the number of offices in semi-urban and rural areas of both the sectors of the 

insurance players mainly to tap the insurance market in these areas. Consequently, around threefourths, 

i.e. 72 per cent of the branches are established by the LIC and also the private sector units in 

these areas. Further, for meeting competition from the public sector giant, LIC and also for promoting 

the business in untapped areas, the private sector insurers also have established a good number of 

branches in semi-urban and rural areas. 

AREA-WISE DISTRIBUTION OF LIFE INSURANCE OFFICES 

AS ON 31 ST MARCH, 2010 

Area LIC Private Sector Industry 

No. of offices Percentage 

to total 


to total 


to total 

Metro 347 10.68 897 10.23 1244 10.35 

Urban 550 16.92 1555 17.73 2105 17.52 

Semi-Urban 923 28.40 3607 41.14 4530 37.69 

Rural 1430 44.00 2709 30.90 4139 34.44 

TOTAL 3250 100.00 8768 100.00 12018 100.00 

Sources: IRDA Annual Report, 2009-10 

The LIC of India has to introduce some training centers in rural areas to educate the policy 

holders and LIC agents to increase the awareness of the significance of Life insurance then it may be 

increase rural area insurance business. It has to build team work of the agents and development 

officers of LIC in order to keep business from rural areas in the hands of LIC. Insurance Corporations 

can take projects in rural areas for creation of employment opportunities in off-season. Income so 

generated will provide the ability to the rural people for the payment of insurance premium. 

The LIC of India has to establish some more branch offices both in rural and urban areas 

keeping the growth of LIC business during the period of 20 years from 1981-82 to 2001-02. As 

private firms has established several their branches offices in the vicinities of municipalities and cities. 

Both the sectors can be used to conduct campaign on insurance awareness. Film stars can be utilized 

to conduct such campaign, as it is the best way of attracting rural people in the present day world. 

MICRO INSURANCE AGENTS 

In offering micro-insurance, micro-insurance agents are allowed to carry out the collection of 

proposal forms, remittance of premium, settlement of claims, nominations and policy administration 

services. The conventional models may not be able to accomplish the desired target in the rural area of 

micro-insurance. The intermediary may have to do the role of an integrated financial advisor. 


The Self-Help Group members get income by way of interest every year. A part of this amount 

can be utilized by the members for buying insurance products because they are prone to various risks. 

The following Table shows information on the growth rate and market share of microinsurance 

agents appointed by the life insurers during 2006-07 to 2009-10. With the notification of 

IRDA (Micro-insurance) Regulations, 2005 by the Regulator, there has been a steady growth in the 

design of products catering to the needs of the poor and under-privileged. As the concept of micro 

insurance agent is new as per the IRDA’s Regulations in 2005, only the information for four years is 

considered. The number of micro insurance agents as on 31 st March, 2010 was 8,676, of which 7,906 

were for the LIC and 770 for the private sector companies. The number of micro insurance agents is 

increased by 6.62 times in the insurance industry, i.e. 6.42 times in LIC and 9.75 times in the private 

sector. It shows a significant increase in the number of micro insurance agents in the industry. LIC 

contributed to a greater extent to this increase. But, the response with regard to the sale of micro 

insurance products by the private sector is not up to the mark. It is marginal and meant only for 

fulfilling the regulatory obligations. 

GROWTH RATE AND MARKET SHARE OF MICRO-INSURANCE AGENTS OF LIFE 

INSURERS DURING 2007-08 TO 2009-10 

(in Percentage) 

Year LIC Private Sector Total 

Amount % Amount % Amount % 

2006-07 1,232 93.97 79 6.03 1311 100.00 

2007-08 4,166 90.88 418 9.12 4,584 100.00 

(238.15) 

(429.11) 

(249.65) 

2008-09 6,647 91.68 603 8.32 7,250 100.00 

(59.55) 

(44.26) 

2009-10 7,906 91.12 770 

(18.94) 

(27.69) 

Note: Figures in brackets are annual growth rate percentage 

% indicates market share of the insurers 

Source: Compiled from the Annual Reports of IRDA 

(58.16) 

8.88 8,676 

(19.67) 

100.00 

Conclusion: In most of the villages send their children to the school as mid-meal is provided to 

those who are enrolled in the school. The agricultural laborers are every-day earners. Therefore, the 

rural people are will to pay insurance premium on a monthly basis. 

Particularly, health insurance schemes are to be made known and introduced in rural areas. 

Unnatural death also provides an opportunity for insurance penetration, health insurance, in rural India. 

The insurance companies have to be providing various insurance schemes for the coverage of land, 

cattle and sheep, which will provide a safety for rural insurers. As a matter of fact risk point of view 

rural people having much more risk than urban. The main reason is that medical facilities are very low 

than city living people. Hence, the insurance companies will be providing various schemes under the 

coverage of various risks with very low premium. And premium can be collected according to the 

convenience of agricultural laborers. To create awareness programmes among the rural population 

efforts are to be taken by the insurance corporation. 

It is therefore, the insurance companies arrangements will be made for selling their products in 

the rural areas both in life and non-life sectors. Finally, the insurance companies are having enough 

opportunities for insurance penetration in rural areas. 


References: 

1. By P.Raja Babu, Dr.TN.Murthy, Rizwana; Performance Evaluation: Ways for winning 

confidence, The ICFAI Journal of Risk and Insurance, volume-April/2009. 

2. Mrinalini Shah and Shweta Dixit, ‘Distribution Channels for Incumbent Rural Insurance 

Industry Confidence’, The Journal of Risk & Insurance, The ICFAI University Press, 

Vol.VI. No: 3&4, July-October, 2009. 

3. Murthy, T.N., Raja Babu, P. and Riswana Ansari, ‘Performance Evaluation of LIC: Ways of 

Winning Confidence’, The Journal of Risk & Insurance, The ICFAI University Press, 

Vol.VI. No:2, April, 2009. 

4. Pranav Prashad, ‘Catalyst for Financial Inclusion – Insurance in the Rural and Social Sector’, 

IRDA Journal, April, 2009. 

5. Priya Kapoor, ‘Same Protection, Lower Premiums’, The Economic Times, December 20, 

2010. 

6. Rajan, R.V., ‘Covering the Countryside – Opportunities and Issues in Rural Insurance’, IRDA 

Journal, September, 2003. 

7. Arman Oza, “Importance of Delivery Mechanism – Role in Micro-Insurance”, IRDA Journal, 

December, 2006, p.8. 

8. www.irda.org. 

9. Annual Report of LIC 2008-2009. 


Are female workers more productive than male workers? An empirical study in 

Bangladesh 

Masoom Ahmed, PhD Candidate, Glyndwr University, UK 

Fazluz Zaman, Lecturer, North South University, Dhaka, Bangladesh 

Munshi Samaduzzaman, Assistant Professor, American International University-Bangladesh (AIUB) 

ABSTRACT 

Job satisfaction is one of the most heavily researched employee attitudes over the last 50 years. 

Pleasing employees by appealing to their intrinsic and extrinsic needs is essential for obtaining 

maximum contribution of employees towards organisational objectives. To investigate gender 

differences on job satisfaction and are female workers are more productive than male worker, we have 

distributed 450 questionnaires among the respondents, 256 were returned, which shows a response rate 

of 56.7%. Data analysis tests were carried out by using statistical package for social sciences (SPSS) 

20.0 version for Windows. Multivariate logistic regression analysis was used to find answers for the 

research questions. The findings of the Logit models indicate that female were significantly more 

satisfied than men and female workers performance is better than male worker. 

Key Words. Gender, job satisfaction, performance. 

INTRODUCTION 

Job satisfaction is one of the most heavily researched employee attitudes over the last 50 years 

(Rayton, 2006). Locke (1976, p. 1300) defined it as “a pleasurable or positive emotional state resulting 

from an appraisal of one’s job or job experiences”. It is an effective response to specific aspects of the 

job and plays a role in enhancing employee commitment to an organisation. Studies have shown that 

employee absenteeism, turnover and other behaviours are related to a person’s satisfaction with his or 

her job and the organisation (Vroom, 1964). 

Several theories have been used by researchers to explain the concept of job satisfaction. These 

theories fall in two groups, namely process and content theories. Content theories attempt to identify 

the factors which contribute to job satisfaction and job dissatisfaction. These theories include 

Maslow’s hierarchy of needs (1954), Herzberg’s ‘two factor theory’ (1959) and McGregor’s ‘Theory 

X and Y’ (1960). On the other hand, process theories attempt to describe the interaction among 

variables in their relationship to job satisfaction. These theories include equity theory, expectancy 

theory and goal setting theory among others. 

Studies have shown that job satisfaction is a multidimensional construct consisting of intrinsic 

job satisfaction and extrinsic job satisfaction (Volkwein and Zhou, 2003). Intrinsic aspects of the job 

comprise ‘motivators’ or ‘job content’ factors such as feelings of accomplishment, recognition, 

autonomy, achievement, advancement among others. Extrinsic aspects of the job, often referred to as 

‘hygiene’ factors are job context factors which include pay, security, physical working conditions, 

company policies and administration, supervision, hours of work, union relations with management 

among others. Herzberg found that hygiene factors were mainly disruptions in the external work 

context while motivators dealt with internal states of the mind (Smerek and Peterson, 2007). Most 

studies have found that job satisfaction is influenced by an array of personal and job characteristics 

such as age, gender, tenure, autonomy, teamwork, relationships with co-workers and supervisors, job 

variety, satisfaction with pay, training among others (Volkwein and Parmley, 2000; Volkwein and 

Zhou, 2003; Lambert, 2004). Stressful work conditions were found to negatively affect employees’ job 

satisfaction (Volkwein and Zhou, 2003; Fisher, 2001). 

Gender has also received a great deal of attention in job satisfaction studies, but again the 

research is inconclusive. In 1997, Thompson and McNamara reviewed all job satisfaction studies 


published in the Educational Administration Quarterly over the past six years and showed no 

significant difference between male and female satisfaction levels. Other studies that have shown no 

significant difference between gender and job satisfaction levels include Barbash (1976). Smith, et al., 

(1998) arrived at similar insignificant findings until they compared the gender of the employee to the 

gender of the employer. They found that women were more significantly more satisfied than men in 

small companies with female supervision, while males were significantly more satisfied in larger 

companies with male supervisors. Studies suggesting that gender does affect job satisfaction are 

available, and data can be found to suggest that either man are more satisfied (Weaver, 1977) or that 

women are generally more satisfied (Kramen-Kahn & Hansen, 1998). 

So, this study focused on, first gender differences on job satisfaction and secondly, are female 

workers are more productive than male workers? 

METHODOLOGY 

The purpose of this study was to determine the factors that contribute to job satisfaction among the 

workers 256 of Bangladesh. 

In conducting the review of literature, the researcher found there have not been enough studies 

in Bangladesh related to gender differences and performance. There have been few studies conducted 

throughout the nation related to retention, attrition, and health. 

A quantitative method study was conducted to gain an understanding of factors related job to 

satisfaction among industrial workers of Bangladesh. Questionnaires were conducted to find out a 

broader understanding of the contributing female and male performance on workplace. 

Of the 450 questionnaires distributed among the respondents, 256 were returned, which shows 

a response rate of 56.7%. The sample was applied to represent the population and underlying structure 

because of examining the reliable correlations and prediction power of factors (Hair et al., 2006; 

Tabachnick and Fidell, 2007). According to Comery and Lee (1992), a sample size of 50 - 100 is 

treated as poor, 200 as fair, 300 as good and 500 as very good and 1000 is treated as excellent. Thus, 

this study covered a fair sample and provided a substantive representation of the total population 

garments industries. 

Data analysis tests were carried out by using statistical package for social sciences (SPSS) 20.0 

version for Windows. 

EMPIRICAL FINDINGS AND ANALYSIS OF THE LOGIT MODEL 

Following relevant literature (Field, 2006; Hosmer and Lemeshow, 2000), three steps were 

implemented in reporting the results of a logistic or Logit model, namely (1) fitting an initial or 

“unsophisticated” model, (2) estimating a more sophisticated or adjusted model, and lastly (3) 

evaluating the predicted probabilities of the Logit model. The literature (Hosmer and 

Lemeshow, 2000; Begg and Lagakos, 1990) also reveals that there are two types of models 

presented in estimating a logistic regression model – rudimentary and adjusted. A rudimentary, 

initial or simple model looks at how a single independent affects regression outcomes and 

ignores potential covariates. 

The literature (Hosmer and Lemeshow, 2000; Hauck et al., 1991) indicates that it 

always best practice to start with a simpler model and then move gradually to an adjusted 

model. This method is known in the literature as a step-wise regression procedure. In addition, 

the practice of omitting covariates leads to biased estimates of the logistic parameters and 

decreases the precision of effect estimates (Gail et al., 1984; Lagakos and Schoenfeld, 1984). 


For the purpose of including explanatory variables in the Logit model, the above 

significant variables are of interest in this thesis because they tell us whether or not the 

performance scores differ for male and female workers. The column of real interest contains the 

significance values of these F-ratios (Table 1). For these data, it appeared that all test statistics 

were highly significant, with p values being less than 0.01 (1%). From this initial result, it can 

be concluded that the performance scores, which were perceived by the workers, do indeed 

differ among different workers’ characteristics and the corresponding company policy. 

However, this effect needs to be broken down for further examination using the Logit model. 

A detailed examination of Table 1 indicates that the Wilk’s lambda (Λ) is (0.85). Other 

MANOVA statistics such as Pillai's Trace, Hotelling's Trace and Roy's Largest Root were not 

discussed due to practical considerations and similar measures (Tabachnick and Fidell, 2007; 

Field, 2006; Hosmer and Lemeshow, 2000). 

Following the relevant literature (Tabachnick and Fidell, 2007), Wilk’s lambda (Λ) is a 

number between 0 and 1. A small Λ value (close to 0) means that the groups (less productive 

and more productive workers) are very well separated by the above independent variables such 

as income, workers’ age, job enrichment policy and others. Apparently, although these groups 

(based on their performance) could be divided significantly by these competing variables 

(because of highly significant Λ and p values less than 0.001), Λ was found to be 0.370, which 

is not relatively close to 0. However, the literature (Field, 2006) reveals that the independent 

variables are significantly valid as separators, regardless of the Λ value not being close to 0, 

with the significance level of α being less than 0.01 (the last column in Table 1). 

Table 1 Multivariate Tests d 

Effect Value F Hypoth 

esis df 

Error 

df 

Si 

g. 

Intercept 

Performa 

nce 

Pillai's 

Trace 

Wilks' 

Lambd 

a 

Hotelli 

ng's 

Trace 

Roy's 

Largest 

Root 

Pillai's 

Trace 

Wilks' 

Lambd 

a 

Hotelli 

ng's 

Trace 

Roy's 

Largest 

Root 

.996 1760.2 34.000 216.00 

71 a 0 

.004 1760.2 34.000 216.00 

71 a 0 

277.0 

80 

277.0 

80 

1760.2 34.000 216.00 

71 a 0 

1760.2 34.000 216.00 

71 a 0 

.158 3.650 204.000 1326.0 

00 

.03 5 4.823 204.000 1287.4 

39 

6.598 6.932 204.000 1286.0 

00 

4.470 29.058 

c 

34.000 221.00 

0 

.0 

00 

.0 

00 

.0 

00 

.0 

00 

.0 

00 

.0 

00 

.0 

00 

.0 

00 

Partia 

l Eta 

Squar 

ed 

Noncen 

t. 

Parame 

ter 

.996 59849. 

203 

.996 59849. 

203 

.996 59849. 

203 

.996 59849. 

203 

.360 744.69 

9 

.429 966.96 

6 

.524 1414.0 

64 

.817 987.95 

7 

Obser 

ved 

Power 

b 

1.000 

1.000 

1.000 

1.000 

1.000 

1.000 

1.000 

1.000 


A forward stepwise regression procedure was employed to examine the significance of the 

competing explanatory variables into the Logit model, such as company’s reward policy, the 

company’s workers’ age, the company’s promotional policy, workers’ income, the company’s job 

enrichment policy, however, some of the findings were not significant and had wrong sign. It appeared 

that only workers’ gender (X 1 ) and age (X 2 ) jointly together were strong predictors of the workers’ 

perceived performance scores (Y). Several attempts were made to include the possible interaction 

effects of X 1 X 2 and other competing explanatory variables (such as the company’s promotional policy, 

workers’ income and the company’s job related policy), however, the results were not significant and 

not presented in the main report. Apart from the insignificance of the interaction effects, the 

independent variables (X 1 and X 2 ) were highly significant at α less than 1% (p values < 0.01, see 

column “Sig.” of Table1). 

Table: 2 Variables in the Equation 

B S.E. Wald df Sig. Exp(B) 95% C.I.for EXP(B) 

Lower Upper 

Step 1 a AGE(1) -1.330 .325 16.781 1 .000 .265 .140 .500 

Constant 1.933 .228 71.797 1 .000 6.909 

a. Variable(s) entered on step 1: AGE. 

Overall results from the Logit model are presented in Table 2. The results reveal that the 

variables X 1 and X 2 (workers’ gender and age) are significant predictors of the result with p < 0.05, 

which is indicated by the “Sig.” column in Table 2. 

In “Variables in the Equation” in Table 2, the “B” column represents the estimated log odds 

ratio. The “Sig.” column represents the p-value for testing whether age is significantly associated with 

the level of a worker’s perceived performance, whilst the “EXP(B)” column represents the odds ratio. 

As mentioned earlier, several attempts were made to include a possible interacting variable (a joint 

impact of the variables of age and income, age and integration policy etc); however, the results were 

not significant and therefore not reported. The Logit regression model can be rewritten in simple and 

multiple regressions (in either additive or multiplicative form). Based on Table 2) 

Table 3 revealed that the estimation of the Logit model terminated by using a MLE method at 

iteration number 4, because parameter estimates changed by less than 0.001. Under “Model 

Summary”, it can be seen that the -2 log likelihood statistic is 153.771. This statistic measures how 

robustly the model predicts the decisions since the smaller the statistic, the better the model is. 

Adding the age variable reduced the -2 log likelihood statistic by 153.771 – 130.066 = 23.705. 

In addition, the value of Cox and Snell R 2 (as a measure of the explanatory power of a regression 

model) has increased from 48% to 52%. R 2 here can also be defined as the proportion of variability in 

a data set that is accounted for by the model, so that the bigger R 2 (close to 100%), the more robust the 

model. For example, R 2 equal to 99% indicates that about 99% variability of the dependent variable is 

explained by the model, whilst the remaining 1% (100%-99%) variability is explained by random error 

or other variables outside the model. However, in a logistic regression context, the literature (Menard, 

1995; Kleinbaum, 1994) also indicates that R 2 statistics do not quite measure the goodness of fit of the 

model, but instead sow how useful the explanatory variables are in predicting the response variable or, 

as it can be referred to, measures of effect size. For example, the value of 0.61, or 61%, indicates that 

the logistic model is useful in predicting the productivity score perceived by the workers. 

As indicated by Table 3 below (Model Summary), the Cox and Snell R 2 were found to be 53% 

for the second model, while the Nagelkerke R 2 was estimated to be 74%. This Model Summary shows 

measures of how well the logistic regression fits the data. These measures are useful when comparing 


several different, competing logistic regression models. The coefficient here can be interpreted in the 

same way as R 2 in an ordinary regression. Hence, in this case, the model is considered relatively good, 

since the independent variables (the variables of productivity and age) explain about 53% to 74% 

variation of the variation in the dependent variable. 

Table: 3 Model Summary 

Step -2 Log likelihood Cox & Snell R Square Nagelkerke R Square 

1 153.771 a .480 .671 

2 130.066 b .526 .736 

a. Estimation terminated at iteration number 5 because parameter estimates changed by 

less than .001. 

b. Estimation terminated at iteration number 6 because parameter estimates changed by 

less than .001. 

Table: 4 Hosmer and Lemeshow Test 

Step Chi-square df Sig. 

1 .83 1 .12 

2 1.301 2 .254 

The table Hosmer and Lemeshow test provides a formal test for determining whether the 

predicted probabilities for a covariate match the observed probabilities. A large p-value indicates a 

good match (column “Sig.”), whereas a small p-value indicates the opposite, indicates to look for some 

alternative logistic models to describe the relationship between this covariate and the outcome 

variable. Table 4 indicates that the p-values are relatively large 0.254, therefore, indicating support for 

the predicted and observed probabilities. 

HL test, a further contingency table (Table 5) for the HL test can produce more details. 

This test divides the data up into ten groups, which are defined by increasing the order of 

estimated probability. The first group corresponds to those subjects who have the lowest 

predicted probability. 

Table: 5 Contingency Table for Hosmer and Lemeshow Test 

Demography = Demography = 

Male 

Female 

Observed Expected Observed Expected Total 

Step 1 1 29 29.000 53 53.000 82 

2 22 22.000 152 152.000 174 

The findings of the Logit models indicate that increasing age decreases the log odds of being 

better performance. In addition, being female workers are increases the log odds of being better 

performance relative to those being male workers. 

A classification table (Table 6) is useful for logistic regression models which involve 

diagnostic testing. The classification table displays the agreement between predicted (vertical column) 

and actual results (horizontal row), and basically indicates that the incorrect answer is never predicted. 

This would be the same as the intercept-only model, without independent variables, where the 


probability of a correct answer is equal to /, which in this case is 0.80 or 80%. 

Table : 6 Classification Table a 

Predicted 

Demography Percentage 

Observed 

Male Female Correct 

Step 1 Demograph Male 0 51 .0 

y 

Female 0 205 100.0 

Overall Percentage 80.1 

a. The cut value is .500 

The findings of the Logit models indicate that female workers performance is better than male 

worker. 

CONCLUSION 

This study was conducted in Bangladesh where it was proposed that employees of 

organisations could be more satisfied and perform better on the basis of psychological and financial 

needs. 

This study reveals that female were significantly more satisfied than men workers. For the 

purpose of including explanatory variables in the Logit model, the above significant variables are of 

interest in this study because they would tell us whether or not the performance scores differ for male 

and female workers. This logit analysis shows measures of how well the logistic regression fits the 

data. The findings of the Logit models indicated that female workers performance is better than male 

worker. 

Despite the promising results, some limitations of the study should be noted that could be 

addressed in future research. Examining employees’ job satisfaction only in garment might limit 

generalisability. It is possible that people who seek employment in other sectors might react 

differently. Thus, these predictor variables of the theoretical framework should be tested in other 

organisations in the same culture which may present confounding effect in those organisations. Thus, 

more tests are necessary to strengthen its generalisability. 

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A Comparative Study of NPA of State Bank of India Group & Nationalized Banks 

Dr. Tanmaya Kumar Pradhan, Asst. Professor, Dept. of Economics, 

NM Institute of Engineering and Technology, 

Sijua, Patrapada, Khandagiri, Bhubaneswar, Orissa, India. 

Abstract: Gross NPA of both SBI group & Nationalised Banks exhibit an increasing trend except 

the year 2008 of Nationalised Banks. As risk management becomes more sophisticated, the simple 

and static rules of 1998 Accord are becoming less relevant, Emphasis needs to be given on innovative 

banking. Autonomy is a sine qua non of innovation. Which needed a new capital framework and ways 

to manage risks. To solve these problems, Basel-II framework is an indicator approach for risk 

management. The study is based on the secondary data. The scope the study is limited to five years 

data. The study is related to SBI group and Nationalised banks. 

KEY WORDS: NPA, GROSS NPA, OVER HANG & BANKS 

1. Introduction:- Financial sector reform was undertaken early in the reform cycle in India. 

However, the banking sector reforms were not driven by any immediate crisis as has often been the 

case in several emerging economies. The design and detail of the reform were evolved by domestic 

expertise, while taking on board the international experience in this regard. And, enough space was 

created for the growth and healthy competition among public and private sectors as well as foreign and 

domestic sectors. The Government preferred that public sector banks manage the over-hang problems 

of the past rather than cleanup the balance sheets with support of the Government. It was also felt that 

there is enough room for growth and healthy competition for public and private sector banks as well as 

foreign and domestic banks. The twin governing principles are non-disruptive progress and 

consultative process. 

In order to ensure timely and effective implementation of the measures, RBI has been adopting 

a consultative approach before introducing policy measures. Suitable mechanisms have been 

instituted to deliberate upon various issues so that the benefits of financial efficiency and stability 

percolate to the common person and the services of the Indian financial system can be benchmarked 

against international best standards in a transparent manner. 

2. Objectives:- 

(i) To determine gross NPA of SBI group and Nationalised banks. 

(ii) To study Basel Committee-II Recommendations 

(iii) To suggest measures to curb the growing NPA 

3. Methodology:- The study is based on the secondary data. The scope the study is limited to five 

years data. The study is related to SBI group and Nationalised banks. 

3.1 Gross NPA of SBI group & Nationalised Banks(Amount in Lakh) 

Year Gross NPA SBI Group Gross NPA Nationalised Banks 

2007 1226000 2629100 

2008 1503700 2511900 

2009 1881255 2680380 

2010 2133767 3547031 

2011 2814002 4290739 

Source: Department of Banking Supervision, RBI 


The Table 3.1 shows that gross NPA of both SBI group & Nationalised Banks exhibit an increasing 

trend except the year 2008 of Nationalised Banks. 

3.1 Basel Committee-II Recommendations 

Advancement in technology, telecommunications and markets have changed the way banks 

collect, measure and manage their risks. As risk management becomes more sophisticated, the simple 

and static rules of 1998 Accord are becoming less relevant, Which needed a new capital framework 

and ways to manage risks. To solve these problems, Basel-II framework is an indicator approach for 

risk management. Basel-II Consists of three mutually reinforcing pillars. 

The first pillar aligns the minimum capital requirements more closely to banks actual 

underlying risks. It will be helpful in credit rating of risks on the basis of external measures issued by 

external rating agencies. 

The second pillar –supervisory review – allows supervisors to evaluate each bank’s 

assessments of its own risks and to determine whether these assessments are reasonable or not. 

The third pillar – market discipline – recognizes the power of marketplace participants to 

motivate prudent risk management, which leads to enhancing transparency in bank’s financial 

reporting. 

Each pillar provides something that the other two can not . So it is suggested that each is 

essential to achieve overall objective of financial stability. Hence, implementation of Basel – II in 

Indian banking sector will help to focus on risk, to improve skills in measuring and managing the risks 

and to enhance efficiency. 

3.2 Suggestions to curb NPA 

The findings of the study make it abundantly clear that banking sector reforms have 

strengthened the Indian banking system which has come up to meet the challenges emerging from 

global competition. But the menace of NPA has not completely gone. The severity of the problem has 

been reduced to some extent. Banks are now no longer functioning under the protected environment. 

Therefore, their very survival depends upon their economic viability. One of the major source of NPA 

has been priority sector lending under different schemes of the government. Sometime in the past the 

populist approach of democratically elected government with regard to rural credit puts the bank in 

trouble. Therefore, NPA arising out of priority sector lending should not be reflected in the 

performance assessment of banks nor in the estimation of NPA. The high percentage of NPA erodes 

public confidence in the performance of the banks. Non inclusion of NPA arising out of non payment 

of priority sector loans would provide a proper yardstick for the measurement of efficiency as well as 

accountability of banks. 

Another major obstacle in the way of efficient functioning of banks has been the sluggish legal 

system of our country. Debt Recovery Tribunals should be converted in to special courts with the 

power of the high courts, the appeal against which can only be heard by the Supreme Court. 

The present system of internal vigilance of banks needs to be strengthened with adequate 

power conferred on the management to deal with cases of fraud and misappropriation by members of 

staff. 

Emphasis needs to be given on innovative banking. Autonomy is a sine qua non of innovation. 

Every branch head should have the autonomy to decide upon the credit delivery & loan recovery 


processes. Instead of fixing targets for them it would be more prudent to leave each of them to set their 

own target for themselves. The views and suggestions of the branch managers should be given due 

importance while framing the credit policy of a bank. Incentives in the form of promotion, desired 

place of posting and advanced increments would imbibe a spirit of involvement and responsibility 

among the lower cadre officers. 

Financial markets in India are many and varied standard norm can be prescribed for all kinds of 

financial markets dealing with short term loans. The present practice of unhealthy competition among 

the private and public sector banks in comparatively developed markets creates a lot of confusion in 

the minds of middle class investors/savers. In their endeavor to offer higher rate of return to the 

depositors very often banks get in to capital market transactions which are risky and uncertain. This 

has been the major cause of NPA of private sector banks. The expenditure now banks are making for 

mobilization of savings should be curtailed. 

Very purpose of social banking will be served when the nationalized commercial banks, instead 

of running after capital market investment will involve them in the process of economic development 

in the country by extending their credit base through system of micro finance. Investment in human 

resource development, employment generating programmes through direct participation, agricultural 

and industrial productivity enhancement programmes, rural industrialization and such other schemes 

would make the commercial banks effective agents of economic development. A shift from the role of 

mediation to that of direct participation in the best way for achieving economic viability. There is a 

need for a formal apex body for constant monitoring & assessment of commercial banks which would 

be an advisory body and which will have no conflict or overlapping of power with the Reserve Bank of 

India. It will function under the Ministry of Finance Government of India with a specific purpose of 

monitoring continuous reforms in the banking sector. The activities of all institutions both public and 

private, registered and unregistered, foreign & indigenous banks operating in the money market should 

be under the purview of the apex body. The main thrust of the proposed apex institution would be to 

provide ways and means for preventing unhealthy competition among the aforesaid institutions. 

4. Conclusions: 

Gross NPA of both SBI group & Nationalised Banks exhibit an increasing trend except the year 2008 

of Nationalised Banks. Very purpose of social banking will be served when the nationalized 

commercial banks, instead of running after capital market investment will involve themselves in the 

process of economic development in the country by extending their credit base through system of 

micro finance. Investment in human resource development, employment generating programmes 

through direct participation, agricultural and industrial productivity enhancement programmes, rural 

industrialization and such other schemes would make the commercial banks effective agents of 

economic development.. 

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May,pp.8 


Agriculture Crisis and Sustainable Economic Development: A Global Perspective 

Geetanjali Singh, India 

Abstract 

World agriculture has entered a new, unsustainable, and politically risky period. Agriculture— 

and the natural resources it depends on—has been overexploited ecologically, has suffered from 

underinvestment, has recently been exposed to ill-designed bio- energy programs, and has been 

politically sidelined for too long. It is now at a critical point. Appropriate responses to the food and 

agriculture price and productivity crises are lacking. A global initiative for accelerated agriculture 

productivity is necessary now; such an initiative makes economic sense, is pro-poor and sustainable, 

and serves security. The initiative needs political leadership and coordination. 

There is no effective governance architecture at the global level and national levels to address 

the matter. Industrialized economies, including the United States, should substantially accelerate their 

investment in international agricultural research and development (R&D) in cooperation with new 

players. 

Introduction 

World agriculture depends mostly on small farms. More than 400 million small farms in the 

developing world do hardly appear on the radar screens of economic policymakers, though the 

households connected to these farms are home to the majority of the world’s hungry and poor people. 

Pressures on food availability are particularly affecting those who can afford it the least— the poor and 

food insecure. Agriculture is being re-identified as an essential element of economic growth in 

developing countries where food security also relates to broader security concerns, but this recognition 

has been too slow in coming. What is required now is a new vision for a transforming, productive and 

economically sustainable agricultural sector in the developing world. 

When it comes to climate change, agriculture is part of the problem and part of the solution because it 

adds to greenhouse gases and offers opportunities for carbon mitigation. Emerging climate change 

impacts in developing countries, such as water scarcity and policies for biomass and CO2, further 

complicate the food supply and price situation. Globalization of retail industries and high-value 

commodity diversification strengthen the geographical and cross-sectoral linkages in the food system. 

Though such global economic integration could help the poor, there will be not only winners but also 

losers. 

How can agricultural growth be accelerated and translated into pro-poor and sustainable development 

in light of the new challenges and pressures. This paper will discuss some recent key changes in the 

world food system: rapidly globalizing agricultural markets, the integration of the agribusiness chain, 

increased trade, changing trade policies, high food prices, closer agriculture–energy sector linkages, 

sustainability threats, and security synergies. 

Globalization of the agri food system 

Agriculture growth is today very much driven by the demand side—toward consumers who are getting 

richer and the retail industries that cater to them. The regional and intercontinental integration of the 

agrifood system is both a consequence of and a factor in the larger process of globalization. The 6.5 

billion global consumers are served by a variety of suppliers that include food retailers standing next to 

the road in Africa as well as modern supermarkets. Supermarkets are supplied by the food processing 


and trading industries, which in turn are supplied by the farm sector, which receives its inputs from 

companies producing fertilizers, agrochemicals, seeds, and other inputs (Figure 1). In this system, 

international corporations have been increasing their power and leverage. Between 2004 and 2006, the 

sales of the top 10 food retailers soared by more than 40 percent, while the sales of the top food 

processors and agricultural input companies grew by 13 and 10 percent, respectively (von Braun 

2007). The sustainability of agriculture can no longer be defined by fields or farms or ecologies. 

Today, agriculture sustainability spans the globe, the whole value chain of food- and agriculturerelated 

inputs and outputs, and includes outcomes such as nutrition, health, and safety. 

Figure 1. The global agrifood business chain, 2006 

The new global power structure of agriculture 

Developing countries and middle-income economies are playing an increasingly important role in the 

global agrifood system. Higher incomes and urbanization are raising food spending in developing 

countries. In the past 20 years, the United States and Western Europe’s share of world agricultural 

production has decreased by 9 and 19 percent, respectively, while the share of Brazil, China, and India 

has substantially increased (Figure 2). The share of agriculture in the economy has fallen in all of the 

sample countries; its share in the United States and Western Europe is currently at a mere 1 and 2 

percent of Gross Domestic Product (GDP), respectively (World Bank 2007a). In contrast, the 

agricultural sector in Africa currently contributes 20 to 40 percent of overall GDP and employs 60 

percent of the labor force (World Bank 2007a, Beintema and Stads 2004). 

The integration of the agrifood system becomes most evident in global agricultural trade. Between 

1985 and 2005, world trade in agricultural products increased more than threefold (FAO 2008a). Trade 

is also an area that provides evidence for new developments in the global power system of agriculture. 

The share of world agricultural exports of one of the major producers—the United States—has 

declined by 33 percent since 1983-1985 (FAO 2008a). In some of the largest developing countries— 

China, India, and Brazil—the share has remained almost constant despite rising production due to 

increased domestic demand. A more open trade regime in agriculture would have far-reaching positive 

effects, but the negotiations through theDoha Round are currently stalled. Developed countries 

continue to be a major import market for agricultural commodities and their trade and domestic 

protection policies have major implications for developing countries. 


Table 1. World Cereal production , 2000-2007 (million tones) 

. 

Figure 2. Agricultural production by country and region, % of total 

Source: FAO 2008a. 

Note: W. Europe includes Belgium, France, Germany, Liechtenstein, Luxembourg, the Netherlands, 

and Switzerland. 

Agriculture policy is today increasingly made outside of the domain of agriculture, and often as an 

offshoot of energy or infrastructure policy. While the U.S. farm bill includes some biofuel support 

programs, for example, most government support for biodiesel production is outlined in the energy bill 

and entails large subsidies. Developing countries are unable to provide agricultural support on such a 

scale, and especially not in new markets such as for bio-fuels and for CO2 sequestration. The global 

power system of agriculture now consists of a conglomerate of different players. The playing field 

includes new actors, such as energy and retail market players, and traditional ones, such as the input 

industries and food processors. However, global agriculture issues currently have only a limited 

decision making architecture relating to public goods such as water, climate, and food safety. What is 

missing is a recognized governance platform that addresses the growth opportunities and sustainability 

threats on a global scale. The current state of multiple agricultural agendas is risky and leads to serious 

lack of attention to the management of and investment in agriculture-related global public policy 

issues. This lack of a coordinated global response is visible in the field of agriculture-energy policies, 

climate change mitigation and adaptation policies for agriculture, food aid policies, and agriculturehealth 

and food safety policies. It also is evident in the lack of a coordinated response to rising world 

food prices. 


Table 2. Change in food-consumption quantity, ratios 2005/1990 

Rising food prices 

Surging food and oil prices have turned the attention of policymakers and the public to the world food 

equation and food–energy price linkages. Between 2000 and 2008, the prices of wheat and petroleum 

in dollar terms increased more than threefold, while the prices of corn and rice more than doubled 

(Figure 3). When adjusted for inflation or reported in euros, the price increases are smaller, but also 

drastic. 

Figure 3. Commodity prices (US$/ton), January 2000–January 2008 

Sources: Data from FAO 2008b and IMF 2008. 

The major drivers of increases in cereal prices have been the high demand for food (and feed) due to 

income growth (and less so due to population growth), high demand for biofuels, and slow production 

responses to that rising demand. Between 2000 and 2006, cereal supply increased by mere 8 percent 

and stocks declined to low levels (von Braun 2007). A rise in cereal prices has uneven impacts across 

countries and population groups. Households that are net buyers of food, which represent the large 

majority of the world’s poor, are negatively impacted (von Braun 2007). It is largely the poor who 

respond to food prices with reduced consumption and changed patterns of demand, leading to calorie 

and nutrition deficiencies. Since food accounts for a large share of their total expenditures, the impact 

on the poor can be dramatic. Faced with higher prices, the poor switch to foods with lower nutritional 

value and to foods lacking important micronutrients. 


Expanding biofuel production 

The expansion of new sources of biofuels such as ethanol and biodiesel has a strong effect on 

agricultural prices, since biofuel production largely draws on natural vegetation. Second-generation 

technology is still a long way away. Incorporating new developments in supply and demand, as well as 

actual biofuel investment plans IFPRI’s International Model for Policy Analysis of Agricultural 

Commodities and Trade (IMPACT) 1 1 projects that the prices of maize and oilseeds will increase by 26 

and 18 percent respectively by 2020. A more drastic expansion scenario doubling the production levels 

assumed in the first scenario projects even more dramatic increases in the price of maize and oil seeds 

– by 72 and 44 percent (von Braun 2007). 

In addition, biofuels have indisputably created new linkages, trade-offs, and competition between the 

agricultural and energy sectors. The concentration of demand in developed countries also implies 

potential for biofuel exports from the rest of the world. Removing trade barriers will facilitate the 

establishment and expansion of biofuel production in countries with a comparative advantage. On the 

other hand, distorting subsidy regimes for biofuels and agricultural products used as biofuel feedstock 

will undermine the comparative advantage of developing countries. 

The threats to agricultural sustainability and resources 

Agricultural production has experienced impressive growth in many developing countries, but is this 

growth sustainable. In Sub-Saharan Africa, agriculture has been reaching almost 6 percent growth in 

recent years (IMF 2007). Yet, when it is driven by area expansion, this growth can undermine natural 

resources, forests, and water systems. In the main domains of natural resources that are key to 

agriculture, new threats have become more visible in recent years, and outlooks raise concerns. 

Water 

Climate change, population growth, irrigation, and industrial expansion increase competition for water. 

About 1.4 billion people now live in river basins where water use surpasses recharge rates. 

In many countries, developed water sources are almost fully utilized, and new sources are becoming 

increasingly expensive to develop (UNDP 2006). Irrigation provides productivity gains and greater 

food security, yet it also exerts substantial pressures on limited water resources. In developing 

countries, irrigated agriculture is the largest user of water resources, accounting for more than 80 

percent of water use (FAO 2008c). However, this does not mean that irrigation in the developing world 

is widely or equally spread. Sub-Saharan Africa, for example, is highly dependent on rainfed 

agriculture and accounts for less than 5 percent of global irrigation (UNDP 2006). The potential for 

agricultural expansion needs to be evaluated against existing water resources and the constraints to 

their expansion. For agricultural growth to be sustainable, efficiency and equity of water use in 

agricultural production needs to be increased. 

Soils 

Overgrazing, deforestation, and inappropriate agricultural practices have been some of the major forces 

behind soil degradation. Inappropriate agricultural practices are often associated with insufficient use 

of mineral fertilizers, rather than overuse. Farmers apply about 9 kg/ha of fertilizer in Africa, compared 

to 142 kg/ha in Southeast Asia. Soil degradation affects one-fourth of the world’s agricultural land and 

the pace of degradation has increased in the past 50 years. Soil quality is a major variable influencing 

agricultural yields, and erosion has already had significant impacts on the productivity of about 16 


percent of the agricultural land in developing countries (Scherr 1999). The goal of simultaneously 

protecting the environment, assuring the sustainability of global soil resources, and increasing 

agricultural production should build on increased agricultural productivity and improved agricultural 

practices. 

Biodiversity 

Biodiversity conservation is severely impacted by the conversion of forests and wild lands to farmland 

and pastures. Maintaining the genetic richness of crops and varieties is of key importance to farm 

productivity. Crop genetic improvements have increased resistance to pests, diseases, and climatic 

shocks. Biotechnology can enhance these positive effects. As a result, yields have increased, but at the 

same time, crop genetic diversity is eroding as traditional varieties are being widely replaced by 

genetically uniform and stable modern varieties. Plants that have been guarded and bred by generations 

of farmers are in danger of being lost and many have recently been placed into storage in the new 

permafrost genebank in Spitzbergen, Norway. 

Climate change and climate risks 

Climate-change risks will have adverse impacts on food production, compounding the challenge of 

meeting global food demand.Consequently, food import dependency is projected to rise in many 

regions of the developing world (IPCC 2007).With the increased risk of droughts and floods due to 

rising temperatures, crop-yield losses are imminent. In more than 40 developing countries—mainly in 

Sub-Saharan Africa—cereal yields are expected to decline, with mean losses of about 15 percent by 

2080 (Fischeret al. 2005). Other estimates suggest that although the aggregate impact on cereal 

production between 1990 and 2080 might be small—a decrease in production of less than1 percent— 

large reductions of up to 22 percent are likely in South Asia . In contrast,developed countries and Latin 

America are expected to experience absolute gains.Impacts on the production of cereals also differ by 

crop type. Projections show that land suitable for wheat production may almost disappear in Africa. 

Nonetheless, global land use due to climate change is estimated to increase minimally by less than 1 

percent. In many parts of the developing world, especially in Africa, an expansion of arid lands of up 

to 8 percent may be anticipated by 2080 (Fischer et al. 2005).World agricultural GDP is projected to 

decrease by 16 percent by 2020 due to global warming. Again, the impact on developing countries will 

be much more severe than on developed countries. Output in developing countries is projected to 

decline by 20 percent, while output in industrial countries is projected to decline by 6 percent 

(Cline2007). Carbon fertilization3 could limit the severity of climate-change effects to only 3percent. 

However, technological change is not expected to be able to alleviate output losses 

and increase yields to a rate that would keep up with growing food demand (Cline 2007).Agricultural 

prices will thus also be affected by climate variability and change.Temperature increases of more than 

3ºC may cause prices to increase by up to 40 percent (Easterling etal. 2007). The riskier climate 

environment that is expected will increase the demand for innovative insurance mechanisms, such as 

rainfall-indexed insurance schemes that include regions and communities of small farmers.This is an 

area for new institutional exploration. 

Underutilized opportunity: The agricultural growth and poverty-reduction link 

The vision of the future of agriculture in the developing world should not focus on conserving small 

farms, but should center on a measured and appropriate transformation toward viable farm units and 

clusters of part-time and specialized farms. Subsistence agriculture is not a viable option for getting out 

of poverty (von Braun and Kennedy 1994). Increasing rural–urban migration is affecting labor 

availability for agricultural activities and the flows of goods and money between rural and urban areas. 

Projections show that urban transformation will continue to occur at an increasingly rapid pace; 61 


percent of the world’s population is projected to live in urban areas by 2030 (Cohen 2006). Droughts, 

land scarcity, and low wages in rural areas, compared to better job opportunities and lower or different 

risks in urban areas, are increasing labor-related migration out of rural areas (von Braun 2005). 

However, three-quarters of the poor remain in rural areas and rural poverty is projected to be higher 

than urban poverty for decades to come (Ravallion et. al. 2007). A massive transformation is in the 

making—global farm employment is estimated to decrease by about 300 million people by 2020, while 

employment in services and industry —both in urban and rural areas— is expected to grow by 400 

million people. Further development of labor-market institutions is needed to enable the participation 

of rural areas in the national economy. 

The underrated agriculture and security risks 

Sustainability of agriculture is today not only a matter of appropriate management and utilization of 

natural resources and eco-systems, but also a matter of sustainability of states and political systems. 

For example, energy security objectives led to subsidized expansion of biofuel production, driving up 

food prices around the world. The poorest suffer silently for a while, but the middle class typically has 

the ability to organize, protest, and lobby early on. Although domestic causes such as neglect of 

agriculture and the rural economy may play an important role, the people’s disenchantment is 

frequently diverted by political leaderships to external causes. The trivial energy security gain brought 

about by biofuel production here may be largely overwhelmed by broader losses in political security 

emerging from frustration and aggression. Increased engagement of the United States in international 

agriculture capacity strengthening could correct the problems. 

Making the world more peaceful is directly linked to making the world more food secure and affluent. 

It has long been recognized that social conflict increases food insecurity, but it also needs to be pointed 

out that food insecurity can be a key source of conflict. Some of the trigger conditions of violence can 

be directly related to change in the prices of staple foods or cash crops. Un channeled frustration that is 

insufficient organized or repressed can lead to conflict (Messer and Cohen 2008). Rising prices of 

tortillas in Mexico City and bread in Uzbekistan have led to riots. 

Conclusion: 

Serving Sustainability: Toward a Global R&D Initiative 

An urgent global R&D initiative for accelerated agricultural productivity Central to the sustainability 

of world agriculture is a global R&D initiative for accelerated agriculture productivity; such an 

initiative makes economic sense, is pro-poor and sustainable, and serves security. The R&D initiative 

needs political leadership and coordination. Industrialized economies, including the United States, 

should substantially accelerate their investment in international agricultural research and development. 

Enhanced collaboration of old and new key global agricultural players In order to effectively 

implement such a global R&D initiative for accelerated agriculture productivity, a new agriculture, 

food, and nutrition governance architecture is needed to provide the appropriate political response to 

the global price and productivity crisis. A coordinated global response is needed in the form of 

agriculture–energy policies, climate change mitigation and adaptation policies for agriculture, food aid 

policies, and agriculture–health and food-safety policies. Agricultural power has become more spread 

around the world, with the result that there is no governance architecture that can generate appropriate 

political responses to the food and agriculture price and productivity.crisis at the global and national 

levels. Under such a new global architecture, new partnerships among old and new players such as the 

United States, Europe, China, India, Brazil, UN agencies, the CGIAR, and foundations, and the private 

sector must be facilitated. 


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Business Incubator for local Economic Development 

VS Sukumaran, Associate Sr. Faculty, 

Entrepreneurship Development Institute of India, Ahmedabad, India 

Abstract 

Local Economic Development is the process by which public, business, local government and 

non-governmental sector partners work collectively to create better conditions for economic growth 

and employment generation in a defined administrative area. In this process, the local area will 

provide a conducive environment for economic growth of the public. This may be, creating 

appropriate wage or self employment. There are various mechanism to create sustainable employment 

avenues such as investment subsidy, infrastructure development, business incubator, etc. 

Business incubator will provide infrastructure facilities to the upcoming entrepreneurs in a 

given area. This will reduce the investment burden of the entrepreneurs. In addition to this the 

incubator will also give business process support, such as technology, developing systems, 

marketing, etc. 

This paper illustrate the importance of business incubator in promoting entrepreneurship and 

employment avenues in the local area. 

INTRODUCTION 

Local Economic Development is the process by which public, business, local government and 

non-governmental sector partners work collectively to create better conditions for economic growth 

and employment generation in a defined administrative area. In Local Economic Development (LED) 

local governments and community-based groups manage their existing resources and enter into new 

partnership arrangements with the private sector. 

Regardless of the form it takes, LED has one primary goal, which is to increase the number and 

variety of job opportunities available to people. In performing these activities, local governments 

and/or community groups must take on an initiating rather than a passive role. Practicing local 

economic development means working directly to build up the economic strength of a local area to 

improve its economic future and the quality of life of its inhabitants. Prioritizing the local economy is 

crucial if local bodies are to be able to compete in the fast changing world. 

Each local body has unique local conditions that can help or hinder its economic development. 

These local attributes will form the seeds from which a local economic development strategy can be 

developed. To build competitiveness each local body needs to understand and act on its own strengths, 

weaknesses, opportunities and threats. It will then make its local area attractive to business, new 

employers, skilled workers and supporting institutions. Local Economic Development is necessary 

because: 

 

 

 

 

 

Economic development raises overall productivity and incomes. 

Additional development can help maintain a high level of employment and job quality. 

It can help to create the jobs necessary for providing opportunities for the jobless and working 

poor. 

It can help to increase the revenue of local self government. 

It will increase the standard of living of people. 


It can provide the earnings needed to make further investments in education, government services, 

amenities, infrastructure, and quality of life. 

PRINCIPLES OF LED 

LED focuses on enhancing competitiveness as also increasing sustainable growth. It also ensure that 

the growth is inclusive. Therefore LED encompasses many different disciplines, such as planning, 

economics and marketing. The key principles of LED consists of : 

 

 

 

 

 

 

 

Prioritize job creation and poverty alleviation 

Target disadvantaged people, marginalized communities and geographical regions. 

Promote local ownership, community involvement, local leadership and joint decision making 

Uses local resources and skills and maximizes opportunities for development 

Involves the integration of diverse economic initiatives in an all-inclusive approach to local 

development. 

Help the local governments to augment their income/infrastructure 

Help to improve the standard of living. 

LED STRATEGY 

i) Resource & skill mapping :To increase the employability of the locale, either for wage or self 

employment, it necessary to understand the current status of resources. Therefore, a resource mapping 

will be the first step. This will include both the human and natural resources. This will help in 

identifying the viable business opportunities in the local area. Further skill mapping will help in 

identifying the skill gap, if any, required for both self and wage employment. 

ii) New enterprise creation : Enterprises are considered as the engine for economic growth. New 

enterprise creation needs concerted efforts. Facilitating the emergence of new enterprises needs a 

systematic approach. Various strategies are followed to develop the new entrepreneurs. 

.iii) Facilitate Wage Employment : Employability of the individual is the major hindrance to get the 

quality job. To attain the local economic development at the optimum level, the local people should get 

quality job. It is therefore necessary to understand the skill level of the entrepreneurs look for. 

Comparing this to the exiting skill of the local people, one can understand the skill gap. Bridging the 

gap through proper training the local people will get quality job. 

iv) Strengthening the Existing Entrepreneurs Including Clusters : Most of the trade and business in 

the local area is struggling for their survival. By virtue of being the business, they are carrying out 

their activities. As a part of the LED, one should work for their sustenance and growth. The 

interventions will include the following : 

Providing business counseling 

Help in functional management areas like finance and accounts, quality control, system 

development, market development, etc. 

Net working 

Mentoring 

Help in expansion and diversification 

Increasing the competitiveness of cluster members 

v) Provide a Conducive Environment/Climate for business growth and investment attraction: 

Many investors are apprehensive as their hard earned money should not be blocked due to 

cumbersome procedures and formalities. It is the local body to create a conducive environment for 

investment attraction. This may be either providing physical infrastructure such as parks/incubators or 

improving the processes and procedures for business registration. 

vi) Equip the Panchayat Raj Institutions on LED : Local self government is the focal point for 

LED. The members involved in the institutions should be sensitized about the various facets of local 

economic developments. 


BUSINESS INCUBATOR 

For the successful initiation of this strategy, it is recommended to implement the 

entrepreneurship model focusing resource mapping and investment mobilization. The so called 

entrepreneurship development programmes are mainly focusing providing funding support and to a 

certain extent facilitate the start ups. Business as such encounter multifarious problems. These 

problems are at times may not be solved by the entrepreneur and the result may be the closing down 

of the unit. It is therefore needed to create an enabling environment for the survival and growth of the 

units. A business incubator can give this environment for the survival and growth of business. 

There are various definitions for business incubator and there is no single way by which one 

can categorize an incubator. One of the definitions for Business Incubator is “an economic 

development tool designed to accelerate the growth and success of entrepreneurial companies through 

an array of business support resources and services. A business incubator’s main goal is to produce 

successful firms that will make the programme financially viable and self-sustainable. The key factor 

for the success of a business incubator is the acceptance by the local business and the ability of the 

local community to generate new entrepreneurs. It has been proven over the years that when 

enterprises are created they draw up on the local resources including the human resources. This in turn 

ensures the utilization of hitherto untapped or unidentified resources thereby optimizing the wealth 

creating abilities in the local community. 

SERVICES TO BE PROVIDED BY BUSINESS INCUBATOR 

Basic Physical Infrastructure like; Land, Building, Electricity (Power), Water, 

Telecommunications. 

Sharing of certain physical infrastructure to reduce the initial investment cost and also 

recurring costs; for e.g. Common power installation cost will reduce the investment cost and 

sharing of telephone lines will reduce the recurring cost of telecommunications. 

Based on the needs assessment, the Business Incubator will work on promoting enterprises, 

which would require common technological facilities. To ensure reduction on investment costs 

and also to ensure optimum utilization of investments, common machinery to be used by the 

enterprises would be provided under a common facility center. This will be supplemented with 

adequate management and skill training to local population for, both using the common facility 

center machinery and also to identify potential entrepreneurs for enterprise building. 

The Incubator, using its technical and financial experts, will work with the entrepreneur to 

prepare viable business plans (project reports) and in association with the local selfgovernment, 

the state government, will work on providing adequate funding support for the 

proposed enterprises. 

It has been felt that in the initial phases of enterprise creation, the entrepreneur faces a starting 

crises, most of which is due to lack of experience. To ensure that the Incubator Entrepreneur 

does not face such problems, services of experts on a retainer ship basis will be provided to the 

enterprises. These services would be mainly on consultancy basis and would essentially cover, 

accounting & auditing services, legal services, financial and tax consultancy, technical and 

technology identification and transfer services, marketing and distribution consultancy, human 

resources training services, ISO and TQM facilities etc. Apart from these, even low services 

like secretarial, communication, housekeeping and facility management services could also be 

envisaged. Since all these services are being shared, they are expected to reduce the overall 

management costs of the enterprise. 

Specialized services like common effluent treatment plants, Internet café, common facilities for 

workers like cafeteria, recreation facilities and medical facilities can also add value to the 

incubator. 


The incubator will also work towards ensuring proper banking services, postal services, courier 

& transport services for smooth financial and product logistics. 

The Business Incubator will also provide adequate warehousing services for storage of raw 

materials and finished products of the tenant enterprises. It will strive to create a clustering 

phenomenon by building trust and better communication among the tenant enterprises. Thus, 

the warehousing services can be converted into a raw material bank and the finished products 

warehouse can be used as a tool for common marketing and distribution. It can also work on 

common branding of the outputs of the incubator. 

The services provided under the banner of the Business Incubator will not be restricted to the tenants 

of the incubator but will also be extended to the local population thereby making it a hub of economic 

activity to ensure a commercially driven local economy. 

STAKEHOLDER ANALYSIS FOR BUSINESS INCUBATOR 

A business incubator for Local Economic Development should have various stakeholders Therefore it 

is necessary to identify proper stakeholders for the LED incubators. While the LED Business Incubator 

is expected to operate at a local level, the stakeholder analysis has to be done in the macro-economic 

context. Hence the stakeholder analysis has to be done on a national or even an international level. 

However for this purpose, the stakeholder analysis has to be done based on how they can contribute to 

the LED Business Incubator. 

The Central Government: 

The central government through its decentralization process has been providing funding to the local 

self-government bodies under various heads. These funds could be utilized for the purpose of creating 

the Business Incubator. Apart from the direct financial support, many Central Government Agencies 

and Organisations like Development Commissioner Small Scale Industry, Development Commissioner 

Handicrafts, Small Scale Service Institutes, etc could also provide support for such initiatives like 

Business Incubator for Local Economic Development. 

The State Government: 

The state government supports the local economy through various measures. The Kerala Government 

has already transferred powers for planning of social and physical infrastructure development to the 

panchayat level. This has been benefitting the local areas as the people have been deciding the nature 

of development and the quantum and quality of development they want. To support such development, 

the goverment has been encouraging Grama Sabhas and grass roots movement and awareness 

programmes. The government has also been providing new programmes which could be adopted by 

the local governments; like the water, sanitation and health programmes, organic farming programmes, 

women and child welfare programmes. 

To support the initiatives, the state government has been providing support to the local self 

government institutions through supplementing the funding support extended by the central 

government. Special projects and missions of the Kerala government also extend support to the local 

self government bodies, significant among them are the Information Kerala Mission and the 

Kudumbashree project as a part of computerisation of all records in the local self government bodies 

and state poverty eradication mission respectively. 

Panchayat Raj Institutions: 

Local self-government department of the State Government is implementing various schemes like 

Swarnajayanti Swarojgar Yojana (SJSRY), National Rural Livelyhood Mission (NRLM), etc. These 

projects are being directly implemented by the local self government bodies under the de-centralized 

3-tier governing system namely; Village Panchayat, Block Panchayat and Jilla Panchayat. This system 

gives more autonomy to Panchayat Raj Institutions (Local Self-Government Institutions). Panchayat 

Raj Institutions can play a better role in resource mapping, infrastructure development and a catalyst 


for the entire process. The Parliament under the 73 rd Constitutional Amendment provided wide ranging 

powers to the Panchayat Raj Institutions, which included poverty alleviation, building the local 

physical and social infrastructure etc. Thus it is now clear that under the mandate given to the 

Panchayat Raj Institutions, they may facilitate in creating an environment conducive for business and 

developing an entrepreneurial culture in the local area. The flow of adequate funds and manpower 

resources to create the LED Incubator would essentially be the role of these institutions. These 

institutions are key to the success of the LED Incubator. 

Banking Institutions: 

Providing adequate financial support to the tenants is the key factor for the success of local 

economic development. Through various interventions, the local community exhibited saving habits 

and an inclination to income generation activities. Availability of adequate and low cost credit without 

collateral security is a major hindering factor for the local population venturing into entrepreneurial 

activities. Banking Institutions would be prime stakeholders ensuring the success of the LED 

Incubator. Banking Institutions in Kerala have over the years been slack in credit off take. This is 

mainly due to lack of investment within the state in Industry and Commerce. This concept of LED 

Incubator provides the Banking Institutions an opportunity to lend to a scientifically planned 

investment. This would give the bankers an opportunity to participate in local asset building. The 

Banking Institutions would not only be called upon to support the industry within the Incubator but 

also in financing the incubator itself. Kerala has a host of formal Banking Institutions in both the 

public sector and the private sector. The State Bank of Travancore, Kerala State Industrial 

Development Corporation, Kerala Financial Corporation, Kerala State Financial Enterprises are key 

financial institutions in the public sector operating in Kerala. The South Indian Bank, The Federal 

Bank, Catholic Syrian Bank, Lord Krishna Bank and many other private business houses have created 

banking and financial institutions of good repute in Kerala. There are also a large number of Regional 

Rural Banks and Agriculture Credit Cooperatives. Apart from these institutions, there are many 

informal financial institutions in the form of chit-funds and “blade” companies, which are at the 

moment ruling the roost due to lack of depth in the banking and financial institutions in percolating to 

the rural areas. It is also a measure of the high bureaucracy and long stretching formalities that the 

existing businesses turn to informal credit. Another aspect of banking institutions is their ability to 

create credit and develop financial intermediation in the rural areas. At the moment, lack of financial 

intermediation is creating problem with people transacting large transactions in cash. 

A good banking system will provide the financial backbone to the LED Incubator. It is 

however, necessary that the bankers are provided appropriate training to provide support the 

entrepreneurs of the Incubator and to understand the banking needs of such entrepreneurs. 

The Local Industry Associations and Trade Bodies: 

It is necessary to have role models for motivating local people. This is more prominent in a 

society bereft of entrepreneurial spirit. The involvement of local Industry Associations and Trade 

Bodies will help the incubator in various ways. They can enthuse their members to take tenancy in the 

incubator. They can also provide technical information to the tenants through a mentoring process. 

Over and above this, a vibrant entrepreneurial fraternity in the local area could also ensure social 

development and public utility development. The members of the Local Industry Associations and 

Trade Bodies could also provide viable market access to the tenant units. 

Local Population: 

The Local Population is the greatest beneficiary of the LED Incubator. However, it is also the 

stakeholder, which will provide the entire resource base of the incubator. The key success parameter 

of the LED Incubator is the exploitation of the local resources in terms of Raw materials, Local Skills 

or Natural Environment. The local population’s willingness to part with or share these resources is 

very important. Also, the acceptance of such a concept in the local area by the population is also a key 


factor. This is not an easy proposition in Kerala. Hence, before planning an LED Incubator in an area a 

baseline survey to understand the demographic characteristics of the local populace as also a needs 

assessment survey to be done to ensure viability of the project in the local area. 

BUSINESS PROCESS OF LED INCUBATOR 

The business incubator for LED will be implemented through a special purpose vehicle called 

LED Incubator Company. The LED Incubator will also have a common facility centre (CFC) and each 

LED Incubator will be expect to host at least 30 units based on the needs assessment survey. Of these 

units, some may be service providers like banks, courier and transportation company etc. The CFC 

will be managed as a commercial venture by the LED Incubator company. 

LED Incubator Promotion Company 

Entrepreneur 

(Tenant of the 

Incubator) 

Common Facilities 

Centre 

Responsible for 

Identifying 

Opportunity, 

Mobilising Resources 

Planning, Implementing 

& 

Managing the Incubator 

The LED Incubator will be managed by key stakeholders representing the entire gamut of 

beneficiaries. These board members would include Tenant Entrepreneurs, Bank and Financial 

Institutions representatives, Local Population representatives, Trade Union Representatives, Key 

Management Consultants, Local Area Executives of the Government (Collector/BDO etc). The 

company will essentially be a not for profit venture. However, it will strive for generation of surpluses, 

which will not be used to pay dividends to contributors of equity or stakeholders. The surpluses so 

generated will be used to develop physical and social infrastructure in the Local area including the 

incubator itself. This company will also be eligible to invest in other LED incubators or organizations 

created to support the tenant enterprises. 

THE MAIN FUNCTIONS OF THE COMPANY ARE AS UNDER: 

 

 

 

 

 

 

Identifying viable business opportunities based on natural resources, skills available, and the 

needs of the local area or the market. Ideally, opportunities chosen should be interdependent as 

this helps in creation of a new cluster in the long run. 

Provide appropriate infrastructure to support creation of new enterprises. 

Provide administrative support like manpower (secretarial, accounting, housekeeping etc) so as 

to ensure reduced cost of operations for the tenant units. 

Inculcate entrepreneurial spirit amongst the community through motivational and management 

training through outreach programmes. 

Identifying and sourcing resources, both technical and financial start-up of tenant units. 

Help them in marketing the products and provide them with market intelligence. 


Hand-holding for business development and growth through empanelled consultants (also 

trained in-house.) 

Create Common facility center to support the tenant units and to reduce the cost of investment 

for the tenant units. 

The revenue for the company shall come from usage fees paid by the entrepreneur for the services 

provided by the company, surplus generated by the common facility center and the usage charges paid 

by the Local Population for the physical infrastructure created by the Company out of the surplus 

generated by the company. The company may also invest the investible surplus of the company in 

income generating securities specified by the Government. There may be an income stream from such 

interest also. The company can also generate some revenues from the training programmes that it may 

conduct for Entrepreneurship and Management. 

ENTREPRENEUR 

The Tenant Entrepreneur is the greatest beneficiary of the LED Incubator. Therefore, his involvement 

in the process of creation and running of the LED Incubator is very important. The services and 

benefits provided by the LED Incubator shall depend on the demands of the tenants and the more 

demands that the entrepreneur makes the more services shall he get. However, this is also based on his 

ability and willingness to pay for the services provided by the Incubator. 

SOCIAL COST BENEFIT ANALYSIS 

 

 

 

 

 

 

 

 

 

 

Will create an entrepreneurial culture amongst the locals 

Facilitate setting up of enterprises in the local area 

Direct Employment in the local area 

Check the unwarranted migration of the locals 

Utilization of local resources effectively, providing income benefits to the local produces. 

By providing self-employment opportunities to the unemployeds, social evils will be minimized. 

Provide support to existing entrepreneurs for their further growth 

Develop industrial clusters 

Increase in local trades and other commercial activities 

Facilitate a quality way of life to the locals 

In short the Business incubator will create an attractive business environment in the local body. This 

will help in attracting investment for new enterprise creation. Further it can also help the existing 

entrepreneurs for expansion and diversification. The following figure will give a gist of benefits 

through Business Incubators. 

Good Jobs Good Income Good Tax Base 

Attractive 

Economic 

Environment 

Enhanced Quality 

of Life 

More investment 

in Infrastructure 

Saloni Shah (2003) Planning for Local Economic Development, a Case of Ahmedabad 


ROLE OF LOCAL SELF GOVERNMENT IN LED 

Following the 73rd and 74th Constitutional Amendments, decentralization efforts in the country have 

received increasing emphasis. Government of Kerala decentralized all relevant functions to local 

institutions with an adequate financial backing and transfer of staff from the line departments clearly 

marks a new era in decentralization within the state. In Kerala, LED could be implemented for a 

village panchayat, block, district or a municipal township area. Local self Governments of Kerala have 

made immense progress in the infrastructure development of their area. However, the efforts to 

entrepreneurship development are to be further sharpened. 

CONCLUSION 

For Economic Development, there are various business models such as Rural Business Hubs, 

Technology Parks, Industrial estates etc. All these have its own uniqueness. However, a Business 

Incubator will provide not only the logistic support to the entrepreneurs but also provide business 

advocacy services for its survival and growth. This business incubator should ]be managed by 

professionals and should develop a business model for its own growth. It was observed that for social 

cause Common Facility Centres have been initiated. However, without a sustainable business model, 

these CFCs are not able to survive. While advocating a Business Incubator for Local Economic 

Development, it is necessary to develop a sustainable business model for the incubators survival. This 

model will pave vistas for developing business as well as a creating entrepreneurial society. 

Reference: 

Sukumaran VS, Umesh Menon, (2004), A concept note on Business Incubator for Local 

Economic Development, KILA Journal of Local Goveornance, Trichur, Kerala 

Deutache Gesellachast Fur, (2003), A Guide to Rural Economic and Enterprise Development 

(internet : www.gtz.de 

http://web.worldbank.org/ 

http://www.upjohninstitute.org/ 

http://www.mesopartner.com/fileadmin/user_files/working_papers/mp-wp11_Local-BE.pdf 

http://www.unescap.org/huset/hangzhou/paper/economic.htm 

http://india.ashoka.org/achieving-local-economic-development 

http://www.nbia.org 

http://sustainablebusinessincubator.com/ 

www.iimahd.ernet.in/users/anilg/files/Articles/Anshul%20Saxena.ppt 

http://www.techmonitor.net/tm/images/a/a7/11may_jun_startup_venture.pdf 


Abstract 

Economic Analysis on the Market Participation Decision of the Red Onion 

Farmers in Jaffna District, Srilanka 

Shylanthi.T & Umashankar.K 

Marketing plays a vital role in determining the profitability of the producers. Availability of 

market information and the right choice of a marketing channel is crucial in deciding the producer 

margins. Hence it is important to identify the factors which have been influencing the farmers 

decision in choosing the marketing channels. Therefore this research has taken effort to identify the 

demographic and socioeconomic characteristics of the red onion farmers influencing the choice of 

marketing channel in Jaffna district, Sri Lanka. A purposive random sampling technique was used to 

select the samples from the population. Structured questionnaire was prepared and pretested prior to 

the data collection. Total sample size was 200, which is representing the 10 percentage of the total 

commercial red onion producers in the district. The compiled data were analyzed within the frame 

work of multinomial logit regression model by using the econometric software STATA version 10. 

The results revealed that the investment in future season and knowing the market price are found to be 

significant increase the log ratio of participation in the wholesale market through middleman based on 

the participation in the direct retailing market by 3.148, 3.532 respectively. The investment in last year 

and membership in a producer group manifested a significant negative impact and decrease the log 

ratio of choice of performing direct transporting based on the participation in the direct retailing by 

19.438, 1.985 respectively. The investment in last year manifested a significant negative impact and 

decreases the log ratio of choice of participation in the wholesale market through middleman based on 

the participation in the direct retailing by 14.058. From this the research concludes that the availability 

of market information vastly deciding the choice of the marketing channels. Hence it is important to 

both government and non government sectors to take effort in disseminating the market information 

using current electronic medias like mobile phones, radio, internet, and television to the red onion 

farmers is expected to increase the farmers share via choosing a most profitable channel. government 

organizations or any other non-governmental organization can take effort to connect the buyer and 

producer by Moreover if any of the non profiteering organization could come forward to perform the 

transport function on behalf of the farmers is expected to increase the farmers share tremendously. 

Organizing the red onion farmer societies or organizations is expected to increase the bargaining 

power collectively on behalf of the individual farmers. And this will intern expect to help the farmers 

to choose the most suitable and profitable marketing channel. 

Key words: Red onion, Multinomial logit model, Choice of a marketing channel, Jaffna district. 

INTRODUCTION 

It has been reported that two third of the Sri Lankan population who have been involved with 

agricultural production living in the rural areas (DCS,2010). The GDP contribution of the Agriculture 

sector in Sri Lanka in 2010 was estimated as 12.6 percent (DCS, 2010/2009). Out of which GDP 

contribution by cash crop sector was estimated to be 10.7 percent (CBSL, 2010). Red onion is one of 

the valuable and prominent cash crops of the dry and intermediate zones of Sri Lanka which fetches 

considerable income to the cultivators. In Sri Lanka, the production of red onion was around 51,200 

MT harvested from 5276 ha in the year of 2008 (Suthamathy, et al, 2011). In Jaffna, among all the 

cash crops red onion is one of the successful cash crops to cultivate and is expected to generate 

considerable income to the farmers. Even though Jaffna district has high potential for red onion 

production, farmers are still finding difficulty in obtaining a reasonable and stable price for their 

produce. Particularly the red onion market in Jaffna district is susceptible to price uncertainties. 


During the last season red onion farm gate price disparity ranged from Rs.40 to Rs.340. Simply this 

alone stands as an evidence for the existence of poor market arrangement in Jaffna peninsula. Local 

farmers are finding difficulty in predicting the future market prices which may help them to make a 

decision on choosing a particular marketing channel and to perform the storage function. Choice of a 

marketing channel plays a vital role in determining the producer margins. Availability of market 

information and the right choice of a marketing channel are crucial in deciding the producer margins. 

Hence it is important to identify the factors which have been influencing the farmers’ decision in 

choosing the marketing channels. Therefore this research has taken effort to identify the demographic 

and socioeconomic characteristics of the red onion farmers influencing the choice of marketing 

channel in Jaffna district, Sri Lanka. Therefore the research has defined its objectives in the following 

manner: 

 

 

 

How far the socio economic characters such as age of the farmer, gender, educational level of 

farmer, cropped land area and crop income influence the choice of a marketing channel. 

How far the market infrastructures such as frequency of selling, information about the market 

price, number of market information sources, preference for contract arrangement, availability 

of own storage facilities, buyer terminate business, own a mobile phone and access to extension 

services have been influencing the farmers choice of a marketing channel. 

How far the investment decisions such as Investment during last season and investment for the 

future season influence the choice of a marketing channel. 

Materials and Methods 

In Jaffna approximately 145,000 families are doing farming as their livelihood 

(DOAE,2010/2009). The total population of the district is around 600,000. Agriculture and fisheries 

have been the principal economic activities of the district. Over 60 percent of the work force in the 

district depends on agriculture for their livelihood (DS,2010). Agriculture in the district contributes 

substantially to the GNP of the country. The agriculture sector, including crop and livestock has 

contributed around 65 percent of the total gross domestic product of the district. In terms of 

production, major cash crops like chilli, onion, tobacco, potato and banana are produced in large extent 

to meet the substantial portion of the local requirement. Total extent of high land available for 

cultivation is 7,851 ha (DS,2010). 

The study covered entire Jaffna district and the samples were selected by using purposive 

random sampling technique. The total red onion farmers list was obtained from the department of 

agricultural extension and then the respondents were selected randomly excluding two extremes of 

those who are cultivating below 1 lachcham and above 20 lachchams. A structured questionnaire was 

prepared and pretested prior to the data collection. Total sample size was 200, which was representing 

the 10 percentage of the total commercial red onion producers in the district. The compiled data were 

analyzed within the frame work of multinomial logit regression model by using the econometric 

software STATA version 10. Here marketing channel1(Directly performing retailing) was considered 

as a base channel for the analysis. Assuming the hederoscedastisity problem the outliers were removed 

from the sample. 


Table : Variable label and expected signs 

------------------------------------------------------------------------------------------------------------------------ 

Variable Label Variable name Chnl1 Chnl2 Chnl3 

------------------------------------------------------------------------------------------------------------------------ 

AGE Age of the farmer - + - 

GEN 

Gender 

EDU Education level of farmer + - + 

FRE Frequency of selling + + - 

MARKTP Information about the market price + + + 

MKTINFO Number of Market information sources - - + 

BTBUSS Buyer terminate business + - + 

INLAST 

Invested during last year 

INFUTURE Invested for future year - - + 

OWNMOB Own a mobile phone - - + 

PERCON Preference for contract arrangement - + - 

OWNSTOR Availability of own storage facilities - - + 

CRPIN Crop income - + + 

CRPLAND Cropping land area - + + 

EXT Access to extension service - - - 

----------------------------------------------------------------------------------------------------------------------- 

Model Equation 

Ln (p 1 /1-p 1 ) = β 0 + β 1 AGE + β 2 DGEN + β 3 EDU+ β 4 FRE + β 5 DMARKTP + β 6 MKTINFO 

+ β 7 DBTBUSS + β 8 DINLAST + β 9 DINFUTURE + β 10 DOWNMOB + β 11 DPERCON + 

β 12 DOWNSTOR + β 13 CRPIN + β 14 CRPLAND + β 15 DEXT + Ut 

Here, AGE-age of the farmer, GEN-gender, EDU-educational level of farmer, FRE-frequency of 

selling, MARKTP-information about the market price, MKTINFO-number of market information 

sources, BTBUSS-buyer terminate business, OWNSTOR-availability of own storage facilities, 

OWNMOB-own a mobile phone, INLAST-investment during last season, INFUTURE-investment for 

the future season, PERCON-preference for contract arrangement, CRPIN-crop income CRPLANDcropped 

land area, and EXT-access to extension services. Among these three explanatory variables 

namely MKTINFO, PERCON and EXT were dropped from the model in order to overcome the 

dummy variable trap and the collinearity problem. 

Multinomial regression for market channel choice. 

Number of obs = 191 

LR chi2(24) = 35.74 

Prob > chi2 = 0.0004 

Log likelihood = -79.725758 

Pseudo R2 = 57.06 


Table 

Mch2 Coef. Std. Err Z P>/Z/ 

Age 0.01 0.03 0.39 0.70 

Dgen -0.15 0.89 -0.18 0.86 

Edu 0.16 0.11 1.00 0.32 

Fre 0.46 0.59 0.79 0.43 

Dmrktp 3.53* 1.88 1.88 0.06 

Dbsprob -0.35 0.65 -0.54 0.59 

Dinlast -14.05*** 4.23 -3.32 0.00 

Dinfuture 3.14** 1.10 2.86 0.00 

Ownmob 0.33 0.64 0.51 0.61 

Cropland 0.01 0.06 0.25 0.80 

Dorgmem -0.44 0.62 -0.77 0.44 

Downstor -1.33 0.85 -1.57 0.12 

Cropin 0 0.00 0.63 0.53 

cons 10.29 3.65 2.82 0.01 

Mch3 

Age -0.02 0.04 -0.69 0.49 

Dgen -1.58 1.16 -1.37 0.17 

Edu 0.01 0.20 0.49 0.63 

Fre 0.41 0.80 0.51 0.61 

Dmrktp 0.07 2.14 0.04 0.97 

Dbsprob 0.07 1.03 0.07 0.95 

Dinlast -19.43*** 3.95 -4.92 0.00 

Dinfuture 2.21 1.48 1.49 0.14 

Ownmob -0.26 1.07 -0.27 0.79 

Cropland 0.01 0.11 0.13 0.90 

Dorgmem -1.98* 1.06 -1.88 0.06 

Downstor 1.03 1.25 0.81 0.42 

Cropin 0.01 0.00 1.29 0.20 

cons 18.3 . 

Mchl 1 is the base outcome. ***, ** and * indicates significance level at 1%, 5% and 10% 

respectively. Here Mch1: Directly performing retailing, Mch2: Selling whole seller through 

middleman and Mch3: Directly transporting to southern part of Sri Lanka. 

Results and Discussion 

Except the variables such as knowing the market price, investment in last year and future 

investment the other variables were found to be statistically insignificant in choosing the marketing 

channel 2. 

Knowing the market price found to be statistically significant at 10 percent level and 

manifested a positive sign in choosing marketing channel 2: selling to wholesaler through middle man. 

If the farmer is more dynamic and knows the market price well then that will expect to increase 

farmers’ market participation through the marketing channel 2. This means that the log ratio of selling 

to wholesaler through middle man based on channel 1 (performing retailing) is 3.532. This is because 

if a farmer is well aware of the market price then it will be difficult for the middlemen to get higher 

margins. If farmer is well informative then he will be much confident when he is bargaining for his 


produce. If the producer is unaware of the market price then that will lead to market imperfections and 

finally producer may end up with a lower producer margins. Same variable also exerted a positive 

impact and encouraging farmers’ participation in the marketing channel 3 (directly selling to the 

transporter). Since the coefficient is found to be insignificant there no point in discussing the impacts 

based on that value. Hence it is obvious that dissemination of market information is quite crucial in 

enhancing the farmers’ share in the market. Market information should be readily available and it has 

to reach the farmers field regularly. If farmers could access the market information from some reliable 

sources then that will in turn help the farmers to get reasonable margins in the red onion business. In 

the mean time market will also move towards competitive nature. 

The variable ‘last year investment’ found to be statistically significant at 1 percent level and 

exerting a negative impact on the market participation via both channel 2 and channel 3: directly 

performing transporting. Increasing the investment in last season by one unit will expected to increase 

the respondents’ market participation in market selling to wholesaler through middle man by the log 

ratio of selling to wholesaler through middle man based on directly performing retailing is -14.058. 

This means that increasing the investment in last season is expected to discourage the market 

participation of the farmer in the market selling to wholesaler through middle man. The second 

regression also implies the same. The farmers would have been discouraged to sell their produce 

directly to the transporter. More investment during the last season will expected to discourage the 

farmers’ participation in the marketing activity by the log ratio of channel 3 to channel 1 is -19.438. 

Even though previous adverse seasonal experience de motivate the red onion farmers to participate in 

the marketing activities but it prominently discourage the farmers to participate in the marketing 

activity particularly through the marketing channel 3 rather than the marketing channel 2. Unexpected 

heavy rain followed by a flood destructed most of the farmers during the last season and that would 

have discouraged the farmers to cultivate more in this season and may resulted a reduced participation 

in the red onion marketing channel. To overcome this farmer can be given credit during the successive 

seasons. More over crop insurance or income subsidies to the affected farmers will also expect to 

increase the farmers’ participation in the marketing activities. 

The variable ‘investment in future’ is also found to be statistically significant at 5 percentage 

level and exhibited a positive sign in choosing the marketing channel 2 (selling to wholesaler through 

middle man). Increasing the investment in future by one unit will expected to increase the respondents’ 

market participation in market selling to wholesaler through middle man by the log ratio of selling to 

wholesaler through middle man based on directly performing retailing is 3.148. This means that 

increasing the investment in future is expected to encourage the market participation of the farmer in 

the market selling to wholesaler through middle man. If the farmer would have invested heavily on the 

production then it is reasonable for him to expect a quick return for his harvest. This is primarily due 

the opportunity cost of the capital that farmer has invested. In most instances farmers have less 

contacts and poorly knowledge about the market arrangements. Unless farmers have some contract or 

coordination it is fairly difficult for them to organize a market for their products. This could be the 

reason why farmers prefer to go to the middlemen to market their products without delay. To 

overcome this, government organizations or any other non-governmental organization can take effort 

to connect the buyer and producer by using current electronic medias like mobile phones, radio, 

internet, and television. 

‘Member in a producer group’ found to be statistically significant at 10 percent level and 

manifested a negative sign in choosing the marketing channel 3. Being a member in a producer 

organisation will expect to decrease the farmers’ market participation in the marketing channel 3 by 

the log ratio of -1.985. This is obvious because the farmer organizations bargain on behalf of its 

members and participate in the market. So the farmer may not be able to participate in the market 

directly. Instead the farmer organization takes effort to market the harvest. But unfortunately farmer 

organizations in the Jaffna district are not well established yet. These organizations are suffering from 


lack of capital. The local farmer organizations lack very basic facilities like storage and transport. Due 

to these reasons they are mostly confined their activities within the Jaffna district. This situation has 

given provision to the private hands and middlemen to exploit the red onion market in Jaffna 

peninsula. To overcome this the farmer organization or cooperatives has to be strengthen. 

Conclusions and Recommendations 

‘Knowing the market price’ and ‘investment in future’ are encouraging the market participation 

of the farmer. In contrast ‘last year investment’ and ‘Member in a producer group’ are discouraging 

red onion producers to participate in the market. From this the research concludes that the availability 

of market information vastly deciding the choice of the marketing channels. Hence it is important to 

both government and non government sectors to take effort in disseminating the market information to 

the red onion farmers is expected to increase the farmers share via choosing a most profitable channel. 

Moreover if any of the non profiteering organization could come forward to perform the transport 

function on behalf of the farmers is expected to increase the farmers share tremendously. Organizing 

the red onion farmer societies or organizations is expected to increase the bargaining power 

collectively on behalf of the individual farmers. This will intern expect to help the farmers to choose 

the most suitable and profitable marketing channel. 

REFERENCE 

Boger, S. (2001), Quality and contractual choice: a transaction cost approach to the Polish hog market, 

European Review of Agricultural Economics 28: 241-261. 

Gow, H.R., & Swinnen, J.F.M. (1998), Up- and down-stream restructuring, foreign direct investment 

and hold-ups in agricultural transition, European Review of Agricultural Economics 24: 331-350. 

King, R. P. (1992), Management and Financing of Vertical Coordination: An Overview, American 

Journal of Agricultural Economics, 74 (5) (December): 1217-1218. 

Den Ouden, M., Dijkhuizen, A.A., Huirne, R.B.M., & Zuurbier, P.J. P. (1996), Vertical 

Cooperation in Agricultural Production-Marketing Chains, with Special Reference 

to Product Differentiation in Pork. Agribusiness, 12 (3) 277-290. 

Peterson, H.C. & Wysocki, A. (1997), The Vertical Coordination Continuum and the 

Determinants of Firm-Level Coordination Strategy, Michigan State University Staff Paper No. 97-64, 

1997. 

Poole, N.D., Del Campo Gomis, F.J., Igual, J.F.J. and Giménez, F.V. (1998), Formal 

contracts in fresh produce markets. Food Policy, 23, 131-142. 

Weleschuk, I.T. and Kerr, W.A. (1995), The Sharing of Risks and Returns in Prairie 

Special Crops: A Transaction Cost Approach, Canadian Journal of Agricultural 

Economics 43: 237-258. 

Ministry of Agriculture, Animal Industry and Fisheries (MAAIF) and Ministry of Finance, 

Planning and Economic Development (MFEPD), 2000, Plan for Modernization of 

Agriculture: Eradicating Poverty in Uganda. Final draft, April 2000, Government of the 

Republic of Uganda, 32-40. 


Rural Infrastructural Development through Rural Roads: with special reference to 

Pradhan Mantri Gram Sadak Yojana (PMGSY) 

R. Sampath, 

Assistant Professor, Economics Wing, DDE, Annamalai University, Annamalai Nagar. 

D. Murugan 

Assistant Professor, Department of Economics, Annamalai University, Annamalai Nagar. 

1. Introduction and Background 

Rural roads are the basic infrastructure requirement and play a vital role in socio-economic 

upliftment of rural community. They contribute significantly in rural development by creating 

opportunities to access goods and services located in nearby villages or major town/market centers. 

Provision of rural roads increases mobility of men and materials thus facilitating economic growth. 

These, in turn, assist in reducing poverty and leads over all social development. Several studies have 

already established that there exist a strong relationship between rural roads and socio-economic 

development. Hine (1982) reviewed several impact studies conducted in about 16 countries. Most of 

these case studies considered are optimistic about the relationship between road investment and 

agricultural development. In India, even during the ’80s, studies on socio-economic aspects of rural 

roads were conducted in selected nine districts under the aegis of Indian Roads Congress. The 

objective of these studies was to find out and quantify the possible impact of roads on socio-economic 

development in rural areas. CRRI (1987) carried out the compilation and analysis of the data for the 

nine districts, to quantify the aggregate impacts. 

Some of the findings are: (a) increase in agricultural production due to road facility, (b) 

increase in fertilizer consumption,(c) increase in non-agricultural activities, and (d) better utilization of 

existing facilities like, school, health, banks and post offices. Similarly, a socio-economic survey 

conducted in a remote area in India by CRRI in 1989, showed that the villages located on the main 

road are comparatively well developed than those away from the road. The rural transport study 

carried out (NCAER and IIMB,1989) for two different periods in 1979 and 1989 revealed that after the 

development of rural roads, there was a change in transport modes in rural areas and also an increase 

in economic activities. 

The economic analysis of rural roads carried out for selected rural road projects original i.e. 

unpaved roads. The economic analysis carried out for rural access project (World Bank, 1999) in 

Bhutan has shown significant transport cost saving. The mule transport costs are as high as 6 times of 

truck transport cost. The net agricultural benefits 

, educational benefits and health benefits were calculated and added in the benefit the Agricultural 

Development Programme (ADP) in Rajasthan. The benefits are estimated by taking net incremental 

agricultural production value, net agricultural transport cost savings and non-agricultural vehicle 

operating cost savings. The overall average IRR for the selected 21 road projects was found to be 

15.64 per cent. In addition, this study results also showed positive relationship between the road 

improvement interventions with socio-economic Parameters. 

In rural infrastructural development rural roads connectivity is one of the key components. It 

promotes access to economic and social services and thereby generating increased agricultural income 

and productive employment opportunities in rural India as well as ensures sustainable poverty 

reduction. The Ministry of Rural Development (MORD) is involved with the task of reducing poverty 

and bringing about rapid sustainable development and socio-economic transformation in rural India. 

To enable the process of developing rural India, various schemes are being implemented across the 

districts of the country. As a part of this, Pradhan Mantri Gram Sadak Yojana (PMGSY) was 

launched to increase rural road connectivity with a view to promote greater access to economic and 

social services and thereby, generating increased economic and social opportunities in rural India. 


It may be seen that alleviation of rural poverty has been a major objective of the Government's 

Social Sector Programme and this is being emphasized in successive Five Year Plans. In this context, 

Ministry of Rural Development, launched various programmes for bringing about rapid and 

sustainable development as well as socio-economic transformation in rural India. 

Further, transformation of rural India in real senses would also entail provision of basic 

infrastructural facilities to rural poor like, transport, electricity road/rail network etc. Despite all these 

efforts over the years at the State and Central levels through different Programmes, about 40% of the 

habitations in the country are still not connected by all weather roads. It is well known that even where 

connectivity has been provided, the roads constructed are of such quality that they cannot be 

categorized as all weather roads. In view of above, the Ministry of Rural Development (MoRD) has 

launched Pradhan Mantri Gram Sadak Yojana (PMGSY), a 100 % Centrally Sponsored Scheme, on 

25th December, 2000.for providing connectivity to all unconnected habitations in rural areas through 

all-weather roads. The main objective of PMGSY is to connect all unconnected habitations in the rural 

areas through construction of all-weather roads with necessary culverts and cross-drainage structures, 

in a manner that will provide the most economic and efficient connectivity thus promoting access to 

economic and social infrastructure as well as assist the habitants who are below poverty line. 

It may be brought out that Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched on 25th 

December, 2000 with the objective of providing All-weather roads (with necessary culverts and crossdrainage 

structures, which is operable throughout the year), to the eligible unconnected habitations in 

the rural areas. In addition, the Programme envisages connecting all habitations having population of 

500 persons and above (as per 2001 census) in plain areas and in respect of the hill states such as 

North-East, Sikkim, Himachal Pradesh, Jammu & Kashmir and Uttarakhand, Desert areas which are 

identified under the Desert Development Programme in the Tribal areas and in the Selected Tribal and 

Backward Districts under Integrated Action Plan (IAP) as identified by Ministry of Home Affairs / 

Planning Commission, having population of 250 persons and above as per 2001 census. In addition, it 

also has an element of up gradation, though it is not central to the Programme. 

The rural connectivity is essential for the overall development of the rural areas. There is a close 

link between rural connectivity and socio-economic aspects, such as, economic growth, employment, 

education and health care. In addition, habitations, which are unconnected, do not have availability and 

accessibility to several facilities and socio-economic services. There are a number of habitations in the 

country, which are still not connected by All-weather roads which or are connected with poor quality 

roads due to poor construction or maintenance. They cannot be categorized as All-weather roads and 

the rationale for launching PMGSY scheme is thus, to redress this situation so that certain 

opportunities and services viz., employment, education, health, transport, marketing facilities etc., 

which are not available in the unconnected habitation, become available to the residents, it is seen that 

in addition to Pradham Mantri Gram Sadak Yojana, the President of India, in his address to Parliament 

on 25th February, 2005, announced a major business plan for rebuilding rural India called Bharat 

Nirman. The Finance Minister, in his Budget Speech of 28th February, 2005, identified Rural Roads as 

one of the six components of Bharat Nirman and has set a goal to provide connectivity to all 

habitations with a population of 1000 persons and above (500 persons and above in the case of hilly or 

tribal areas) with an all-weather road. A total of 59564 habitations are proposed to be provided new 

connectivity under Bharat Nirman. This would involve construction of 1, 46,185 Kms of rural roads. 

In addition to new connectivity, Bharat Nirman envisages up gradation/renewal of 1,94,130 Kms of 

existing rural roads. This comprises 60% up gradation from Government of India and 40% renewal by 

the State Governments. According to latest figures made available by the State Governments under a 

survey to identify Core Network as part of the PMGSY programme, about 1.67 lakh Unconnected 

Habitations are eligible for coverage under the programme. This involves construction of about 3.71 

lakh km. of roads for New Connectivity and 3.68 lakh km. under up gradation. In this context, the 

present study makes an attempt to analyse the role of PMGSY and Bharat Nirman in the development 

of rural road development in India. 


II. Objectives 

i. to examine the role of PMGSY in developing rural connectivity. 

ii. to bring out the performance of Bharat Nirman Bhawan in rural road development. 

III. Results and Discussions 

This section brings out the physical achievement and the targets under PMGSY. Further, it 

brings out the target and achievements in rural connectivity under PMSGY for six years from 2006 to 

2012. 

Year 

Table -1 

Pradhan Mantri Gram Sadak Yojana(PMGSY)- Physical progress 

No.of 

habitations 

to be 

connected 

Target Achievement % of achievement 

Target- No. of Achievement Habitations 

Length of Habitations Length of connected 

Road Works Connected Road Works 

to be 

completed (in 

completed(in 

kms.) 

Kms.) 

Works 

completed 

2005-06 7895 17454 8202 22756 103.89 130.37 

2006-07 13857 45395 10892 30710 78.60 67.65 

2007-08 14015 55020 11336 41231 80.88 74.93 

2008-09 18100 64440 14454 52405 79.85 81.32 

2009-10 13000 55000 7896 60117 60.74 109.30 

2010-11 4000 34090 7584 45109 189.6 132.32 

2011-12 4000 33000 4142 21750 103.55 -65.90 

Source: Ministry of Rural Development, Annual Report – 2011-12. 

The above table exhibits the number of habitations to the connected and target of length of road 

works to the completed in KMS. Similarly, it shows no of habitations connected in kms and 

achievements in length of kms completed. 

It is observed from the results that the number of habitations connected exceeded the number of 

habitations to be connected from 7895 in 2005-06 to 8202. As against – this in the subsequent period 

from 2006-2007 to 2009-2010 the number habitation connected has shown a declining trend. It shows 

that there had been a tardyness in the implementation of number of habitations connected. In contract, 

in the recent years the trend in the number of habitation has shown a noticeable increase in it. Further, 

it shows that the number of habitations connected has been increasing under PMGSY. The similar 

trend has been observed from the results that the length of road works was high in the initial period in 

the year 2005-06 and it is also noticed to be above the targeted level from 17454kms to 22756 kms. 

Further, in the subsequent years from 2006 to 2009. On the contrary, there has been an encouraging 

trend in the length of kms of road connectivity from 2010 to 2012. By and large, it could be inferred 

from the results that the progress under road connectivity interms kms has shown an encouraging trend 

in the recent years. 


Table - 2 

Progress under Bharat Nirman – Length of Roads 

(Number) 

New Connectivity 

Up-gradation(km) 

S.No 

Achievement Target Achievement during 2011 - 12 

Target 

States 

During (2011- Upgradation 

(2011-12) 

Renewal Total 

2011-12 12) 

1 2 3 4 5 6 7 8 

1 Andhra pradesh 300 169.49 720 87.37 0.00 87.37 

2 

Arunachal 

pradesh 

166 8.69 0 0.00 0.00 0.00 

3 Assam 250 566.31 24 3.10 0.00 3.10 

4 Bihar 3200 883.21 2000 44.62 0.00 44.62 

5 Chhattisgarth 1000 110.87 500 88.38 0.00 88.38 

6 Goa* 0 0.00 0 0.00 0.00 0.00 

7 Gujarat 462 223.27 198 119.77 284.78 404.55 

8 Haryana 0 0.00 0 0.00 33.65 33.65 

9 

Himachal 

pradesh 

500 7.30 250 101.08 0.00 101.08 

10 Jammu&Kashmir 500 110.35 250 48.48 0.00 48.48 

11 Jharkhand 1000 356.09 0 0.00 0.00 0.00 

12 Karnataka 0 0.00 0 0.00 0.00 0.00 

13 Kerala 25 9.05 250 80.85 53.96 134.81 

14 Madhya pradesh 1200 321.75 2000 194.00 0.00 194.00 

15 Maharastra 400 38.08 0 0.00 55.00 55.00 

16 Manipur 150 72.65 0 8.71 0.00 8.71 

17 Meghalaya 100 10.07 0 0.00 0.00 0.00 

18 Mizoram 100 39.86 0 0.00 0.00 0.00 

19 Nagaland 20 6.00 150 2.00 15.00 17.00 

20 Odisha 900 556.17 1200 564.28 210.74 775.02 

21 Punjab 0 0.00 0 

0.00 

0.00 0.00 

22 Rajasthan 250 2.90 0 0.00 280.00 280.00 

23 Sikkim 154 1.00 50 0.00 0.00 0.00 

24 Tamilnadu 20 8.00 960 414.40 0.00 414.40 

25 Tripura 100 13.95 215 0.00 29.88 29.88 

26 Uttar pradesh 220 9.99 780 206.28 0.00 206.28 

27 Uttarakhand 333 140.64 0 0.00 0.00 0.00 

28 West Bengal 650 191.48 203 16.32 0.00 16.32 

Total 12000.00 3857.17 9750 1979.64 963.01 2942.65 

Table-2 shows road connectivity and upgradation status across the states of India. In regard to 

the new connectivity of roads among the states, it may be observed that among the states Assam, 

Bihar, Chattishgarh, Jammu and Kashmir and Madhya prades have should an increasing trend in road 

connectivity interms of kms. Further, in the rest of the states the progress is slow. It shows that the 

rural connectivity in the rest of the states showed be given importance and that will lead to 

development in the rural road infrastructural development. In the upgraduation of rural roads, it may 

be observed that Andra Pradesh, Gujarat, Kerala, Himachal Pradesh, Madhya Pradesh, Rajasthan, 

Uttrapradesh and Tamil Nadu have shown a progressive trend as compared to the rest of the states in 

Indai. It implies the fact that in new connectivity of roads and up gradation, there is progress among 


the states but at the same time there should be proper monitoring and more funds should be allocated 

to the states like Goa, Haryana, Himmachal Pradesh, Jarkand, Manipur, Magalaya, Mizoram and other 

states which and lagging behind in new connectivity of roads and upgradation. 

Table-3 

Projects Sanctioned during 2011-12 under PMGSY (till Dec – 2011 

S.No State Value 

Number of Length in km 

Rs. Crore roads/Bridges 

1 Bihar-RWD 915 647 1899 

2 Chhattisgarh 100 101 326 

3 Gujarat 54 46 137 

4 Himachal Pradesh 156 112 601 

5 Jharkhand 635 531 roads+49 2006 

bridges 

6 Madhya pradesh 1043 743 3105 

7 Meghalaya 95 18 106 

8 Nagaland 356 56 955 

9 Odisha 1467 886 3550 

10 Punjab 235 36 499 

11 Rajasthan 886 1076 3603 

12 Sikkim 206 80 roads + 15 352 

bridges 

13 Tripura 348 69 roads + 40 370 

bridges 

14 Uttarpradesh 425 555 957 

15 Uttarkhand 72 12 roads +24 bridges 98 

16 West Bengal 612 247 1269 

Total 7604 5343 19833 

Table – 3 exhibits the funds allocated in crores for construction of roads and bridges. It shows 

that the state Odisha ranks first in getting more funds allocated at Rs.1467 crores followed Madhya 

Pradesh, Bihar, Rajasthan, West Bengal and other states. The similar trend has been observed in the 

number of bridges constructed in the 2011-12. In the case of road in kms the state Rajasthan occupied 

the first place followed by Punjab, Madhya Pradesh, Jarkhand, Bihar and other states. In this context, it 

may be inferred from the results that the PMGSY has been in progress in extending rural road 

connectivity as well as construction of bridges across the major states of India. At the same time, there 

should be more focus on the states like Gujarat, Tripura and Sikkim and other states where the rural 

road infrastructural development is tardy. 

IV. Conclusion 

In the light of the above results and discussion, the following conclusion could be drawn. 

i. It may be inferred that in the new connectivity of road among the states, Assam, Bihar, 

Chattish Garh, Jammu and Kashmir and Madhya Pradesh have recorded a progressive trend 

under PMGSY. As a result, the over all productive economic activities have increased. 

ii. In the case of road construction in kms, the states Rajasthan, Punjab, Madhya Pradesh, 

Jarkhand and Bihar have recorded a remarkable performance in rural road infrastructural 

development. 

iii. Regarding funds allocation fro construction of roads and bridges, odisha has shown a 

commendable progress and it is closely followed by Madhya Pradesh Bihar Rajasthan and 

Bengal 

iv. By and Large, the rural road infrastructural development has been progressive in the rural 

areas of India states and its overall progress and performance is highly encouraging. 


References 

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Framework in India”, In Indian Roads Congress, Technical Paper No.528. New Delhi: IRC. 

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Habitat Centre, 10 September 2012, PPT available with ISST 

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Gram Sadak Yojana (PMGSY)”, Policy Brief for UN Women at the National Consultation, 

Mumbai (April 2012), Centre for Gender Economics, Department of Economics, University of 

Mumbai, and United Nations Women 

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available with ISST 

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Political Weekly, Vol 47 no 17, pp 42-49 

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3 Issue 8, February 2011, pp 1-6 

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Sanitation”, Supplement to IDS Working Paper 257, IDS 

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Agency, Ministry of Rural Development 

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Economic and Political Weekly, Vol. 40, No. 16 (Apr. 16-22, 2005), pp. 1631-1639 

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the 12th Five Year Plan, available at 

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Issues”, In Transport and Communications Bulletin for Asia and the Pacific, No. 81 Planning 

for accessibility and rural roads, UN ESCAP, Thailand, 2011 

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http://pmgsy.nic.in/downloads/WorldBank/ESMF1.PDF 


Financial Performance analysis of GOHE Co-Operatives Savings and Credit 

Union in Bure Woreda, Ethiopia 

Dr. Sambasivam Yuvaraj, Associate Professor, Department of Management, 

College of Business and Economics, Debre Markos University, Debre Markos, Ethiopia 

Mr. Biruk Ayalew Wondem, Lecturer, Department of Accounting and Finance, 

College of Business and Economics, Debre Markos University, Debre Markos, Ethiopia 

Abstract 

This study was conducted in Gohe Cooperatives Saving and Credit Union in Bure Woreda to analyze 

the financial performance by using the data set disclosed in four years annual audit reports of the 

financial statements and questionnaire Survey that was carried out on 132 general assembly member 

representatives to collect information on the saving mobilization strategies efficiencies and loan 

services. Participatory discussion with management boards; and in depth interview with control 

committee, manager, and accountant were carried out on saving mobilization and loan services of the 

union on how they are mobilizing members saving and delivering quality credit to members. This 

paper examines the financial performance on the financial health, sign of growth trends, efficiency of 

saving mobilization and the loan services strategies. The health check up and sign of growth trend 

conducted in the framework of most common financial ratios of PEARLS on the basis of available 

financial data concludes that ‘Gohe’ has unhealthy position on liquidity; inadequacy of capital; though 

healthy assets quality in delinquency non-earning assets are greater than the standard set by the 

WOCCU model. The efficiencies of saving mobilization & loan service, however, the union able to get 

good members attitude and perception on saving security, return on members saving, professional 

services, credit appraisal technique and loan service the union faces the problem of loan able funds, 

absence of technical assistance of professionals, and sometimes members were not able to pay loan 

repayment on the due date, limitation in providing diversified services. 

Key words: Asset Quality, Capital Adequacy, Financial Structure, Liquidity, Loan, Saving, sign of 

Growth. 

1. INTRODUCTION 

Cooperation has been the very basis of human civilization. The inter-dependence and the mutual help 

among human beings have been the basis of social. It is the lesson of universal social history that man 

cannot live by him-self and for him-self alone. The spirit of association is essential to human progress. 

Since the beginning of human society individuals have found advantage in working together and 

helping one another; first in foraging, then in hunting later in agriculture and still in manufacture 

(Krishnaswami and Kulandiswamy, 2000). Cooperative is a user-owned and user controlled business 

that distributes benefits on the basis of use. More specifically, it is distinguished from other business 

three concepts or principles: first, the user owner principle. Persons who own and finance the 

cooperative are those that use it. Second the user-control principle. Control of the cooperative business 

is by those who use the cooperative. Third, the user benefits principle. Benefits of the cooperative are 

distributed to its user on the basis of their use (Cobia, 1998). 

The current government of Ethiopia has put agriculture at the heart of its policies. There is a particular 

emphasis on promoting adoption of fertilizer, improved seeds and the efficiency of input marketing 

and distribution. In order for cooperatives to meet their stated objectives they should have properties 

and funds. The sources of the funds are different. That is used to acquire assets and also to run the 

activities of the societies. Unless the properties and funds of societies are managed according to the 


existing cooperative legislation, regulation, and its by-law; it is difficult for a cooperative to win the 

confidence and the support of its members (Oromya farmers development bureau, 1998). Due to the 

limited outreach of the commercial banking system and NGO-supported credit schemes, and the 

uncertainty surrounding the future of the input supply loan programme have galvanized the 

Government to establish a legal and policy framework conducive to the growth of Micro Finance 

Institutions (MFIs) and Rural Savings and Credit Cooperative Societies (RUSACCOs) in rural 

Ethiopia. Since Proclamation 40/1996, 19 MFIs have been licensed by the National Bank of Ethiopia 

(NBE). Over the last four years, the microfinance industry has recorded remarkable growth, with a 

network of about 500 branches and sub-branches, an outstanding loan portfolio of about USD 33.5 

million, net savings of about USD 16 million, and expanded outreach to nearly 500 000 poor rural 

households. Over 40% of the industry’s clients are women. Overall the financial performance of the 

sector has been good, with operational viability averaging 135% over the past three years. Despite 

rapid growth, however, the overall outreach as of 31 December 2000 represented less than 5% of rural 

households. Ethiopians have a strong tradition of saving, which is evident from the widespread 

existence of informal rotating savings and credit organizations such as iqubs and iddirs. There is also a 

promising history in the country of successful savings and credit cooperatives in urban areas. Recent 

government policy and legal framework augur well for the development of politically independent 

RUSACCOs, owned and managed by their members. With agriculture remaining the backbone of 

Ethiopia’s economy, the provision of financial services is expected to have a substantial impact in 

activating the largely under-utilized productive potential in the rural areas. Financial analysis of a 

typical cross-section of investments in on-, off- and non-farm enterprises shows significantly high 

returns on investments in crop production, draught animal power, livestock fattening, bee-keeping, 

tailoring and petty trading (IFAD, 2001). 

Following this proper financial management is noteworthy for the success of the financial service to 

the poor. And the starting point for sound financial management is the timely and accurate production 

of financial reports, which requires punctual and accurate financial records. This begins with 

accounting: the process of recording financial transactions, grouping them together by category and 

summarizing them for a certain period or at a certain point in time. The summarized information of all 

these transactions is placed in standardized financial statements. Frequently, RUSACCOs must 

produce financial statements based on a format required by lenders, donors, local regulators, or 

network organizations. Such statements may satisfy reporting requirements of one or more of those 

groups, but the required format may not be helpful as a management tool. Despite efforts to create 

standard accounting practices or terminology, such as the International Financial Reporting Standards 

(IFRS) and the Financial Definitions Guidelines, few attempts to harmonize the content and 

presentation of financial statements have been made. Financial management presents financial 

management tools for analysis of the microfinance institutions and or (SACCOs) financial health. The 

financial statements created in the accounting part provide basic information on which financial 

analysis and management is based in finance management. International best practice for microfinance 

suggests that good financial system is the basis for successful and sustainable operations. Quality 

financial analysis depends on the quality of recorded information to be analyzed. This information 

comes largely from the accounting system, so accounting information is fundamental for financial 

analysis to gauge the financial health of SACCOs (AEMFI, 2008). 

1.2 STATEMENT OF THE PROBLEM 

Traditionally, the role of finance was considered as passive in the development process in general and 

rural development in particular. However, it was recently recognized that rural finance is a strong tool 

to reduce poverty and contribute towards rural development. Despite the importance there are limited 

financial institutions delivering financial services in rural Ethiopia. As a result, the bulk of finance is 

coming from the informal financial service providers. Though, the informal sector is the major rural 

finance providers, the financing is only meant to address short term demand for finance such as 


consumption during cash shortage and for other emergencies which neglects productive investment 

(Kalifa Abdula, 2006). Following the above problems rural savings and credit cooperative unions 

have: Inadequate capital base, Restrictive capital structure, Inadequate mix of financial products, Poor 

investment decision making (without sufficient research on possible success and impacts on 

members),Lack of observance of basic principles of banking and financial management, and 

RUSACCOs have also threats or challenges because of liberalization the cost of borrowing has 

become to prohibitive because of high borrowing, access to credit by RUSACCOs to other financial 

institution has become very limited and cost of living has shot up astronomically hence the members of 

the RUSACCOs cannot live comfortably without from their RUSACCOs this has created a high 

demand for the loan able funds whose supply is constant and since RUSACCOs easily meet this 

demand for loans members loyalty is at cross roads (Associates in Integrated Development (AFRICA) 

Limited, 2007). 

According to Berhane Kidanu (2008), RUSACCOs are operated and managed by elected committee 

members. Most committee members are illiterate, even who attend elementary school and high school 

lack the capacity to operate and manage efficiently. They lack basic knowledge and skill to perform 

the day- to day activities of SACCOs. Hence, it is difficult to assume an efficient performance, which 

meets the required standard in such condition. There is poor recording and book keeping. Besides, a 

lack of savings facilities creates problems at three levels: (i) the level of the individual; (ii) the level of 

the financial institution; and (iii) the level of the national economy. At the level of the individual, the 

lack of appropriate institutional savings facilities forces the individual to rely upon in-kind savings 

such as savings in the form of gold, animals or raw materials, or upon informal financial 

intermediaries, such as Rotating Savings and Credit Associations (ROSCAs) or money-keepers. These 

informal savings options, however, do not offer a combination of security of funds, ready access or 

liquidity, positive real return and convenience in order to meet the various needs of the particular 

saver. At the institutional level, RUSACCOs have micro product service windows on both sides of the 

balance sheet, serving micro and small savers and borrowers with an average savings balance or loan 

amount below the average per capita annual income in the respective countries. Yet the number of 

RUSACCOs that exclusively offer credit is much larger than RUSACCOs with both savings and credit 

facilities. Empirical studies have demonstrated that the performance records of credit-only 

RUSACCOs in outreach and sustainability have not been widely successful (Schmidt/Zeitinger, 1996; 

Christen et al. 1995, Yaron 1992). On the other hand, those RUSACCOs lacking effective savings 

mobilization strategies are unable to increase their outreach to a significant number of clients. In 

addition, few RUSACCOs that do not mobilize savings have attained full financial self-sufficiency, 

independently covering their expenses for operations, loan loss, cost of funds and inflation with their 

revenues. Throughout the world, RUSACCOs have often experienced that exclusively offering credit 

services can lead to undue dependency on external sources of financing. This dependency can cause 

the RUSACCOS to concentrate on the demands of the donors rather than on the demands of potential 

clients, especially potential savings clients. At the level of the national economy, high levels of savings 

increase the amount of national resources and decrease the need to resort to foreign indebtedness in 

order to cover domestic investment and consumption demand. Numerous countries with low internal 

savings rates must borrow from abroad, which results in a debt service burden. This clearly underlines 

the importance of savings mobilization to sustain economic growth with national financial resources 

(Elser, et.al 1999).The poor need sustainable access to financial services to be out of poverty. So 

before dealing further on the issue of ‘sustainability’, it would be prudent to investigate first the key 

issues that limit the expansion of the service. Why is there still low financial intermediation in 

Ethiopia, particularly in rural areas? 


1.3 THE RESEARCH QUESTIONS 

1. What is the financial health of the union in performing the financial activities in line with the 

WOCCU proposed standards? 

2. What is the sign of growth trend of the union in relation to its financial performance in profit, 

members share capital, institutional capital, total assets, loans, savings, and membership? 

3. How is the union efficient in its saving mobilization strategies? 

4. How is the union effective on its loan service and credit administration? 

1.4 OBJECTIVES OF THE STUDY 

The general objective of the study is to analyze the financial performance of Gohe cooperatives saving 

and credit union. 

The specific objectives of the study are: 

1. To check up the financial health of the union in performing the financial activities. 

2. To determine the sign of growth trends of the union in terms of profit, members share 

capital, institutional capital, total assets, loans, savings, and membership. 

3. To gauge the efficiency of saving mobilization strategies of the union. 

4. To examine the value of loan service of the union. 

1.5 RESEARCH METHODOLOGY 

This study was conducted in ‘Gohe’ saving and credit union found in Bure ‘Woreda’ district. Data for 

the study were collected from primary and secondary sources. The Primary data were collected 

through survey, in depth interview and FGD. The primary data were analyzed in simple descriptive 

stastics from and qualitatively. All general assembly members of the union were selected from each 

primary level cooperatives and total of 132 member respondents were taken as sample size from the 

union to get the required information on saving mobilization and loan services of the union to conduct 

the survey. The secondary data were collected from audited financial statements of four years and 

portfolio reports which were analyzed by using WOCC model with references to PEARLS and to 

measure the financial health of the union by ratio analysis. The WOCCUs proposed standards of 

excellence were used as measure of excellence and the software PEARLS monitoring system were 

used for analyzing based on the data appropriateness. 

1.6. RESULTS AND DISCUSSION 

Regular health check-up has a supreme to maintain the confidence of members in financial system and 

activities of their union; to protect the interest of members, depositors, lenders, and any other 

stakeholders in the union; and to detect the adverse effect of various financial risks on the financial 

performance of the union. Due to the fact that, Health of an individual Financial institution is a 

function of multiple factors such as liquidity position, earnings and cost, solvency, capital adequacy, 

asset quality, financial structure and growth trends of the union results on these key indicators are 

presented in tabular form to check up the financial healthiness of Gohe cooperatives saving and credit 

union in the following sections one by one and WOCCUs model was used to interpret and assess the 

financial performance of the union in a meaningful manner. 


Table.1. Liquidity of Gohe Cooperatives Saving and Credit Union (Years in E.C) 

Indicators of Liquidity 

Proposed 1998 1999 2000 2001 

standard 

L 1 :Loan Outstanding /Total Savings 60%-70% 66.5% 215% 64% 298% 

deposits 

L 2 :Liquidity Reserve/Saving Deposits 10% 0.00% 0.00% 0.00% 0.00% 

L 3 :Non Earning Liquid Assets / Total Max.5% 20.41% 0.68% 78.03% 2.96% 

Assets 

L 4 :Current Assets / Current Liabilities 1:1 2:1 1.7:1 1.9:1 1.4:1 

Source: Worked Out From Audit Reports of the Union 

The result loan to saving (L 1 ) of Gohe cooperatives saving and credit union in the year of 1998 and 

2000 (Table 1), indicates the union was in the position to the proposed standard which reflects the 

union was funding loans to members from the balance sheet accounts i.e. from members saving 

deposits, where as in the year 1999 and 2001 the union was not able to fund members loan from 

members savings deposits and shares which forced the union to go for external credit and the union 

was not in a position to meet the required standard showing lack of sustainable financial services to 

finance loan from members savings deposits. The liquid reserve requirement (L 2 ) is out of the 

WOCCUs proposed standard. The WOCCUs model proposed to maintain saving deposits as liquid 

assets a minimum of 10% after paying all short-term obligations (30 days and under) and Gohe 

cooperatives saving and credit union did not maintain such liquidity reserve in any of the study periods 

(Table 1). This suggests Gohe cooperatives saving and credit union couldn’t meet cash needed for 

withdrawals, however, this reflects also the union able to avoid the opportunity cost lost on idle liquid 

assets due to the fact that funds in checking accounts and simple savings accounts earn negligible 

returns, in comparison with other investment alternatives. 

Investment in non-earning liquid assets increases the liquidity position of a cooperative but it does not 

earn anything. So, investment in such assets should be minimal. As we can see here in the result Table 

1, non-earning liquid assets to total assets (L 3 ) indicates, in the year 1999 and 2001 Gohe cooperatives 

saving and credit union was in line with the proposed standards or WOCCUs model which suggests 

the union have no any problem of liquidity and problem of idle funds where as in the study years of 

1998 and 2000 the union could not perform in line with the proposed standards though, the liquidity 

position is good there was too much investment in non-earning assets this indicated unhealthy 

functioning on earnings in these periods. The percentage of non-earnings assets to total assets of Gohe 

cooperatives saving and credit union in the year 1998 and 2000 was far beyond the proposed standards 

which increase the liquidity position of the union that is in the union cash has occupied the 

considerable amount of non-earning liquid assets in the year 2000 and in the year 1998 checking 

account (current account) which is another non-earning liquid assets occupied the larger portion. The 

non-earning assets yield nothing and have their own impact on L 3 as well as the earnings or 

profitability of the union. The considerable amount of such nonearning liquid assets threats the 

liquidity position of Gohe cooperatives saving and credit union further. L 4 measures the adequacy of 

the liquid current assets to satisfy the current obligations request. L 4 is showing during the study period 

the union was able to meet its current obligation which goes in line with the proposed standard but 

there is also too much investment on current assets of the union. Overall, liquidity position is showing 

unhealthy condition according to WOCCU proposed standards; Gohe cooperatives saving and credit 

union may fail to satisfy the deposit withdrawal request because the union has no any liquid reserve 

funds to come across such request. 


Table 2: Earnings and Cost Allocation of Gohe Cooperatives Saving and Credit Union (Years in 

E.C) 

Indicators of Earnings and Costs Proposed 1998 1999 2000 2001 

Allocation 

standard 

E 1 :Loan Yield >=interest rate 13.38% 16.93% 20.28% 7.65% 

E 2 :Return On Assets >interest rate .99% 4.06% 4.47% 2.89% 

E 3 :Total Operating Expenses/Average 5% 3.97% 3.27% 1.92% 1.93% 

total Assets 

E 4 :Cost Of Funds 40%-50% 9% 39% 37% 20% 

E 5 :Staff Cost 15%-20% 51% 14% 10% 23% 

E 6 :Operational Costs 8%-12% 70% 26% 18% 32% 

Source: Worked Out From Audit Reports of the Union 

As stated in the literature, indicators of this component are categorized into two categories: indicators 

relating to rates of return or earnings and indicators of costs or allocation of expenses. Firstly, earnings 

here the loan portfolio are the most important and profitable asset of the savings and Credit 

cooperatives. Hence Interest on loans is the major income for the cooperative. Table 2; E1 measures 

the yield on the loan portfolio. For the purpose of calculation of E 1 , interest income is inclusive to 

commission, fee, and penalty charges. According to the WOCCUs proposed standard, E 1 should be 

greater than the entrepreneurial rate (interest rate charged on loan). Entrepreneurial return covers 

interest expenses, cost of operation and administration on financial activities. In addition, it should 

earn enough to contribute to capital levels which maintain institutional capital at least 10 percent of 

total assets. Though E 1 is seemed quite high during the study periods, yet loan yield is not enough to 

cover the entrepreneurial return particularly in the year 2001 which is very low. This entails the union 

was not able to generate sufficient profit to maintain a strong capital position in the study year 2001 

which impairs its financial health. Saving and Credit unions are not-for-profit, member-owned 

financial institutions. Saving and Credit unions need to earn sufficient profits so that they can build up 

institutional capital to the minimum 10% institutional capital to total assets ratio. Here Gohe 

cooperatives saving and credit union has low levels of institutional capital (F8); therefore, although 

they are showing positive unadjusted Return on Assets (E2), Gohe cooperatives saving and credit 

union couldn’t not generating sufficient profit to maintain a strong capital position. This fluctuating 

unadjusted Return on Assets (E2) reflects the inconsistency in the earning and institutional capital 

building capacity of Gohe cooperatives saving and credit union during the study years. 

Secondly, allocation of expenses: total Operating Expenses to Average total assets- the primary ratio 

determining efficiency (E 3 ) indicates that management is increasing its efficiency in controlling the 

operating expenses below the proposed standard for the whole study years; Cost of funds (E 4 ) 

including interest paid on savings and deposits, plus interest paid on loans. Allocation of financial 

income for cost of funds is lower than staff costs and operational costs in the first year of the study 

period but in the rest of the study period Gohe cooperatives saving and credit union able to allocate 

more income on cost of funds which gives profit for the union though this was the case in none of the 

study years the union able to meet the proposed standards this reveals Gohe cooperatives saving and 

credit union provides noncompetitive interest rates on members savings and deposits which links to 

savings deposit growth trends of the union; staff cost allocation in the first and last year of the study 

period is beyond the standard which implies the union allocates more of its income on salaries and 

benefits; and operational costs never meets the standard set in any of the study period this concludes 

that Gohe cooperatives saving and credit union is not managing the expenses as per the proposed 

standard of excellence. 


Table 3, Solvency of Gohe Cooperatives Saving and Credit Union (Years in E.C) 

Indicators of Solvency 

Proposed 1998 1999 2000 2001 

standard 

S 1 :Loan Loss Allowance/Delinquency 100% 100% 100% 100% 100% 

>12 Months 

S 2 :Net Allowance For Loan Losses / 35% 100% 100% 100% 100% 

Delinquency Of 1-12 Months 

S 3 :Solvency >=100% 110.5% 116.71% 117.78% 118.64% 

S 4 :External debt / deposits RJEBS: Volume: 02, Number: 06, April-2013 Page 63

have an adequate amount of capital to protect the interest of the members, depositors, creditors, and the 

stakeholders that ensures solvency of the union also in the study periods. Reserve to loan outstanding 

(C 2 ) in the study periods shows Gohe cooperatives saving and credit union has no any loan loss reserve 

in the study years. The reason for this unhealthy financial performance on capital adequacy is the 

union could not maintain adequate reserves from their earnings to build up their capital base or unable 

to get adequate return from their investment, may be paying more dividend to the members instead of 

maintaining as reserve, and not able to maintain reserves for the loan outstanding. 

Table 5, Assets Quality of Gohe Cooperatives Saving and Credit Union (Years in E.C) 

Indicators of Asset Quality 

Proposed 1998 1999 2000 2001 

standard 

A 1 :Total Delinquency/Total Loan

financial cooperative. In the case of Gohe cooperatives saving and credit union, this ratio is far below 

this benchmark of the WOCCU proposed standard during the study years. This reflects also the 

existence of low level of institutional capital of Gohe cooperatives saving and credit union during the 

study years; and delinquent loans to reserves (A 4 ) measure the adequacy of reserves to cover the 

delinquent loans shows the union doing its financial activities in delinquency control in line with 

WOCCUs proposed standard as stated above in A 1 and as we can see Table 5, the union is following 

stringent credit policy and collection procedure has no any problem with delinquent loan over the 

whole study periods. At the end, Gohe cooperatives saving and credit union has good financial health 

in its assets quality (loan portfolio) though the union has a problem of too much investment in nonearning 

assets and inadequacy of institutional capital. 

Table 6: Financial Structure of Gohe Cooperatives Saving and Credit Union (Years in E.C) 

Indicators of Financial Structure 

Proposed 1998 1999 2000 2001 

standard 

F 1 :Net Loan/Total Assets 70%-80% 29.47% 91.49% 19.97% 93.16% 

F 2: Liquid investments/Total Assets RJEBS: Volume: 02, Number: 06, April-2013 Page 65

programs and the union was doing on the wrong way on achieving financial independence during the 

study periods. External credit to total assets (F6) the target is less than or equals to 5% but the result on 

table 6, points out Gohe cooperatives saving and credit union is in line with the target only in the 

study years 1998 and 2000 which entails that the union able to finance its activities from members 

saving deposit this the low external credit to total assets ratios suggested that the union was not 

dependent on external funds or borrowings whereas, in the year 1999 and 2001 the union is out of the 

proposed standards i.e., there is too much reliance on external credit this reflects the union has no 

effective marketing program to sell its saving products and gained financial independency in the study 

years 1999 and 2001 indicating lack of sustainable financial operation. The members’ shares to total 

assets (F7) the target is to finance 10% - 20% of the assets of the union as we can see from the result 

Gohe cooperatives saving and credit union was able to finance a sustainable proportion of the union 

assets though it able to perform in line with the proposed standard only in the year 1999 and 2001 as 

per WOCCU model suggests the larger portion of the union capital is members share capital which 

clashes with the new capitalization system, member shares are de-emphasized and replaced with 

institutional capital. 

Both (F 8 ) and (F 9 ) are far below the WOCCU benchmark. Institutional capital is the second line of 

defense to absorb unexpected losses. Institutional capital includes all legal reserves and surplus created 

either from the accumulation of net income or from capital donation. Low level of institutional capital 

(F8) implies that Gohe cooperatives saving and credit union has set aside insufficient reserves and 

retained low level of earning in the financial activities which reveals a downward trend towards 

dangerously insufficient capital reserves. (F9) is below the WOCCU benchmarks in the consecutive 

years of the study period. The negative (F9) shows that its institutional capital is not enough even to 

cover 100 percent of delinquent loan greater than 1 year and 35 percent of delinquent loan from 1 to 12 

months. This analysis of institutional capital concludes that second line of defense of Gohe 

cooperatives saving and credit union was weak during the study period. 

Table 7: Sign of Growth of Gohe Cooperatives Saving and Credit Union on Its Key Indicators 

Key indicators 

Operational Years in E.C 

1998 1999 2000 2001 

G 1 :Saving Deposits NA 7.96 34.70 22.47 

G 2 :Net Loan NA 500.94 -71.33 744.13 

G 3 :Total Assets NA 93.55 31.39 80.91 

G 4 :Member Share Capital NA 15.77 63.94 15.32 

G 5 Institutional Capital NA 71.01 52.30 -12.83 

G 6 :Profit NA 500.4 68 3 

G 7 :Membership NA 0 11.8 15.8 

Inflation (Annualized) 10.6 15.8 25.3 36.4 

Source: Worked Out From Audit &Portfolio Reports of the Union 

Note: source of inflation rate is NBE. 

The sign of growth trends of Gohe cooperatives saving and credit union in its key indicators are 

presented on Table 7, in summary form and discussed one by one in the following sections: 

Although a cooperative does not make profits, profit is not their primary motive; it is reasonable and 

desirable for it to run up surpluses. Surpluses are created in the cooperative because the world we live 

in is full of uncertainties. To protect itself against these uncertainties, the cooperative must marginally 

increase the amount collected to cover its annual expenses and the surplus created as a result will be 

used to implement the fourth principle of cooperation provision of dividend (division among members 

based on their participation or transaction in the union). Table 7, indicates profitability growth trends 


of Gohe cooperatives savings and credit union is showing positive growth trends at a decreasing rate. 

The operating efficiency of the union and its ability to ensure adequate return to its members depends 

on the profit earned by it. Profitability and sustainability reflects the ability of the union to continue 

operating and to grow in future. This graph entails Gohe cooperatives saving and credit union is not 

striving for the sustainability of profit growth trends as we have seen in the result the percentage 

change in the year 1999 is 500.4% which shows higher change whereas, in the study period of 2000 

and 2001 it is showing a decreasing trend this Lowers profitability resulting to diminishing ability to 

provide for operational costs including staff wages and slow build-up of institutional capital. In 

general, Gohe cooperatives saving and credit union financial performance in profitability reflects in 

today's increasingly competitive environment, there is problem of marketing creatively in order to sell 

the maximum quantity of financial products to members, ineffective management, lack of 

accountability for adequate margins and lack of strict control over expenditures to maintain sustainable 

sign of growth trends in profitability during the study period. 

The capital needed for development and growth of a cooperative can come from three sources: the 

members themselves, net surpluses generated by the cooperative, external finance such as bank loans. 

The best source of financing for a cooperative is from members. The more financing members provide, 

the less the cooperative business will need to borrow from other sources which helps to reduce the 

costs of borrowing. The result Table 7, the members share capital growth indicates a positive change 

but there is no sustainability on its growth although member shares capital are de-emphasized under 

the WOCCU model, Gohe cooperatives saving and credit union does not maintain a dependence on 

shares for growth but there is a signal of dependence problem on the year 2000 which shows 63.94% 

growth trend and in the rest of the study period shows the same growth trend. If sing of growth trends 

in this area are excessive, it usually signals an inability of the Gohe cooperatives saving and credit 

union to adapt to the new system of promoting deposits over shares. So that as result of the study 

though it couldn’t maintain growth sustainability Gohe cooperatives saving and credit union is in a 

safe place as to level of members shares. As stated earlier, the WOCCU model, under the new 

capitalization system, growth on member shares capital are de-emphasized and it should be replaced 

with institutional capital this due to the fact that this capital never exists if the member leaves the 

union. In general, Gohe cooperatives saving and credit union shows the sign of quality members’ 

shares capital growth trend as per WOCCUs model though in the year 2000 the sign of growth trend of 

is very high and unable to show sustainability during the study period. 

Institutional capital growth is the best indicator of profitability within saving and credit unions. A 

static or declining growth trend in institutional capital usually indicates a problem with earnings. If 

earnings are low, the saving and credit union will have great difficulty in adding to institutional capital 

reserves. One of the indisputable signs of success of a robust saving and credit union in transition is a 

sustained growth of institutional capital, usually greater than the growth of total assets. As we have 

seen on Table 7, the growth trends of Gohe cooperatives saving and credit union was showing a 

declining rate in the study years which suggests that Gohe cooperatives saving and credit union is 

unhealthy in its institutional capital growth. Here except year 2000 the growth trend of institutional 

capital is lesser than the growth of the total assets in the rest of study periods. Particularly in the year 

2001 it indicates negative growth trend which implies the union is not in a position to finance nonearning 

assets from its institutional capital, unable to improve earnings and absorb losses and sufficient 

capital is unavailable implies, the Gohe cooperatives saving and credit union is forced to use more 

expensive deposit savings or member shares to finance its fixed assets requirements and abnormal 

losses. 

Since, the only successful way to maintain asset values is through strong, accelerated growth of assets, 

accompanied by sustained profitability. Growth in total assets is one of the most important ratios. 

Many of the formulas used in the PEARLS ratios include total assets as the key denominator. Strong, 

consistent growth in total assets improves many of the PEARLS ratios. By comparing the growth in 


total assets to other key areas, it is possible to detect changes in the balance sheet structure that could 

have a positive or negative impact on earnings. The ideal goal for all saving and credit unions is to 

achieve real positive growth (i.e., net growth after subtracting for inflation) each year. The result on 

the sign of growth trends of total assets of Gohe cooperatives saving and credit union (Table 7), 

indicates that the union was showing positive trends in total assets growth over the study periods still 

as stated in the above key indicators the union faces the problem of keeping sustainable growth trends 

in its total assets also. As to the real growth of the union the WOCCUs model proposed total assets 

growth rate must be above the inflation rate and Gohe cooperatives saving and credit union performed 

total assets growth in line with this proposed standard this entails the union was maintaining the real 

value of the members’ assets and able protect from the impact of inflation. 

Loan portfolio is the most important asset of rural saving and credit cooperative unions. Sign of growth 

in total loan portfolio should keep the same pace of the sign of growth in the total assets. Lower 

growth rate in loan portfolio relative to the growth in total assets implies the investment of funds in 

less profitable assets and conversely the higher growth in loan portfolio signals good probability of 

maintenance of profitability. Table 7, shows the sign of growth trends of Gohe cooperatives saving and 

credit union in its net loans portfolio is not sustainable. In the year 1999 and 2001 it indicates positive 

change in percentage i.e., 500.94% and 744.13% respectively whereas, in year 2000 the percentage 

change is -71.33% which suggests lack of sustainable growth in loan portfolio and even the sign of 

loan growth trend 1999 and 2001 is not going in the same pace as the sign of total asset growth trend. 

As stated earlier the loan portfolio is the most important and profitable asset for saving and credit 

cooperative union, If growth in total loans keeps pace with growth in total assets sustainably, there is a 

good likelihood that profitability will be maintained in the union. Conversely, if loan growth trends 

drop faces sustainability problems, this suggests that other less profitable areas are growing more 

quickly than loan portfolio. In general, as we can see from the result Gohe cooperatives saving and 

credit union has no the strategy to maintain sustainable growth trends in its loan portfolio in the same 

pace as total assets growth trends so as to go up the union profitability. 

Members savings are a source of funds with low financial costs i.e., interest costs, compared to other 

commercial funds so that rural saving and credit cooperative unions should encourage members to 

save and strives to attract new members by giving attractive interest and security on their saving. It is 

often argued that small saving deposits entail high administrative costs that will turn rural saving and 

credit cooperative unions into an unprofitable business for sustainable growth. Table 7 highlights the 

sign of growth trends from 1998 to 2001 in the volume of saving deposits in Gohe cooperatives saving 

and credit union. The fact that the total saving deposits grew by 7.96% in 1999; by 34.7% in the year 

2000; and by 22.47% in the year 2001 Though, in the first two years the union able to show fast sign of 

growth trends Gohe cooperatives saving and credit union couldn’t sustain this growth trends in the 

year 2001 and declining percentage trends implies that Gohe cooperatives saving and credit union has 

not been successful in both attracting new savers by giving attractive interest rate on their saving, 

delivering modernize services, making the union more competitive and in convincing existing 

members to increase their savings levels in the union which helps to finance members lending demand 

from savings deposit from the union itself. 

One of the essential tenants of saving and credit union philosophy is that saving and credit unions 

should offer access to quality financial services to as many members as possible; due to the fact that 

one of the key indicators of growth of RUSACCOs union is the number of member primary 

cooperatives in the union. Membership growth of the RUSACCOs union is measured by number of the 

primary cooperatives under the union over its operational years. Gohe cooperatives saving and credit 

union has 17 primary cooperatives in the study years 1998 and 1999; 19 and 22 in the study year 2000 

and 2001 respectively in number. Table 7, indicates the percentage sign of growth trends of the 

primary cooperatives in the union which shows sustainable growth in membership of primary 

cooperatives. Here the percentage sign of growth proposed by WOCCUs model is minimum 5% and 


Gohe cooperatives saving and credit union was showing membership growth in line with the proposed 

standard as well as showing sustainable growth trends to expand its outreach to rural areas that are 

unattractive to commercial banks which helps to provide access to members of the population who 

would not normally save in the formal sector, nor be able to physically access a traditional financial 

institution, especially commercial, due to locality and deposit restrictions. 

1.6.1 RESULTS FROM DESCRIPTIVE STATISTICS ANALYSIS 

The efficiency of saving mobilization strategies and the value of loan services of rural saving and 

Credit cooperative unions could be clearly assessed on a variety of competitive savings and credit 

products offered that will meet the needs of their members. In view of low income and high risks in the 

rural areas, effective provision of these services serves important goals of accelerated growth, poverty 

alleviation and reduced exposure to vulnerability. In this section of the study the efficiency of saving 

mobilization strategy and the value of loan services of Gohe cooperatives saving and credit union was 

assessed from survey data, and validated by information explored from interview, and focus group 

discussion. 

As it can be seen from graph No.1, the profile of respondents by cooperative type in the union from the 

total general assembly member respondents 42%, 37%, and 5% of the respondents are male 

respondents from Multipurpose, RUSACCOs, and Irrigation primary cooperatives respectively; 8% of 

female respondents from multipurpose and 8% of female respondents from RUSACCOs primary 

cooperatives were exists and none of the respondents were female from irrigation primary cooperatives 

that suggests there is gender gap either in the voting of females members in the general assembly 

representatives or there is less females participation in the rural SACCOs membership. 

1.6.1.1. SAVING MOBILIZATION STRATEGIES OF GOHE COOPERATIVES SAVING 

AND CREDIT UNION 

This part of the study analyzed and presented on Gohe cooperatives saving and credit unions’ savings 

mobilization strategies efficiency outcomes of members attitude, perceptions and opinion on the salient 

features that members give more value on their savings i.e., security, returns on saving deposits, 

professional image on member services, diversification of services and members awareness creation on 

saving mobilization strategies from a rural saving and credit cooperative union financial performance 

perspective. In the survey general assembly members of Gohe cooperatives saving and credit union 

were asked why they have saved in Gohe cooperatives saving and credit union. As shown in Table 8 

below, majority of the respondents are motivated by the safety of depositing their money in saving 

account (53%) as well as ease of access to credit once one becomes a member (25%). To get interest 

income is the third most important reason (14.4%) and for emergency use is the least reason as 


esponded by (7.6%) of the members. This indicates members in Gohe cooperatives saving and credit 

union more value their saving security, secondly access to credit to get loan and thirdly return on their 

savings. 

Table 8, Reasons of Respondents on Having Saving Account in the union 

Reasons of Respondents on Having Saving Account in Gohe Frequency Percent 

Cooperatives Saving and Credit Union 

Security 70 53 

Emergency Use 10 7.6 

To Get Interest Income 19 14.4 

Ease of Loan Access 33 25 

Total 132 100 

Source: Worked out from 2002 E. C. Members Survey Data 

The WOCCU saving mobilization strategy technical guide states 1 , which ‘Savers Most Value Safety’ 

Savers most frequently report that the key feature they seek is safety for their savings. They want to 

feel confident that their deposits will be available when they need them. 

1.6.1.2 LOAN SERVICE STRATEGIES OF GOHE COOPERATIVES SAVING AND CREDIT 

UNION. 

On this section of the study the researcher assessed members attitude, opinion and knowledge results 

on the value of loan services effectiveness of the union on loan repayment capacity analysis, credit 

policy, interest rate charged on loan, weakness in the union, loan evaluation processes, quality of the 

unions’ loan services and the overall appropriateness of financial services of Gohe cooperatives saving 

and credit union; and discussed the outcomes of the study. WOCCU states 1 effective credit screening 

practices improve asset quality and protect client savings. Credit risk is measured most accurately 

when loans are approved and processed on the basis of the “five Cs”: character, capital, capacity, 

collateral, and conditions. Rural saving and credit cooperative unions have managed to mitigate loan 

repayment risks in their loan portfolios while engaging in rural micro-credit. Given the fluidity of 

funds between the household and the union, best practice in individual lending is for lenders to 

evaluate the risk not of a single activity listed by the borrower on the loan application but rather of all 

the diverse cash flows of all household members. To cope with the heterogeneity, seasonality, and the 

risk of agriculture, the best rural micro lenders tailor loans to the production cycles of each borrower 

and check that the household can repay with non-farm income even if crops fail or if livestock die. 

Through time and repeated contact, loan officers grow to know the character and cash flows of 

borrowers and so can judge their risk better. 

In the survey members of Gohe cooperatives saving and credit union asked on their knowledge that the 

Gohe cooperatives saving and credit union followed on loan evaluation to determine quality credit. 

The rural saving and credit cooperative unions’ main asset is the loan portfolio that occupies the 

largest proportion in total assets of saving and credit unions. The largest source of risk of any saving 

and credit cooperative union resides in its loan portfolio which largely depends on the quality of loan 

portfolio. The gravest danger to this asset is the delinquency. The higher delinquency ratio implies 

more severity in the financial condition and presence of higher risk to the member-client savings. To 

overcome the occurrence of this danger Gohe cooperative saving and credit union used the lending 

methodology that relies in part on the existing bonds of the farmer groups and follows stringent credit 

policy. The collateral for loan is savings, while additional guarantors are required to secure the 

remaining value of loans such as group guarantee. The collateralized savings cannot be withdrawn 

until the completion of loan repayment. This is likely to encourage low income members into a habit to 

save and of cash management, in addition to acting as a safety net. Loans are disbursed to needy 

members according to the given loan Criteria’s which are stated in the by-laws of the union. The union 


provides loans to their members mainly for purchase of agricultural inputs (seeds, fertilizer, tools, etc), 

animal fattening, animal rearing, and off-farm activities such as loan for marketing and warehousing 

activities; While practicing group lending the union taken into account the business plan, the audit 

report of the cooperatives, and the requirement of loan and articles of agreement on the loan 

requirement of primary cooperatives. In addition, Gohe cooperatives saving and credit union to 

maintain loan security and to avoid delinquency considered whether the loan requested goes in line 

with their plan, giving training on accounting, and the union check if the loan requested is for 

purchase of cereals the union first checks whether there is cereals or not in that area. Sometimes the 

loan utilization problem under primary cooperative levels they used the loan on cereals acquisition and 

when they are requested they couldn’t pay on time which creates difficulty of making regular financial 

audit report. 

The union maintained general reserve, work appreciation reserve and social reserve as per its by-law, 

though, it was not practicing Provisions for loan losses one of WOCCUs safety principles which is the 

first line of defense to protect savings against identified risk of losses to the saving and credit union. 

Due to the fact that Gohe cooperatives saving and credit union has regulatory standards followed a 

more stringent policy on loan loss provisioning. As per their service diversification and awareness 

creation Gohe cooperatives saving and credit union was providing loan for marketing and warehousing 

activities as diversified services though, the union unable perform as expected on awareness creation 

due to the existence of budget limitation. 

The loan services of Gohe cooperatives saving and credit union faces many challenges in Bure woreda, 

however, it strives to provide financial intermediation by resisting these problems. Low population 

density of the rural members creates high transactions costs; limited technological advancement; poor 

infrastructure; difficulties in assessing the creditworthiness of a member and the limited possibility to 

ask for collateral add to the high transaction costs. Though the union able to avoid loan delinquency 

and the problem of getting collateral from the rural poor members the union overcome these problems 

by using group guarantee and granting loan based on their demand deposits they have in the union. 

The Loan demand is very high and incompatible compared with the availability of loan able funds that 

is the union couldn’t met the primary cooperatives needs which constrained the loan out reach of the 

union. Loan able funds are in short supply for the following main reasons: small size of saving 

accounts of RUSACCOs members of the union due to the incidence of high rural poverty; poor saving 

habits of members; small membership size of RUSACCOs; lack of vertical and horizontal linkages 

among cooperatives and funding other institutions the union was not even in a position to mobilize 

surplus funds; Poor linkages with banking and other financial Institutions like Insurance; negligible 

external revolving fund to the union; rural and agricultural credit (food security revolving fund) are 

directed and managed by multi-purpose cooperatives; Low net surplus generated and retained within 

the union due to small-scale operations. Similarly, Lack of entrepreneurial skills or know how to 

utilize the available fund even. Hence, the loan types are limited and similar in usage; they lack 

diversity and peculiarity in character the interviewee integrated this problem with the Zonal level 

professionals they stated the professionals have no the required skills in financial management and 

even they couldn’t render technical assistance on financial management semi-annually which mean 

that looseness of the zonal promotion Bureau on assigning qualified technical assistance for the 

sustainable financial intermediation of the union in the area. 

1.7 CONCLUSIONS 

Ethiopia’s Agriculture Development led industrialization strategy has the basic objective of reducing 

rural poverty, increasing agricultural production and productivity in rural Ethiopia. To meet these 

objectives, rural financial service has its own tremendous role these services are rendered by the rural 

saving and credit cooperatives. Rural financial cooperatives are user-owned financial intermediaries 

and significant providers of financial services in rural areas which required sound financial 


management; Gohe cooperatives saving and credit union is the rural saving and credit union found in 

West Gojam Zone Bure Woreda which provides rural financial intermediation service in that area. 

The financial health on the liquidity position of the union indicated that unhealthy condition according 

to WOCCU proposed standards Gohe cooperatives saving and credit union may fail to satisfy the 

deposit withdrawal request due to the fact that the union has no any liquid reserve funds to come 

across such request; deteriorating liquidity position provide members with unsafe place to deposit their 

money. 

Earnings and costs allocation position pointed out the loan yield is not enough to cover the 

entrepreneurial return particularly in the year 2001 not able to generate sufficient profit to maintain a 

strong capital position in the study year 2001 which maintain the institutional capital at least 10 

percent and pay the returns on member share capital. In other words, its earning is not sufficient to 

make the second line of defense against non-performing assets and pay attractive dividend on member 

share capital; inconsistency in the earning and institutional capital building capacity of Gohe 

cooperatives saving and credit union during the study years. Gohe cooperatives saving and credit union 

is not managing the expenses as per the proposed standard of excellence. 

Solvency or protection of Gohe cooperatives saving and credit union for delinquent loan greater than 

12 months and 1-12 months there is 100% protection of delinquent loans outstanding that enables the 

union is showing in a safe status on protection in the study period and the solvency position also 

comply with the WOCCU model in the whole of the study years. However, Gohe cooperatives saving 

and credit union has not followed the specified policy for loan loss provision, bad debt written of, and 

no delinquency report due to the fact that the credit policy followed in the union is stringent and they 

make loan recovery for any loan delinquent from the balance of defaulters or from the accounts of 

guarantors which enables to have hundred percent solvency or protection to cover the possible loan 

losses from doubtful loans. In a nut shell, the union is showing in a safe status on solvency and 

protection position in the study period. 

Capital adequacy of Gohe cooperatives saving and credit union signified the union was not able to 

maintain adequate capital in line with the proposed standard to protect the interest of members, 

depositors, creditors, and the stakeholders that ensures solvency of the union also in the study periods. 

Inadequacy Capital base indicated the union was not in a position to overcome unexpected and 

expected losses yet, it was not able to maintain any loan loss reserve in the whole study years that is 

the union could not provide members with a safe place to deposit their money. 

The financial health on the asset quality position pointed out the Percentages of delinquent loan ratio 

of Gohe cooperatives saving and credit union complied with the proposed standards that the union has 

good financial health in its assets quality particularly in its delinquency control though non-earning 

assets are greater than the standard set by the WOCCU model and percent of net zero cost funds is less 

than the set benchmark. All these suggest that quality of assets of Gohe cooperatives saving and credit 

union is in line with the standard on its delinquency ratios and is not up to the standard as set by the 

WOCCU model on its non-earning assets and net zero cost funds. 

Financial structure Gohe cooperatives saving and credit union has invested most of its funds in more 

productive assets and less in non-earning and less productive assets, and managed the sources of funds 

effectively from saving deposits. But the union no longer able to offer competitive rates on members 

saving to encourage members saving which enables the union to finance loan requested from members 

saving this total assets financed from members saving showed in none of the study periods agree with 

the WOCCUs model and it has a weak institutional capital base as a second line of defense against 

non-performing assets. 


Sign of growth trends of key indicators of Gohe cooperatives saving and union indicated the highly 

fluctuating sign of growth trends which imply that Gohe cooperatives saving and credit union does not 

have sound strategy for sustainable growth in its financial service activities. But the signs of growth of 

membership show sustainable growth that it has achieved desirable growth trends during the study 

period. 

Gohe cooperatives saving and credit union control committee and management boards also follows 

stringent credit policy to avoid loan delinquency. As to the overall appropriateness of financial 

intermediation Gohe cooperatives saving and credit union financial service is considered necessary and 

accepted by the great majority of the members in the union. 

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Significance of asset quality of State Co-operative Banks in India and impact of 

Non-Performing Asset on the liquidity, solvency and profitability 

Abstract 

Tarasankar Das, Fakirchand College, University Of Calcutta, West Bengal, India 

The State Co-operative bank (StCBs) is the leader of the co-operatives in a state and acts as a 

supervisory body at the top and arranges to spread the co-operative movement. Asset quality is an 

important aspect of the evaluation of banks. Position and growth of different kinds of assets of StCBs 

of India from 2002-03 to 2010-11 are assessed in the present study. The study found that Compound 

annual growth rate (CAGR) of sub-standard assets, doubtful assets, loss assets and gross NPAs are - 

8.74%, 0.29%, 21.28% and -1.21% respectively. Multiple regression analysis is employed to assess the 

impact of asset quality on the profitability, liquidity and solvency of StCBs in India. The study 

observes that profitability of the banks is negatively associated with independent variables. Whereas 

the liquidity and solvency are positively associated with the independent variables under this study. 

The study suggests for maintaining the proper provisions for loss assets and improving the recovery 

performance in order to survive in the competition. 

Keywords: Asset quality, Liquidity, Non-performing assets (NPAs), profitability, Solvency. 

INTRODUCTION 

Banks play a pivotal role in building and developing the every economy. The present banking scenario 

in India is witnessing sea changes. The business of banking revolves around optimum mobilization and 

application of funds. Co-operative banks are the most important source of rural financing and hold the 

significant position in the Indian banking system. The structure of short-term co-operative sector 

comprises of State Co-operative Banks (StCBs) at the apex level (state), District Central Co-operative 

Banks (DccBs) at the intermediate level and Primary Agricultural Credit Societies (PACS) operating at 

grass roots level. Similarly, long term co-operatives are the State Co-operative Agriculture and Rural 

Development Banks (SCARDBs) at the state level and Primary Co-operative Agriculture and Rural 

Development Banks (PCARDBs) operating at district/block level. The State Co-operative bank is the 

leader of the co-operatives in a state and acts as a supervisory body at the top and arranges to spread 

the co-operative movement. State Co-operative banks (StCBs) in India over the years grown 

substantially in terms of coverage and outreach, and at end-march 2011, number stood at 31. Asset 

quality is an important aspect of the evaluation of banks. Composition of the loan portfolio affects the 

asset quality of the banks. It is an important parameter to evaluate the strength of the bank. The asset 

quality indicates the type of loans and advances issued by the banks. The prudential norms of income 

recognition and asset classification were implemented for co-operative banks in India in 1996-97 (RBI 

circular no RPCD.Be 155/07.37.02/95-96 dated 22 June 1996) in order to strengthen them and 

improve their performance. It will be pertinent to mention the views of the committee on the financial 

system, 1991 popularly known as Narasimhom Committee 1. “The committee believes that a proper 

system of income recognition and provisioning is fundamental to the preservation of the strength and 

stability of the banking system. A proper asset classification will however, have to precede this 

exercise”. The primary objective behind measuring the asset quality is to ascertain the quality of the 

assets and to know the nature and types of non-performing assets (NPAs). In the present study it has 

been tried to assess the asset quality of the State Co-operative Banks in India and impact of NPAs on 

the operational efficiency from the year 2002-03 to 2010-11. 

The present study has been divided into seven sections. First section covers the brief idea about nonperforming 

asset. Asset classification and provisioning of loans covered in the second section. In 


section three brief review of literature are discussed. Objectives of the study are covered in section 

four. In section five methodology and data are discussed. Section six covers empirical results and in 

the section seven conclusion and suggestions are made. 

1. Brief idea of Non-performing asset. 

A non-performing asset is defined as credit facility in respect of which interest or instalment of 

principal is past due for two quarters. In respect of advances for agricultural purposes, if interest has 

not been paid during the last two seasons of harvest (covering two half years), after it has become ‘past 

due’ then such advance should be treated as NPA. However, international rating agencies like 

Standard and Poor are of the view that the asset quality in the Indian banking system is far below. 

According to them Indian banking practices are not up to the international mark as laid down by Basle 

Norms which considers an account as NPA if principal or interest is not paid for a quarter. In order to 

comply with the international benchmark and ensure more transparency, it has been decided to adopt 

the ‘90 day’s overdue norms’ for identification of NPAs from the year ending 31.03.04. 

2. Asset classification and provisioning norms. 

I. Asset classification. 

According to the prudential norms the classification of assets has to be done on the basis of objective 

criteria which would ensure a uniform and consistent application of norms. Assets are classified into 

the following four heads: 

a) Standard Assets:- 

The assets which does not disclose any problem and which does not carry more than normal 

risk attached to business. Thus in general all the current loans which have not become NPA 

may be treated as standard assets. 

b) Sub-standard Assets:- 

Loans in which either interest or instalments are overdue for more than 90 days to 36 months 

are classified as sub-standard assets. 

c) Doubtful Assets:- 

If the loan is overdue for beyond a period of 36 months, it is classified as doubtful assets. The 

doubtful assets itself is further subdivided into three categories:- 

i) Doubtful Assets I if it is overdue for a period of 36 to 48 months. 

ii) Doubtful Assets II if it is overdue for a period of 49 to 72 months. 

iii) Doubtful Assets III if it is overdue for a period more than 72 months. 

d) Loss assets:- 

The last category is the loss assets which are loans accounts identified by the banks or its 

auditors or supervisors (RBI/NABARD) as irrecoverable for any reason. In this case, loan is 

considered as NPA only if it is overdue for two crop seasons and the 90 days norms is not 

applicable. 

II. Provisioning norms 

The prudential norms also cover the provisioning for bad loans in respect of different kinds of assets. 

The details of provisioning requirements in respect of the different kinds of assets stated above are 

explained below:- 

i) Standard Assets: - 0.25% of all outstanding standard loan assets to provide cover for 

any normal business losses that may arise in future. 

ii) Sub-Standard Assets: - 10% of the outstanding loan amount has to be provided towards 

anticipated losses. 


iii) 

iv) 

Doubtful Assets:- 

a) Doubtful assets I—20% of the outstanding amount. 

b) Doubtful assets II—30% of the outstanding amount. 

c) Doubtful assets III—60% of the outstanding amount. 

The provisions had been increased to 100% by 31 st march 2010 for 3 rd category of 

doubtful assets. 

Loss Assets:- 

The entire loss assets should be written of. 100% of such loans shall have to be 

provided for certain relaxations, however, have been allowed for loans for agricultural 

purposes. 

3. Review of literature. 

In the past some studies relating to financial performance of commercial banks and cooperative 

banks in India and abroad have been conducted. A brief review of these efforts at research in 

the field of liquidity, solvency, growths, profitability and non-performing assets of banks has been 

presented in the following paragraphs. 

Mehta Basant (1994), attempts to measure the Performance of Udaipur Central Co-operative 

Bank (UCCB .The survey clearly indicates that cent percent beneficiaries were not repaying regularly 

the installments of their loans and only 20 % beneficiaries repay their half or more than half amount of 

loans, so it was suggested that UCCB should organize recovery camps and the District administration 

should take suitable actions without delay. 

Kulwantsing and Singh (1998) measured the performance of the Himachal Pradesh Cooperative 

Banks. On the basis of certain parameters such as capital, deposits, working capital, loans 

issued they observed that improvement is satisfactory over a period of five years. But recovery 

performance was unsatisfactory and over dues had increased steadily. This was due to after effects of 

loan waiver scheme. 

Shekhar et al (1999) measured the performance of Karimnagar District Central Co-operative 

Bank in Andhra Pradesh, India by the financial ratio analysis. With the help of financial ratios 

solvency, liquidity, profitability, efficiency and strength of the banks were analysed for the period 

1985-86 to 1994-95. 

Sharma.K.C, Josh.J.C, Kumar Sanjay, AmalorpaVanathan. R, Bhaskaran.R (2001) analyse the 

conceptual aspects of overdues, recovery and prudential norms of rural financial institutions (RFI). 

They also studied about the factors affecting recovery of loans in RFI. In this paper they also suggest 

methods and strategies for better recovery and NPA management in RFI. 

Michael. Justin Nelson, Vasanthi. G and Selvaraju. R. (2006), analyse the effect of nonperforming 

assets on operational efficiency of Central Co-operative Banks. The study argued that 

quantum increase in various classes of NPAs- substandard, doubtful and loss assets deplete asset 

quality of the banks. As a result not only liquidity and profitability decline but also solvency of the 

banks is at stake. They concluded that only prompt, preventive and curative measures of credit 

monitoring can curb the menace of NPAs. 

Bhardwaj. R, Priyanka, RahejaRekha (2011), analysed the role of co-operative bank’s in 

agricultural credit in India from 2001-02 to 2006-07 with the help of AGGR. The study reveals that 

AGGR of agricultural credit by co-operative banks always less as comparison to AGGR of all India 

institutional agricultural credit during the period under consideration and the level of NPAs in cooperative 

banking system is very high as compare to other financial institutions. They suggest that cooperative 

banks’ in India should control their NPAs level for surviving in credit market of India in 

future. 

Dharmendran. A (2011), assesses the position and growth of nonperforming assets (NPAs), in 

DCCBs in India for the eight years from 2001 to 2008. In his study he analysed that the accumulation 

of NPAs has been detrimental to the financial health of the banks. The banks have faced the additional 

burden by creating more provision for management of NPAs. He concluded that there was a need for 


effective recovery management, particularly of short-term loans and stringent measures must be taken 

to control and prevent NPAs. 

Veerakumar.K (2012), analyses the priority sector advances by the public, private and foreign 

banks in India group-wise, target achieved by them and comparative study on priority and non-priority 

sector NPAs over the period of 10 years between 2001-02 to 2010-11. He concluded that non-recovery 

of credit in time and lower recovery of NPAs are the major reasons of mounting NPAs of Schedule 

commercial banks. 

Shyamala. A (2012), attempts to measure the impact of NPAs on profitability of SBI group, 

Nationalised banks group and private banks group in India from 2000-2001 to 2009-10.The study 

concluded that introduction of prudential norms has improve the performance of the banks and 

accordingly resulted into orderly down of NPAs as well as enhancement in the financial strength of the 

Indian banking structure. 

Chisti, Khalid Asraf (2012), assess the effect of loan quality on performance of the private 

banks in India during the period 2006-07 to 2010-11. Operating performance of the sample banks is 

estimated with the help of financial ratios. Multiple regression has been employed and result showed 

that a bad asset ratio is negatively associated with banking operating performance. 

Siraj. K. K and Pillai. P Sundaram (2012), attempt to analyse whether the Indian banking sector 

is able to manage the NPAs during post-millennium period or not. The study includes NPAs from 

bank- group wise that provide understanding on management of NPA by different bank groups. They 

concluded that even though the NPAs indicators showed recovery of NPA during first half of last 

decade, it remained challenging in the second half of the period. 

Dharmendran. A (2012), seeks to examine the position and growth of NPAs of the State Cooperative 

Banks of India from 2000-01 to 2007-08. The study found that gross and net NPAs are 

relatively high during the study period. He suggested about the additional provision for various 

categories of assets. 

4. Objective of the study. 

Attempts have been made to assess the asset quality of StCBs of India and the impact of NPAs in 

operational efficiency during the period 2002-03 to 2010-11. The specific objectives of the study are: 

a) To assess the position and growth of different kinds of asset of StCBs of India from 2002-03 to 

2010-11. 

b) To examine the asset quality of the StCBs in India from 2002-03 to 2010-11. 

c) To analyse the impact of NPAs on profitability, liquidity and solvency position of the StCBs in 

India from 2002-03 to 2010-11. 

5. Methodology and data. 

NPAs should be considered against the loans and advances issued by the banks, cause the NPAs 

primarily arise. According to the prudential norms banks have to consider provisions when there is a 

question of NPAs. When the provisions are adjusted against the gross NPAs it gives rise to the net 

NPAs. The following ratios are adopted to measure the asset quality of the StCBs in India from 2002- 

03 to 2010-11. 

a) Gross NPAs to Gross Advances. (GNGA) 

b) Net NPAs to Net Advances. (NNNA). 

c) Total Investment to Total Assets (TITA). 

d) Net NPAs to Total Assets (NNTA). 

e) Gross NPA Coverage ratio 

Multiple regressions have been employed to measure the degree of impact of asset quality on 

profitability, liquidity and solvency of the banks under study. Mean of profitability ratios, liquidity 


atios and solvency ratios are taken as dependent variable and various ratios used to measure the asset 

quality have been taken as independent variable. In the present study the ratios taken to measure the 

profitability, liquidity and solvency are stated below: 

I) For profitability 

a) Spread to total Asset. b) Return on Asset. c) Interest income to total income. d) Non-interest 

income to total income. e) Profit margin ratio (Net profit/ Total income). f) Burden to Total 

Asset. 

The equation of multiple regression used in this study are 

Profitability = α + ß 1 GNGA + ß 2 NNNA+ ß 3 TITA +ß 4 NNTA+ε 

II) For liquidity 

a) Liquid asset to total deposit. b) Liquid asset to total asset. c) Deposit to total asset d) Loan to 

total deposit 


Liquidity = α + ß 1 GNGA + ß 2 NNNA+ ß 3 TITA +ß 4 NNTA+ε 

III) For solvency 

a) Investment to deposit b) Credit Deposit ratio c) Spread to total assets d) Net worth to total 

assets. e) Borrowing to Working fund. 


Solvency = α + ß 1 GNGA + ß 2 NNNA+ ß 3 TITA +ß 4 NNTA+ε 

For the purpose of the study, the secondary data for 9 years from 2002-03 to 2010-11 are used. The 

secondary data has been collected from the data bases of Reserve Bank of India (RBI) and National 

Bank for Agricultural and Rural Development (NABARD). The trend and growth of the variables 

taken for study are addressed by using CAGR (Compound Annual Growth Rate). In order to analyse 

and interpret the data in this study SPSS software have been used. 

6. Empirical results. 

Asset quality of the State co-operative banks in India is shown in the table 1. The aggregate NPAs of 

the State Co-operative Bank in India in 2002-03 are Rs. 6284 crore consisting of Rs 3535 crores in 

sub-standard category, Rs 2443 crores in doubtful category and the remaining Rs 306 crore in loss 

category. The overall NPAs of State Co-operative Banks (StCBs) declined in the year 2004-05 

although the share of loss assets is the alarming. NPAs of the StCBs in India varied widely across 

the states /UTs at end march 2005. In some states such as Haryana and Punjab, NPAs are less than 

3%, while in some other states (Arunachal Pradesh, Assam, Manipur and Nagaland) NPAs are more 

than 50%. Only in nine out of 31StCBs in India NPA ratio is less than 10%. 


Asset quality of the State Co-operative banks in India from 2002-03 to 2010-11 

(Rs.in crores) 

Table-1 

Year Sub-standard Asset Doubtful 

Asset 

Loss 

Asset 

Gross 

NPAs 

Provision 

for NPAs 

Net 

NPAs 

2002-03 3535 2443 306 6284 5690 594 

2003-04 3288 3010 250 6548 3608 2940 

2004-05 2961 1975 1136 6072 2982 3090 

2005-06 2763 2292 1680 6735 3558 3177 

2006-07 2957 2625 1122 6704 3200 3504 

2007-08 2779 2652 737 6168 3000 3168 

2008-09 1627 3822 276 5725 3310 2415 

2009-10 1332 2219 802 4353 4438 -85 

2010-11 1700 2500 1500 5700 3997 1703 

CAGR(%) -8.74 0.29 21.98 -1.21 -4.32 14.07 

Ratios for measurement of Asset quality of the State cooperative bank of India 

from 2002-03 to 2010-11 

Table -2 

Year Gross NPAs/ Net NPAs/ Total Investment/ Net NPAs/ Gross NPA 

Gross Advances Net Advances Total Assets Total Assets coverage ratio 

2002-03 16 1.67 29.74 0.97 90.54 

2003-04 15.28 7.2 34.06 4.01 55.1 

2004-05 13.98 7.64 32.43 4.3 49.11 

2005-06 13.81 6.59 36.21 3.66 52.83 

2006-07 12.4 6.88 28.14 4.08 47.73 

2007-08 11.01 5.99 33.2 3.35 48.64 

2008-09 10.57 4.75 43.07 2.23 57.81 

2009-10 8.06 -0.17 45.02 -0.07 101.95 

2010-11 8.2 2.62 38.55 1.32 70.12 

AM 12.14 4.79 35.6 2.65 63.75 

SD 2.89 2.78 5.72 1.59 19.83 

CV 23.8 58.03 16.06 60 31.1 

CAGR(%) -8.02 5.79 3.3 3.93 -3.14 

The overall NPAs of StCBs have increased during 2005-06 in contrast to decline witnessed during 

previous year. Substantial asset slippage continued during the year with a decline in the sub-standard 

assets and increase in doubtful and loss assets. NPAs of StCBs varied widely across the states at end 

march 2006 also. During 2006-07, the NPAs of StCBs declined in both absolute and percentage term. 

The improvement in asset quality is also discernible from the decline in loss assets and partly due to 

migration from lower categories. Thus there is an increase in the sub-standard and doubtful assets 

categories. In the year 2006-07 it is observed that only 11 out of 31 StCBs the NPA ratio are less than 

10%. During 2007-08 NPAs of StCBs posted a decline in absolute terms of the various categories of 

NPAs. Out of the various categories of NPAs ‘Sub-standard’ and ‘Doubtful’ assets each constitutes 

over 40% of the total NPAs of StCBs at end march 2008. There is a fall in terms of both growth and 

share of loss assets between 2007 and 2008. There is considerable variation in the asset quality of 

StCBs across states. While on the other hand, StCBs from the northern region had the lowest NPA 


Ratio of around 3% during 2007-08, the StCBs from the north eastern region had as high as 40% of 

their total loan assets classified as non-performing in nature. The asset quality of StCBs improved as at 

end march 2009 over the previous year. Category wise details of non-performing loans showed that 

highest decline observed are in the loss category. Similarly, sub-standard assets also witnessed a 

decline during 2008-09 over the previous year bringing down its share in total non-performing loans in 

2008-09 as compared with the previous year. The asset quality of StCBs improved as at end march 

2010 over the previous year with their NPAs declining both in absolute as well as percentage terms. 

From the table 1 it may be seen that the decline in NPAs are mainly due to decline in sub-standard and 

doubtful assets while there are steep increase in loss assets in 2009-10 as compared to previous year. 

There is deterioration in the NPAs position of StCBs in 2010-11. The high growth in NPAs in 2010-11 

emanated from sub-standard assets, since the growth in doubtful assets showed a slight moderation 

over the previous year. From the table 1, it may be observed that CAGR of sub-standard assets, 

doubtful assets, loan assets and gross NPA are -8.74%, 0.29%, 21.28% and -1.21% respectively. It 

may be seen from the table 1 that provision for NPAs come down from Rs.5690 crore in 2002-03 to 

Rs. 3997 crore in 2010-11 growing at the rate of -4.32% p.a. Due to this reason net NPAs of the StCBs 

in India during the period of study went up from Rs.594 crore in 2002-03 to Rs.1703 crore in 2010-11 

growing at the rate of 14.07% p.a. 

Gross NPAs to Gross Advances 

It is a measure of the quality of assets in a situation, where the bank has not provided any provision on 

NPAs. In that case gross NPAs are measured as a percentage of gross advances. A lower ratio 

indicates the better quality of advances. The ratio of gross NPAs to gross advances of the state cooperative 

banks in India from 2002-03 to 2010-11 are presented in the table 2. It is observed from the 

table that this ratio declines from 16% to 8.2% during the study period. The lower this ratio the better 

it is. The CAGR of this ratio during the study period are -8.02%. The average of this ratio for the study 

period is 12.14%. with co-efficient of variation 23.8%. Declining trend of this ratio clearly indicates 

that management of the StCBs in India is much conscious about the NPAs. 

Net NPA to Net Advances 

This ratio is the most standard measure of asset quality. Net NPAs are calculated by deducting net of 

provisions on non-performing assets and interest in suspense account from gross NPAs. It may be 

observed from the table 2 that this ratio fluctuated between 1.67% in 2002-03 and 2.62% in 2010-11. 

The average of this ratio during the study period stood at 4.79%. This ratio is showing the decreasing 

trend during the study period although the CAGR of this ratio is 5.79%. CV of this ratio during the 

study period is 58.03% which indicates existence of high fluctuation in this ratio at that time. 

Total Investment to Total Asset 

This ratio measures the proportion of total assets involved in investments. This ratio indicates the 

aggressiveness of banks in investing rather than lending. A higher ratio represents that the bank has 

maintained a high cushion of investments as a safeguard against NPAs by adopting a conservative 

policy. A high level of investment means lack of credit off-take in economy. It also affects the 

profitability of the banks adversely. It is observed from the table 2 that this ratio fluctuated between 

29.74% in 2002-03 to 38.55% in 2010-11. The banks are witnessing increasing trend which means 

bank have conservatively kept a moderate cushion of investment to guard against NPAs. The average 

of this ratio during study period is 38.55% with CV 16.06%. CAGR of this ratio during the study 

period is 3.3%. 

Net NPAs to Total Assets 

This ratio indicates the efficiency of the bank in assessing credit risk and to an extent recovering the 

debts. Lower ratio indicates the better performance of banks. An analysis of this ratio reveals that the 

ratio varied between 0.97% in 2002-03 and 1.32% in 2010-11. The average of this ratio is worked out 

at 2.65% over the period of study. The analysis of CV (60%) shows that banks have widely fluctuated 

in this ratio during the period of study. CAGR of this ratio during the period of study is 3.93%. 


Gross NPA coverage ratio 

Provision for NPAs to gross advances is intimately connected with the prudential norms which are also 

known as Gross NPA Coverage ratio. It may be seen from the table 2 that this ratio varied between 

90.54% in 2002-03 to 70.12% in 2010-11. It is also observed that provision for NPAs are decreasing 

during the period of study. The average of this ratio during the study period stood at 63.75% with CV 

31.1%. As the provision against NPAs are growing @-3.14% p.a. the net NPA went up from Rs.594 

crore in 2002-03 to Rs.1703 crore in 2010-11 grown @ 14.07%. As a result net NPA to net Advances 

ratios are grown @5.79%. 

The performance of the co-operative banks is reflected by their operational efficiency. Operational 

efficiency of the banks is affected by the volume of NPA in the loan portfolio, which in turns 

influences profitability, liquidity and solvency position of the co-operative banks in India, 

Impact of NPAs on profitability 

The prudential norms mainly cover the following four major aspects: Capital adequacy, income 

recognition, asset classification and provisioning. After the introduction of prudential norms 

profitability of the banks are adversely affected by the NPAs in two ways. First there is a loss of 

interest income to the extent of interest accrued on NPAs as income recognition is limited to only 

standard assets. Secondly, the bank has to maintain the loan loss provisions for NPAs from the 

operating profit. Continuous decline in profitability due to increase in NPAs would ultimately affects 

the viability of the bank. 

Results of determinants of Profitability of State Co-operative Bank of India 

Table-3 

Variables Unstandardised co- efficient SE t Significance Tolerance VIF 

Constant 23.245 3.236 7.197 0.001 

GNGA -0.182 0.115 -1.582 0.175 0.479 2.086 

NNNA -0.010 0.099 -0.096 0.092 0.703 1.423 

TITA -0.062 0.059 -1.046 0.343 0.468 2.138 

R =0.594 R 2 = 0.353 Adjusted Std. error of estimate-0.65240 F=0.908 

Durbin-Watson- 2.111 

*Significant at 1% level of significance 

R 2 = -0.036 

The strengths of the relationship between the dependent variable profitability and all the independent 

variables taken together considered in this study and the impact of the independent variables on the 

profitability are shown in the table 3 after considering regression analysis under enter method. 

It is observed from the table 3 that an increase in gross NPA to gross advances by one unit the 

profitability of the banks decreased by 0.182 unit and that are statistically significant at 1% level of 

significance. When net NPA to net Advances increased by one unit the profitability of the banks are 

decreased by 0.010 units, which is statistically significant at 1% level of significance. When total 

Investment to total asset increases by one unit, the profitability of the banks decreased by 0.062 units 

and it is also significant at 1% level of significance. The multiple correlation co-efficient between the 

dependent variable profitability and the independent variables taken together are (R) 0.594. It indicates 

that the profitability of the banks is significantly responded by its independent variables. It is also 

evident from the value of R 2 that 35% of the variation in profitability is accounted by the joint 

variation in independent variables. Standard error of regression co-efficient being low certifies that 

there exists really line of estimates among the variables. Adjusted ‘R’ square signifies that (-) 0.04 per 

cent of the variations in the profitability are explained by the independent variable. Though the 

adjusted R square is very much lower than the R Square, it demonstrates that regression equation 

perhaps over-fitted to the model and of some degree of generalizability. The value of F=0.908 is more 

than alpha (0.05); it is not significant and confirms at least one of the independent (asset quality) 

variables is useful in the prediction of profitability. The observed R 2 and F statistics may thus be 


sufficient to draw an inference in favour of the goodness of the regression model to fit into the present 

bank of identifying the factors influencing the profitability of the banks during the study period. To 

facilitate pass up multicollinearity problem, one independent variable NNTA are removed from the 

regression equation to arrive the final table. VIF statistic is more than 1 and nearly 2 indicate that there 

is no multicollinearity problem. At the same time Durbin- Watson statistic (2.111) indicates that error 

terms are not auto correlated. The slope of the profitability that is profitability equation is associated 

with independent variables negatively under this study. 

Impact of NPA on liquidity 

Banks are in a business where liquidity is of prime importance. Increasing NPAs not only critically 

affect the liquidity of the banks but also force the banks to maintain more liquid assets thereby 

increasing cost. As fund is blocked in bad assets the bank is bound to borrow money or mobilize 

deposits for the shortest period of time in order to maintain minimum cash in hand which results 

additional cost to the banks. The lending capacity of the banks is adversely affected due to their 

inability to recycle the resources. Enhancement of capital is not always possible for the co-operative 

banks. Hence, every time NPAs increase, deposits are mobilized to fund the incremental NPAs thereby 

increasing interest expenditure. Due to the RBI guide line every bank in India has to maintain the 

minimum amount in SLR and CRR. So, the Co-operative banks not only have to fund the NPAs but 

for every Rs.100 of such assets, banks have to maintain more than Rs. 100 of resources. This can be 

expressed as follows. 

Deposit required= NPAs/ 1- (SLR+ CRR). 

Where SLR= Statutory liquidity ratio. CRR= Cash reserve ratio. 

Thus, as the level of NPAs as a proportion of total loans and advances issued by the banks increases, 

the liquidity risk of the banks also increases. 

Results of determinants of liquidity of State Co-operative Bank of India 

Table-4 


Constant 35.232 3.833 9.191 0.000 

GNGA 0.357 0.353 1.013 0.350 0.756 1.322 

NNNA 0.341 0.366 0.931 0.388 0.756 1.322 

R = 0.619 R 2 = 0.384 Adjusted Std.error of estimate-2.508 F= 

R 2 = 0.178 

1.867 


The power of the affiliation between the dependent variable liquidity and all the independent variables 

taken together considered in this study and the impact of the independent variables on the liquidity are 

exposed in the table 4 after considering regression analysis under enter method. It is observed from the 

table 4 that an increase in gross NPA to gross advances by one unit the liquidity of the banks 

increased by 0.357 unit and that are statistically significant at 1% level of significance. When net NPA 

to net Advances increased by one unit the liquidity of the banks are increased by 0.341 units, which is 

statistically significant at 1% level of significance. The multiple correlation co-efficient between the 

dependent variable liquidity and the independent variables taken together are (R) 0.619. It indicates 

that the solvency of the banks is significantly responded by its independent variables. It is also evident 

from the value of R 2 that 38% of the variation in liquidity is accounted by the joint variation in 

independent variables. Standard error of regression co-efficient being low certifies that there exists 

really line of estimates among the variables. Adjusted ‘R’ square signifies that 17% per cent of the 

variations in the liquidity are explained by the independent variable. The value of F=1.867 is more 

than alpha (0.05); it is insignificant and authenticates in any case one of the asset quality variables is 

helpful in the prediction of solvency. The observed R 2 and F statistics may accordingly be adequate to 

depict a conclusion in favour of the goodness of the regression model to fit into the present bank of 


identifying the factors influencing the liquidity of the banks during the study period. With the intention 

to keep away from multicollinearity problem, two independent variables TITA and NNTA are 

removed from the regression equation to arrive the final table. VIF statistic nearly 2 indicates that there 

is no multicollinearity problem. Simultaneously Durbin- Watson statistics (2.202) indicate that errors 

terms are not auto correlated. The gradient of the liquidity that is liquidity equation is associated with 

independent variables positively under this study. 

Impact of NPA on solvency 

Decline in the profitability and liquidity ultimately affects the solvency position of the State Cooperative 

banks in India. Since the loans and advances issued by the banks is a principal part of the net 

assets, loan defaults are a primary cause of potential losses. The solvency of a bank is exhibited by 

capital adequacy ratio which is directly related to quality of assets. As per the requirement of 

prudential norms provisions are charged to profit and loss account, as a result owned fund of the state 

co-operative banks are significantly reduced. If tax provisions are ignored, an increase in loan loss 

provisions or writing of an asset requires an equal amount of increase in the mandate capital (Beattie et 

al 1995). A substantial portion of NPAs in loan portfolio, thus affects the solvency position of the 

banks as accretion to owned funds is reduced due to higher amount of loan loss provisions and 

consequently less profit. So, every time NPAs increase, co-operative banks have to look for additional 

amounts to raise minimum capital to cover them. But it is difficult for the State Co-operative banks to 

have a large capital base due to some legal constraints. Raising capital from the public in general at 

large is not permissible by the rules of the co-operatives. 

Results of determinants of Solvency of State Co-operative Bank of India. 

Table-5 


Constant -1.028 29.601 -0.035 0.974 

GNGA 1.392 1.056 1.319 0.244 0.479 2.086 

NNNA 0.555 0.906 0.613 0.567 0.703 1.423 

TITA 0.328 0.540 0.607 0.570 0.468 2.138 

R =0.62 R 2 =0.39 Adjusted Std. error of estimate-5.979 F=1.093 

R 2 = 0.03 


The forces of the association between the dependent variable solvency and all the independent 

variables taken together considered in this study and the impact of the independent variables on the 

solvency are shown in the table 5 after allowing for regression analysis under enter method. 

Table 5 illustrates that an increase in gross NPA to gross advances by one unit the solvency of the 

banks increased by 1.392 unit and that are statistically significant at 1% level of significance. When 

net NPA to net Advances increased by one unit the solvency of the banks are increased by 0.555 units, 

which is statistically significant at 1% level of significance. When total Investment to total asset 

increases by one unit, the solvency of the banks increased by 0.328 units and it is also significant at 

1% level of significance. The multiple correlation co-efficient between the dependent variable 

solvency and the independent variables taken together are (R) 0.62. It indicates that the solvency of the 

banks is significantly responded by its independent variables. It is also apparent from the value of R 2 

that 39% of the variation in solvency is accounted by the joint variation in independent variables. 

Standard error of regression co-efficient being low certifies that there survives really line of estimates 

among the variables. Adjusted ‘R’ square signifies that 0.03 per cent of the variations in the solvency 

are explained by the independent variable. Nevertheless the adjusted R square is immensely lower than 

the R Square; it demonstrates that regression equation perhaps over-fitted to the model and of some 

degree of generalizability. The value of F=1.093 is more than alpha (0.05); it is not significant and 

confirms at least one of the independent (asset quality) variables is useful in the prediction of solvency. 


The observed R 2 and F statistics may therefore be satisfactory to draw a presumption in favour of the 

goodness of the regression model to fit into the present bank of identifying the factors influencing the 

solvency of the banks during the study period. To facilitate stay away from multicollinearity problem, 

one independent variable NNTA is removed from the regression equation to arrive the final table. VIF 

statistic is more than 1 and nearly 2 point out that there is no multicollinearity problem. All at once 

Durbin- Watson statistic (1.638) designates that error terms are not auto correlated. The slope of the 

solvency that is solvency equation connected with the independent variables positively under this 

study. 

7. Conclusion and suggestions 

The quality of assets plays a crucial role in determining the financial strength of a bank. The quality of 

assets of a bank can be measured by considering the NPAs. More risky assets in the bank balance sheet 

indicate the more credit risk. The study found that CAGR of sub-standard assets, doubtful assets, loss 

assets and gross NPA are -8.74%, 0.29%, 21.28% and -1.21% respectively. It is also observed that 

provision for NPAs come down from Rs.5690 crore in 2002-03 to Rs. 3997 crore in 2010-11 growing 

at the rate of -4.32% p.a. Due to this reason net NPAs of the StCBs in India during the period of study 

went up from Rs.594 crore in 2002-03 toRs.1703 crore in 2010-11 growing at the rate of 14.07% p.a. 

So. management of the StCBs in India have to take the necessary steps in order to reduce the loss 

assets and maintaining the proper provisions in order to survive in the competition. The CAGR of the 

ratio Gross NPAs to Gross Advances during the study period are -8.02%. Declining trend of this ratio 

clearly indicates that management of the StCBs in India is much conscious about the NPAs. The ratio 

Net NPA to net Advances is showing the decreasing trend during the study period although the CAGR 

of this ratio are 5.79%. The banks are witnessing increasing trend in the ratio of Investment to Total 

asset which means bank have conservatively kept a moderate cushion of investment to guard against 

NPAs. It also affects the profitability of the banks adversely, so management of the StCBs should be 

cautious about the asset mix in future. Net NPA to total asset ratio of the banks during the period of 

study is satisfactory. Lower ratio indicates the better performance of banks. The study observes that 

profitability of the banks is associated with independent variables negatively. Whereas the liquidity 

and solvency of the StCBs is associated with independent variables positively under this study. Last, 

but not the least the banks should give the proper attention in respect of the recovery performance in 

order to survive in the competition. 

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Board Composition, Ownership Structure and Firm Performance 

Jyotsna Ghildiyal Bijalwan 

(Department of Management Studies,) Uttarakhand Technical University, India. 

Email-jyotsnaghildiyal@yahoo.com 

Dr. Pankaj Madan 

Associate Professor, Faculty of Management Studies, Gurukul kangri vishwavidyalaya, India. 

Email- pankaj_mad@yahoo.com 

Abstract 

The study primarily focuses on investigating the relationship between corporate governance and the 

firm performance. Board composition and Ownership structure are primarily taken as the factors of 

corporate governance, where as financial performance of the firm is measured with the financial ratios 

viz. Return on Capital employed, Return on the equity, Profit after tax and Return on assets. For the 

detail study purpose we have divided the board composition into two components a) Board size b) 

board composition. The study is based on the 121 small cap, mid cap and large cap companies listed 

on the Bombay Stock Exchange (BSE) India, for the period of 2010 -2011.Our empirical analysis of 

the data is suggestive of the result of that a relationship of positive and significant nature exists 

between board size & board composition and firm’s financial performance in India. We also found that 

there is no relationship exists between ownership structure and firm performance. 

Key words: board size, board composition, ownership structure, corporate governance, financial 

performance, India. 

Introduction 

Corporate governance can be viewed as a mechanism that ensures external investors receive 

proper returns on their investments. Effective corporate governance provides an assurance on the 

safety of the invested funds and the returns on investment (Shleifer and Vishny ,1997). The study 

primarily focuses on investigating the relationship between corporate governance and the firm 

performance. Many researchers have been investigating the relationship between corporate governance 

and firm performance by using the empirical data. There is no unanimous consent on the results of the 

studies (Patterson, 2000). Similarly another study shows that the corporate governance has a strong 

impact on the firm performance during the 1997-98 East Asian financial crises. The study further 

propounds that independent directors have traditionally been hailed as a way of improving, monitoring 

management (Kim and Lee, 2003). 

In an empirical study based on the Indian firms by Dwivedi and Jain (2005) with the sample 

size of 340 large listed Indian firms for the period of 1997 -2001. They found a positive and significant 

relationship between corporate governance and performance of Indian firms, by using a simultaneous 

equation regression model, whereby they used Tobin Q as the measure of firm performance and board 

size and ownership as components of corporate governance. Gupta (2006) in his study traced the 

difference in the corporate governance practices of three automobile companies in India named Hero- 

Honda Ltd, Maruti Udhyog Ltd. and Escorts Ltd. The companies were randomly selected on the basis 

of their size and goodwill in the market. The study was focused on observing the compliance of the 

selected sample companies’ corporate governance practices with the Clause-49.The results of the study 

revealed that the Hero-Honda with 90%, Marurti with 80% and Escorts with 70% were in line with the 

Corporate governance norms as per Clause-49. A study by Lee (2008) based on Korean firms tries to 

study the relationship between corporate governance and firm’s financial performance. In this study, 

the effect on Korean firms is empirically tested. The study is based on the agency theory of corporate 

governance. Ownership concentration and Ownership identity are taken as two components of the 

corporate governance and net income to total assets ratio (NIA) and ordinary income to total assets 


atio (OIA) are taken as performance variables. The study with the multivariable regression analysis 

reveals the significant linear lump-shaped relationship between ownership concentration and firm 

performance and insignificant relationship between ownership identity and firm performance. In 

nutshell the study shows a positive and significant relationship between corporate governance and 

firm’s financial performance. In another study based on Chinese firms tried to find the relationship 

between the corporate governance and corporate performance of 106 High –tech small and medium 

size enterprises in China. The study through empirical analysis finds the relationship between 

ownership concentration and corporate performance follows a positive correlation. It further states that 

the relationship between shareholding ratio of the 2 nd to 10 shareholders, number of board and share 

holders meetings and executive remuneration shows a positive and significant relationship with 

corporate performance (Zhenyi, Li and Ying, 2010). 

There are some other studies which deny any relationship between corporate governance and 

firm performance. And many other studies show weak or insignificant relationship between corporate 

governance and the firm’s performance. For an e.g. study in Miami University, USA shows no 

relationship between corporate governance and firm’s performance (Daily and Dalton, 1992). There is 

no correlation between board independence and long term firm performance (Bhagat & Black, 1998). 

Similarly in another study by Bauer et al. (2004) on European firms found a negative relationship 

between corporate governance standards and firm’s performance. 

Some of the studies show a positive and significant relationship between corporate governance 

and firm performance, some studies reveal a negative and insignificant relationship or some studies 

even show a mixed result of the link between corporate governance and the firm performance. The 

results may vary due to different institutional environment across the countries (Carlin & Mayer, 

2000). There is no unanimous consent on the results of the studies. Some of the studies show a positive 

and significant relationship between corporate governance and firm performance, some studies reveal 

a negative and insignificant relationship or some studies even show a mixed result of the link between 

corporate governance and the firm performance. 

Board composition (BC) and Ownership structure(OS) are primarily taken as the factors of 

corporate governance, where as financial performance of the firm is measured with the financial ratios 

i.e. Return on Capital employed (ROCE), Return on the equity (ROE), Profit after tax(PAT), Return on 

assets (ROA). For the detail study purpose the Board composition (BC) is further divided into two 

components a) Board size b) board composition. The study is based on the 121 small cap , mid cap and 

large cap companies listed on the Bombay Stock Exchange (BSE) India, for the period of 2010 -2011. 

The data are collected through Prowess database, maintained by CMIE (Center for monitoring Indian 

economy). 

Hypothesis development 

Board composition (BC) and firm’s performance 

Generally research on corporate governance and performance are based on principal-agent theory. 

Since the Berle and Means (1932) first proposed the characteristics of the modern corporation is the 

ownership and control power separation , mostly corporate governance and performance is researched 

from internal control and supervisory mechanisms that constitute by the specific forms of corporate 

governance the shareholders ' meeting, the board of directors and the management of the company, the 

results of our research focuses on the board size ,board composition and its effect on the firm 

performance. It further investigates the relationship between ownership structure and firm 

performance. Our study is also formulated on the grounds of the agency theory of corporate 

governance, where the management or board acts as agent and owners i.e. equity share holders are 

principal. 

Board size (BZ) 

Board size refers to the total number of the directors on the board for a particular financial year. There 

are no specific guidelines on the number of directors a company can have and there is no ideal board 


size as well. During our study it was observed that generally the public limited companies have a 

larger board size as compare to private limited companies in India. The board size cannot be specified 

at the country level also, as the countries differ in their legal, social, economic, and corporate 

environment. One size cannot be fit for all. The board size has a positive association with the firm’s 

performance. Larger board size led to better decision making which further results into better 

performance of the firm (Dalton et al., 1998). 

In another study in the University of Lagos, Nigeria, based on 30 firms listed on Nigerian stock 

exchange tries to study the impact of board structure on the firm’s financial performance in Nigeria. It 

further investigates the composition of the board of directors in the firm. By using Ordinary Least 

Square (OLS) regression the results show the positive relationship between the board size and firm 

performance (U. M. Uadiale, 2007). Larmou and Vafeas (2009) in their study focused on finding a 

relationship between board size and firm performance of the small firms with a history of poor 

operating performance. Multi-variable regression model was applied to test an empirical relationship 

between explained and explanatory variables. The results suggest that the larger board size is 

positively related to the shareholders value. 

Board composition (BC) 

Board composition is one of the most important components of corporate governance. It plays 

very crucial role in determining the governance strategy of any firm. Boards are composed of 

executive, non-executive and independent directors. Executive directors share a direct potential 

interest with the firm they are insiders. Non-executive directors and independent directors are 

outsiders. Independent directors do not have any direct or indirect interest or any relationship aligned 

with the firm. Board composition refers to the size of the boards i.e. the total number of the directors 

on the board for a particular financial year, their ratio and classification into executive, non-executive 

and independent directors. It also includes the independence of the board. Board composition reveals 

the level freedom or independence in the decision making process. In an empirical study by (Kim and 

Lee, 2003) it is showed that the corporate governance has a strong impact on the firm performance 

during the 1997-98 East Asian financial crisis. It further revealed that independent directors have 

traditionally been hailed as a way of improving, monitoring management. But further Bhagat and 

Black (2002) in their study presented the empirical evidence that challenges the previous study. The 

evidence shows that it is indifferent to have more independent directors on the board because the firms 

with more independent directors on their board do not perform better than other firms. On the basis of 

review of literature on the board size and board composition we formed argument that the board size 

and the board composition both are insignificant to the firms performance and this paved the way for 

development of hypothesis H01 and H02. 

H01: The board size has insignificant impact on the firm’s performance. 

H02: The Board composition has insignificant effect on the firm’s performance. 

Table no 1. Independent Variables 

Factors Indicators Description Symbolic 

Sr. 

no. 

1 Board composition 

(BCN) 

2. Ownership 

Structure 

(OS) 

Ownership structure (OS) 

a) Board size 

b)Board 

Independence 

Ownership 

Structure 

a) Total no. of BOD sitting on board 

b) Ratios of DIRs to ID and ED to NED 

ect 

Percentages of shares held by various 

stake holders in the company 

a)BZ 

b) BI 

OS 


The ownership structure can be defined as the distribution of equity with regard to votes and capital 

but also by the identity of the equity owners. These structures are of major importance in corporate 

governance because they determine the incentives of managers and thereby the economic efficiency of 

the corporations they manage”. - Jensen and Meckling 

In a study based on 137 listed firms of Tehran Stock Exchange for the period of 2001-2006 by 

Fazlzadeh et.al.(2011) aimed at studying the role of ownership structure on firm performance. The 

study applied panel data regression analysis method. The results reveal that the ownership 

concentration did not have any significant effect on the firm’s performance. The study further reveals 

that the industry factor moderates the effectiveness of the relationship between ownership structure 

and firm performance. Some of the researcher also found the positive and significant relationship 

between ownership structure and the firm performance, such as there is a relationship between the 

ownership structure and the operating performance of the firm (Jensen and Warner, 1988).The agency 

problem could be solved with the help of the ownership structure and the ownership concentration can 

influence the firm’s performance (Shleifer and Vishny, 1997). Review of the literature on the 

ownership structure and firm performance gave us the basis for the argument that ownership structure 

is not related to firm performance and ownership structure has no effect on the corporate performance. 

There for to prove our point H03 was developed for the study. 

H03: The ownership structure has insignificant impact on the firm’s performance. 

Research design and methodology 

Data selection 

The sample is selected on Stratified Random Sampling basis, which involved two stages in sample 

selection. 

At the first phase, companies listed on the stock exchange are identified on the basis of their capital 

base i.e. as small cap, mid cap and large cap companies. 

Second phase involved qualified corporate governance report and financial reports by way of 

modification, qualification or adverse opinion. 

Initially the sample size was 200 companies listed on the Bombay Stock Exchange (BSE), India; due 

to unavailability of appropriate data the sample size shrink to 121 companies. Out of which forty 

companies are from large cap category, forty are from mid cap category and forty one companies are 

from the small cap category. The companies belong to different industrial sectors such as power, fuel, 

cement sugar, textile, telecommunication ,petroleum, automobile, entertainment, mining , iron , steel, 

pharmaceutical, fast moving consumer goods (FMCG) ect., for the period of 2010 -2011. The data is 

collected through Prowess database, maintained by CMIE (Center for Monitoring Indian Economy). 

Variable selection and model construction 

For the study purpose corporate governance is the independent variable which comprises of the factors 

of corporate governance as board composition and ownership structure, whereas firm’s performance is 

dependent variable. There are many other factors which affect the firm’s performance they are taken as 

control variables. 

Independent variables 

Based on the various conceptual and empirical studies in India and around the world few independent 

variables were selected, definition and description of which is given in the table no.1. 

Dependent variables 

Review of the literature on the corporate governance and the firm performance suggests that the firm 

performance can be mainly measured in two ways first market based performance and secondly 

accounting based performance. Market based performance measures and Accounting based 

performance measures differ in two main aspects. First is time based in which the market value is 

forward looking and accounting value is backward looking, whereas market based measure is what 

management will accomplish, where as accounting based measure is an estimates of what management 

has accomplished (Demsetz & Villalonga ,2001). Many researchers have utilized Tobin Q as a market 

based performance measure for the firm performance. Though the accounting value constrained by the 

standards set by the accountant, accounting policies opted by his firm and the accounting norms and 


standards prevailing in the country, still the accounting rates can be better as they are free from the 

investors bias and speculations to a large extent. Secondly the capital market in India is not as 

developed as of Western and European countries; therefore we preferred the accounting based method 

to measure the firm performance. Various financial ratios such as Return on Capital employed 

(ROCE), Return on the equity (ROE), Profit after tax (PAT), Return on assets (ROA) are utilized for 

the study. 

Control variables 

Control variables are described in the Table no 2. 

Table 2 

Control Variable Description 

Sr.no Control Variables Description Symbolic 

1 Size of the firm Total assets TA 

2. Leverage Debt/Equity LEV 

3. Liquidity Current assets /Current Liabilities COR 

4. Inventory Ratio IR 

Figure no 1: Test Model Corporate Governance and Firm Performance 

Measurement of Corporate Governance Scores (CGS) and development of questionnaire 

The study is based on the structured questionnaire. The questionnaire consists of 51 questions related 

to the corporate governance factors. The Corporate Governance Scores (CGS) reflects the scores 

obtained by an individual company on a particular corporate governance factor or component. The 

corporate scores (CGS) are based on the information provided by the firms in their annual reports. The 

annual corporate governance report was carefully and extensively reviewed for the study. The 

corporate governance score (CGS) was developed on the bases of Standards & Poor’s (S&P) – 

Governance, Management, Accountability Metrics and Analysis (GAMMA).GAMMA scores attempts 

to assess the effectiveness of individual company governance practices as a system of interaction 

among a company’s management, board, shareholders and other stakeholders aimed at building 

company value and ensuring fair distribution of its earnings. 


Board size and firm performance 

Board size (BZ) here refers to the size of the board. It refers to the total number of board of directors 

sitting on the board. In order to find out the impact of board size on the firm’s financial performance 

the board size of the companies were divided into two categories a) companies with the smaller board 

size i.e. having less than 10 directors sitting on the board and b) companies with the smaller board size 

i.e. having more than 10 directors sitting on the board for the given particular financial year. 

Board composition and firm performance 

Further to find out the impact of board composition on the firm’s financial performance the board 

composition was categorized into four categories. It facilitated the evaluation of the nature of the 

relation, degree of dependence and the impact of the Independent variable i. e. board composition on 

the dependent variable i. e. firm’s performance. 

Small board size with non compliance (SBSNC).The first category has firms which have small board 

size but are not compliant with the provisions in the Clause 49 and Voluntary Regulation, Act 2009. 

(SBSNC). This category includes the firms who score up to 30 points in the board composition 

category. 

Small board size with compliance (SBSCL). Second categories has the firms with the small board size 

but are in full compliance with the regulatory provisions in the legislative framework of corporate 

governance in India (SBSCL). This category covers the firms who score between 31 points to 79 

points in the board composition category of the questionnaire. 

Large board size with non compliance (LBSNC). Third category firms have larger board size but are 

showing the non compliance with the regulatory and legislative provisions (LBSNC). This category 

consists of the firms scoring between 80 points to 89 points in the board composition category of the 

questionnaire. 

Large board size with compliance (LBSCL). Fourth category covers the firms with large board size 

and they are compliant to the corporate governance norms, regulations and provisions in India 

(LBSCL). The firms who score above the 89 i.e. between 90 points to 100 points do come under this 

category. 

Ownership structure and firm performance 

Ownership structure gives a fair idea about the percentages of share held by the promoters, public, 

directors, private companies, institutional investors, government bodies and the foreign institutional 

investors in a firm. It also reveals the ownership pattern of the firm. In order to know the ownership 

pattern of the firms the ownership structure (OS) was categorized into three different patterns which 

includes, which are explained as follows. 

Concentrated ownership. The firm which has more than 50% and above shares held by an individual 

share holder or a particular family or group was termed as firm with concentrated ownership. The 

firms scoring 38 points in the ownership structure category of the questionnaire come under this 

category. 

Diversified ownership. The firm in which none of the stakeholders owns more than 25% share was 

termed as diversified ownership structure. In the questionnaire the firms scoring 33 points are termed 

as diversified ownership structure. 

Block holdings ownership. The firms with more than one individual holding above 25% or where more 

than one stakeholder holds between 25% to50% shares in the firm, such firm was termed as block 

holding ownership pattern. The firms scoring 43, 48 and 53 points in the questionnaire were put into 

the block holding category. 

Results and Interpretation 

The group statistics of Table no.3 displays the sample size, mean, standard deviation, and standard 

error for both group of companies (one with board size less than 10 and another with board size larger 

than 10). On average the Return on Capital Employed Percentage (ROCP) of companies having larger 

board size is 3.53% more than the companies having smaller board size. The other financial 

parameters like Profit after tax (PAT), Return on Asset (ROA) and Return on Equity (ROE) showed 

differences in averages of 2.31%, 0.4% and 6.07%, however the difference between the means is 

considerable among PAT, ROA and ROE. 


The procedure produces two tests of the difference between the two groups. One test assumes 

that the variances of the two groups are equal. The Levene statistic tests this assumption. In Table no. 

4, the significance value of the F statistic is 0.579 (for ROCEP%), 0.000(for PAT), 0.045 (for ROA) & 

0.123(for ROE), the values greater than 0.10 shows that equal variances can be assumed for those 

groups i.e. ROCEP, ROE and for PAT, ROA equal variances cannot be assumed and parameters 

having value greater than 0.10, you can assume that the groups have equal variances and ignore the 

second test. 

The t column displays the observed t statistic for each sample, calculated as the ratio of the 

difference between sample means divided by the standard error of the difference. The df column 

displays degrees of freedom. For the independent samples t test, this equals the total number of cases 

in both samples minus 2. The column labeled Sig. (2-tailed) displays a probability from the t 

distribution with 119 degrees of freedom where equal variances are assumed. The value listed is the 

probability of obtaining an absolute value greater than or equal to the observed t statistic, if the 

difference between the sample means is purely random. The Mean Difference is obtained by 

subtracting the sample mean for group 2 (where board size is more than 10) from the sample mean for 

group 1(where board size is less than 10). The 95% Confidence Interval of the Difference provides an 

estimate of the boundaries between which the true mean difference lies in 95% of all possible random 

samples of 121 companies. Since the significance value of the test is less than 0.05 in case of PAT and 

ROE, we can conclude that the average difference of 2.31% PAT between two groups and 6.07% 

among ROE is not due to chance alone. The companies now have to reconsider their decisions about 

board size. The t statistic provides strong evidence of a difference in PAT and ROE between 

companies having board size more and less than 10. The confidence interval suggests that in repeated 

samplings, the difference is unlikely to be much lower than 3108 (PAT) and 15.05% ROE. The 

companies will look into ways to retain these returns. 

Figure no. 2 

Figure no. 3 


Figure no. 4 

Figure no. 5 

The Table no. 5 displays descriptive statistics for each group and for the entire data set with N 

indicating the size of each group and the standard deviation and standard error statistics confirm that as 

ROCEP, PAT, ROA, ROE increase, variation in performance decreases. One-Way ANOVA compares 

these sample estimates to determine if the population means differ. The standard deviation indicates 

the amount of variability of the scores in each group. These values should be similar to each other for 

ANOVA to be appropriate. Equality can be inspected via the Levene test. The 95% confidence interval 

for the mean indicates the upper and lower bounds which contain the true value of the population mean 

95% of the time. The Levene statistic of Table no. 6 rejects the null hypothesis that the group variances 

are equal in case of ROA & PAT. ANOVA is robust to this violation when the groups are of equal or 

near equal size; however, we decided to continue to use F-test for other parameters too. As per data of 

corporate governance parameters in the research instrument, we are interested in finding out if 

financial parameters varied depending on different Board Compositions or not and for that ANOVA 

test is applied, the total variation is partitioned into two components. Between Groups represents 

variation of the group means around the overall mean. Within Groups represents variation of the 

individual scores around their respective group means. If desired, the between groups variation can be 

partitioned into trend components. According to Table no. 7 the significance value of the F test in the 

ANOVA table is 0.553 (ROCEP), 0.015(ROA), 0.185(ROE) and 0.001(PAT). Small significance 

value of 0.015(

hoc test for pair wise comparisons in One-Way ANOVA whose results are shown in Tale no 8. The 

groups differ in some way. The means plot helped us to "see” and learn more about the structure of the 

differences in these structures. SBSNC and LBSNC showed higher mean ROCEP than their 

counterparts. Mean ROE of SBSNC, LBSNC & BSNC are far higher than SBSCL. Mean ROA of 

SBSNC is significantly higher than its other board composition categories while PAT is significantly 

higher of LBSNC than others. As it can be observed in figure no.2, 3, 4 and figure no.5. 

Figure no. 7 

Figure no. 8 

Figure no. 9 

In this Table no. 13 displays descriptive statistics for each group and for the entire data set with N 

indicating the size of each group and the standard deviation and standard error statistics confirm that as 

ROCEP, PAT, ROA, ROE increase, variation in performance decreases. One-Way ANOVA compares 

these sample estimates to determine if the population means differ. The standard deviation indicates 

the amount of variability of the scores in each group. These values should be similar to each other for 

ANOVA to be appropriate. Equality can be inspected via the Levene test. The 95% confidence interval 


for the mean indicates the upper and lower bounds which contain the true value of the population mean 

95% of the time. The Levene statistic of Table no.14 accepts the null hypothesis that the group 

variances are not equal in case of ROCE, ROA, ROE and PAT. ANOVA is robust to this violation 

when the groups are of equal or near equal size; however, we decided to continue to use F-test for 

other parameters too. 

As we are interested in finding out if financial parameters varied depending on different 

organization structures or not and for that ANOVA test is applied, the total variation is partitioned into 

two components. Between Groups represents variation of the group means around the overall mean. 

Within Groups represents variation of the individual scores around their respective group means. If 

desired, the between groups variation can be partitioned into trend components. According to Table 

no. 15 the significance value of the F test in the ANOVA table is 0.324(ROCEP), 0.326(ROA), 

0.318(ROE) and 0.118(PAT). All the significant values are (>0.05) indicate no group differences. 

Thus, it is a must to accept the hypothesis that average financial parameters varied equally across 

different board compositions. The difference in financial parameters across different organization 

structures is insignificant for ROCE, ROA, ROE and PAT only as the significance values of these 

parameters is more than 0.005. 

The tests of between-subjects effects help us to determine the significance of a factor. 

However, they do not indicate how the levels of a factor differ. The post hoc tests show the differences 

in model-predicted means for each pair of factor levels. For more detailed analysis we used Tukey 

HSD Post hoc test for pair wise comparisons in One-Way ANOVA whose results are shown in Table 

no. 16. Now thus as we know the groups differ in some way, in order to learn more about the structure 

of the differences. The means plot facilitates to "see" this structure. The ownership structure is 

categorized into diversified ownership structure, concentrated ownership structure and block holdings 

structure. The graphs further reveals that the firms with the block holding have highest mean of ROCE, 

ROA, ROE and PAT as compare to their other counterparts. 

The graph related to the ownership structure categorization and ROCE shows that the firms 

with the block holding organization structure have the highest mean of ROCE, followed by the firms 

with the concentrated ownership structure. And the firms with the diversified ownership structure 

show the lowest level of mean of ROCE. Figure no.6. Further the graph related to the organization 

structure categorization and ROA shows that the firms with the block shareholding structure have the 

highest level of mean of ROA whereas the firm with the diversified organization structure has the 

lowest mean of ROA. Figure no.7. The graph related to the organization structure categorization and 

ROE shows that again the firms with block holding organization structure category have the highest 

mean of ROE, whereas the firms with the concentrated ownership have the lowest mean of ROE. 

Figure no. 8. Similarly the graph related to the organization structure categorization and PAT shows 

that the firms with the block holding organization structure have highest mean of PAT followed by the 

firms having diversified organization structure, and the firms with the diversified ownership structure 

show the lowest mean of PAT. Figure no. 9. 

Thus it can be concluded that the firms with the block holding category of organization 

structure have highest mean of all the financial parameters i.e. ROCE, ROA, ROE and PAT. Therefore 

the null hypothesis can be accepted. 

Conclusion 

The post liberalization period of the Indian economy has witnessed several structural and regulatory 

reforms. The journey of Indian economy from a caterpillar to a beautiful butterfly has given inputs to 

the more complex organizational structure, operational framework failure, frauds and unethical 

business practices. In order to safeguard the interest of the investors there are many provisions in the 

legal and regulatory framework of India, in spite of that last two decades witnessed the series of the 

financial scams. 

On establishing and analyzing the correlation among the independent variables as per the 

proposed model, it was found that relationship of significant nature exist between board size and firm 

performance. Hence, in simple words it can be concluded that firstly these factors are correlated and do 

have an impact on each other as well but the strength of relationship is not very strong. Secondly it can 


e said that the board size affects the firm’s performance. In India larger boards are less effective than 

smaller boards, except in the case of PSUs (Dey & Chouhan, 2007). Thirdly one size does not fit to all, 

standard board size vary from country to country and also depends on the nature of industry. In India 

smaller board are more successful particularly in private sector because of ease in decision making and 

less conflicts. 

These findings that there is a relationship between board size and firm performance are in congruence 

with the past studies carried out by (Dalton et al., 1998; Hermalin and Weisbach, 2003; U. M. Uadiale, 

2007; Balasubramanian, 2008 and Larmou & Vafeas, 2009) which have identified the effects of board 

size on the firm’s performance, and found them to be correlated. 

Fourthly the study results found that relationship of significant nature exist between board 

composition and firm performance. Hence, in simple words we can say that these factors are correlated 

and do have an impact on each other as well but the strength of relationship is not very strong. It can 

be further said that the board composition affects the firm’s performance. Fifthly in India larger boards 

are less effective than smaller boards, except in the case of PSUs. Smaller board with non compliance 

and larger boards with compliance to standard corporate governance practices show higher levels of 

ROCE, ROA, and ROE the only change is in the case of PAT where the larger boards with the 

compliance and non compliance both are showing the higher degree of PAT. It can be possible 

because the firms with firms with the larger capital will show higher profits. 

The results can be backed by the previous research outcomes, many researchers have found the 

positive and significant relationship between board composition and firms performance such as (Kim 

and Lee, 2003; Tvevor W. Chamberlain, 2007; Ameer et.al., 2009) and many other researchers 

propounds the same. The number of independent directors on the board plays a very important role. 

The ratio of executive to non executive directors ensures the fair decision making. Sixthly both the 

number and proportion of outside directors are positively and significantly correlated to the firm 

performance. In the India majority of private sector firms are owned by the individuals, or families. 

The promoters are the dominant shareholders and ownership is spread amongst the family members 

and group of friends. Therefore it becomes very significant to have more number of independent 

directors on the board so that the interest of minority shareholders can be protected. 

Seventhly in the case of ownership structure and firm performance, it was found that 

relationship of insignificant nature exist between the dependent and independent variables. Hence, it 

can be said that these two variables are not correlated. It can be further said that the ownership 

structure does not affects the firm’s performance. 

In the nutshell we can say that there is a difference between the corporate governance system in 

UK, USA and INDIA. The corporate governance of the countries like UK and USA is based on the 

Anglo American model in which the ownership and management are separate, whereas in the India 

majority of the cases management and ownership is same. In India in case of majority of firms 

specially belonging to private sector ownership belongs to an individual or family or group of closely 

related corporate. In the case of state owned enterprises the ownership is with the government in both 

the cases the ownership pattern is either concentrated or is in bloc holding by government, corporate, 

and group of institutions. Capital market in India is not developed enough to encourage the diversified 

ownership structure. Therefore the study results suggest no relationship between the ownership 

structure and firm performance in India. The results can be backed by the previous research outcomes 

,for instance in a study based on 137 listed firms of Tehran Stock Exchange for the period of 2001- 

2006 , (Alireza Fazlzadeh; Ali Tahbaz Hendi and Kazem Mahboubi, 2011) found that the ownership 

concentration did not have any significant effect on the firm’s performance. There are many other 

studies in the western countries who find the positive relationship between the ownership structure and 

firm performance. The reason for that outcome could be the difference in the political governance, 

legal and regulatory framework and the governance system. As mentioned before in the countries like 

UK and USA the ownership and management are separate from each other, where as in India in 

majority of the cases the ownership and the management is the same and the firms where both are 

separate suffers from the holding and agency problem. 


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Annexure 

Tables 

Table No 3 - Group Statistics 

Board Size N Mean Std. Deviation Std. Error Mean 

ROCE Percentage Less than 10 54 15.9287 18.05561 2.45706 

More than 10 67 19.4549 14.60148 1.78386 

PAT Less than 10 54 4.7574E2 1140.06534 155.14324 

More than 10 67 2.4408E3 4113.89345 502.59208 

ROA Less than 10 54 1.78188E1 62.327403 8.481685 

More than 10 67 1.38717E1 16.972589 2.073532 

ROE Less than 10 54 7.57333 25.774133 3.507415 

More than 10 67 1.52733E1 14.511155 1.772820 

ROCE 

Percentage 

PAT 

ROA 

ROE 

Equal 

variances 

assumed 

Equal 

variances 

not 

assumed 

Equal 

variances 

assumed 

Equal 

variances 

not 

assumed 

Equal 

variances 

assumed 

Equal 

variances 

not 

assumed 

Equal 

variances 

assumed 

Equal 

variances 

not 

assumed 

Table no 4 - Independent Samples Test 

Levene's Test t-test for Equality of Means 

for Equality 

of Variances 

F Sig. T Df Sig. 

(2- 

Mean 

Difference 

Std. Error 

Difference 

95% Confidence Interval 

of the Difference 

tailed) 

Lower Upper 

.310 .579 - 119 .237 -3.52622 2.96826 -9.40367 2.35122 

1.188 

- 

1.161 

22.013 .000 - 

3.404 

- 

3.736 

101.052 .248 -3.52622 3.03632 -9.54944 2.49699 

119 .001 - 

1965.10058 

78.292 .000 - 

1965.10058 

577.30462 - 

3108.22139 

525.99261 - 

3012.20992 

- 

821.97977 

- 

917.99124 

4.086 .045 .496 119 .620 3.947047 7.950263 -11.795268 19.689362 

2.415 .123 - 

2.073 

.452 59.354 .653 3.947047 8.731467 -13.522396 21.416491 

- 

1.959 

119 .040 -7.699950 3.714946 -15.055915 -.343986 

79.379 .054 -7.699950 3.929994 -15.521826 .121925 


ROCE 

Percentage 

Table no.5 - Descriptive 

N Mean Std. 

Deviation 

Std. Error 95% Confidence Interval for 

Mean 

Minimum 

Lower Upper Bound 

Bound 

SBSNC 7 19.4514 12.20959 4.61479 8.1594 30.7434 2.57 41.33 

SBSCL 47 15.4040 18.81490 2.74443 9.8798 20.9283 -1.09 112.62 

LBSNC 4 14.8725 12.95788 6.47894 -5.7464 35.4914 3.49 26.71 

LBSNC 63 19.7459 14.74426 1.85760 16.0326 23.4592 .23 75.38 

Total 121 17.8812 16.25871 1.47806 14.9548 20.8077 -1.09 112.62 

Table no.6 - Test of Homogeneity of Variances 

Levene Statistic df1 df2 Sig. 

ROCE Percentage .214 3 117 .887 

ROA 13.244 3 117 .000 

ROE 1.207 3 117 .311 

PAT 13.348 3 117 .000 

Maximum 

ROA SBSNC 7 6.60965E1 143.189447 5.412052E1 -66.33160 198.52470 2.106 390.464 

SBSCL 47 1.06285E1 37.336588 5.446101 -.33394 21.59093 -91.762 213.904 

LBSNC 4 8.57128 9.137788 4.568894 -5.96898 23.11154 .284 16.515 

LBSNC 63 1.42083E1 17.340297 2.184672 9.84119 18.57538 .067 107.611 

Total 121 1.56332E1 43.336642 3.939695 7.83292 23.43356 -91.762 390.464 

ROE SBSNC 7 1.30071E1 10.678417 4.036062 3.13125 22.88303 .530 33.200 

SBSCL 47 6.76404 27.301288 3.982302 -1.25192 14.78000 -95.300 87.200 

LBSNC 4 1.23700E1 9.592198 4.796099 -2.89333 27.63333 .780 20.500 

LBSNC 63 1.54576E1 14.802992 1.865002 11.72953 19.18570 -39.700 64.400 

Total 121 1.18369E1 20.591031 1.871912 8.13069 15.54320 -95.300 87.200 

PAT SBSNC 7 1.2823E3 1668.30978 6.30562E2 -260.5878 2825.2706 1.27 4904.74 

SBSCL 47 3.5561E2 1010.32335 1.47371E2 58.9686 652.2527 -3052.05 4904.74 

LBSNC 4 5.6386E3 9011.64567 4.50582E3 -8700.9492 19978.1292 1.13 18924.00 

LBSNC 63 2.2378E3 3658.53683 4.60932E2 1316.4209 3159.2020 .60 20040.00 

Total 121 1.5639E3 3293.10417 2.99373E2 971.1180 2156.5939 -3052.05 20040.00 

Table no.7 - ANOVA 

Sum of Squares Df Mean Square F Sig. 

ROCE Percentage Between Groups 560.926 3 186.975 .702 .553 

Within Groups 31160.553 117 266.330 

Total 31721.479 120 

ROA Between Groups 19330.457 3 6443.486 3.659 .015 

Within Groups 206037.285 117 1761.002 

Total 225367.743 120 

ROE Between Groups 2046.121 3 682.040 1.634 .185 

Within Groups 48832.749 117 417.374 

Total 50878.869 120 

PAT Between Groups 1.642E8 3 5.473E7 5.631 .001 

Within Groups 1.137E9 117 9719203.026 

Total 1.301E9 120 


Table no.8 - Multiple Comparisons 

Tukey HSD Post hoc test 

Dependent (I) Board (J) Board Mean Difference Std. Error Sig. 95% Confidence Interval 

Variable 

Composition Composition (I-J) 

Lower Bound Upper Bound 

Category Category 

ROCE Percentage SBSNC SBSCL 4.04739 6.61163 .928 -13.1848 21.2795 

LBSNC 4.57893 10.22885 .970 -22.0809 31.2388 

LBSNC -.29444 6.50189 1.000 -17.2406 16.6517 

SBSCL SBSNC -4.04739 6.61163 .928 -21.2795 13.1848 

LBSNC .53154 8.49994 1.000 -21.6222 22.6853 

LBSNC -4.34183 3.14548 .514 -12.5400 3.8564 

LBSNC SBSNC -4.57893 10.22885 .970 -31.2388 22.0809 

SBSCL -.53154 8.49994 1.000 -22.6853 21.6222 

LBSNC -4.87337 8.41486 .938 -26.8054 17.0586 

LBSNC SBSNC .29444 6.50189 1.000 -16.6517 17.2406 

SBSCL 4.34183 3.14548 .514 -3.8564 12.5400 

LBSNC 4.87337 8.41486 .938 -17.0586 26.8054 

ROA SBSNC SBSCL 55.468057 * 1.700117E1 .008 11.15722 99.77889 

LBSNC 57.525265 2.630252E1 .133 -11.02803 126.07856 

LBSNC 51.888263 * 1.671898E1 .013 8.31293 95.46360 

SBSCL SBSNC -55.468057 * 1.700117E1 .008 -99.77889 -11.15722 

LBSNC 2.057208 2.185678E1 1.000 -54.90898 59.02340 

LBSNC -3.579794 8.088298 .971 -24.66065 17.50106 

LBSNC SBSNC -57.525265 2.630252E1 .133 -126.07856 11.02803 

SBSCL -2.057208 2.185678E1 1.000 -59.02340 54.90898 

LBSNC -5.637002 2.163800E1 .994 -62.03298 50.75898 

LBSNC SBSNC -51.888263 * 1.671898E1 .013 -95.46360 -8.31293 

SBSCL 3.579794 8.088298 .971 -17.50106 24.66065 

LBSNC 5.637002 2.163800E1 .994 -50.75898 62.03298 

ROE SBSNC SBSCL 6.243100 8.276783 .875 -15.32901 27.81521 

LBSNC .637143 1.280501E1 1.000 -32.73707 34.01136 

LBSNC -2.450476 8.139400 .990 -23.66452 18.76357 

SBSCL SBSNC -6.243100 8.276783 .875 -27.81521 15.32901 

LBSNC -5.605957 1.064067E1 .952 -33.33915 22.12724 

LBSNC -8.693576 3.937674 .127 -18.95649 1.56934 

LBSNC SBSNC -.637143 1.280501E1 1.000 -34.01136 32.73707 

SBSCL 5.605957 1.064067E1 .952 -22.12724 33.33915 

LBSNC -3.087619 1.053416E1 .991 -30.54321 24.36797 

LBSNC SBSNC 2.450476 8.139400 .990 -18.76357 23.66452 

SBSCL 8.693576 3.937674 .127 -1.56934 18.95649 

LBSNC 3.087619 1.053416E1 .991 -24.36797 30.54321 

PAT SBSNC SBSCL 926.73079 1.26303E3 .883 -2365.1592 4218.6208 

LBSNC -4356.24857 1.95404E3 .121 -9449.1316 736.6345 

LBSNC -955.47000 1.24207E3 .868 -4192.7190 2281.7790 

SBSCL SBSNC -926.73079 1.26303E3 .883 -4218.6208 2365.1592 

LBSNC -5282.97936 * 1.62376E3 .008 -9515.0464 -1050.9123 

LBSNC -1882.20079 * 6.00887E2 .012 -3448.3153 -316.0863 

LBSNC SBSNC 4356.24857 1.95404E3 .121 -736.6345 9449.1316 

SBSCL 5282.97936 * 1.62376E3 .008 1050.9123 9515.0464 

LBSNC 3400.77857 1.60751E3 .154 -788.9271 7590.4842 

LBSNC SBSNC 955.47000 1.24207E3 .868 -2281.7790 4192.7190 

SBSCL 1882.20079 * 6.00887E2 .012 316.0863 3448.3153 

LBSNC -3400.77857 1.60751E3 .154 -7590.4842 788.9271 

*. The mean difference is significant at the 0.05 level. 


Table no.14 - Test of Homogeneity of Variances 

Levene Statistic df1 df2 Sig. 

ROCEPercentage 1.638 2 118 .199 

ROA 2.402 2 118 .095 

ROE .863 2 118 .425 

PAT 2.582 2 118 .080 

Table no.15 - ANOVA 

Sum of Squares Df Mean Square F Sig. 

ROCEPercentage Between Groups 600.040 2 300.020 1.138 .324 

Within Groups 31121.440 118 263.741 

Total 31721.479 120 

ROA Between Groups 4238.990 2 2119.495 1.131 .326 

Within Groups 221128.753 118 1873.972 

Total 225367.743 120 

ROE Between Groups 977.676 2 488.838 1.156 .318 

Within Groups 49901.193 118 422.891 

Total 50878.869 120 

PAT Between Groups 4.629E7 2 2.314E7 2.176 .118 

Within Groups 1.255E9 118 1.064E7 

Total 1.301E9 120 

Table No.16 - Multiple Comparisons 

Tukey HSD Post hoc test 

Dependent (I) Organization (J) Organization Mean Difference Std. Error Sig. 95% Confidence Interval 

Variable Structure 

Category 

Structure 

Category 

(I-J) 

Lower Bound Upper 

Bound 

ROCEPercentage Diversified Concentrated -6.66098 4.69627 .335 -17.8083 4.4863 

Block Holding -7.56100 5.42110 .347 -20.4288 5.3068 

Concentrated Diversified 6.66098 4.69627 .335 -4.4863 17.8083 

Block Holding -.90002 3.71026 .968 -9.7069 7.9068 

Block Holding Diversified 7.56100 5.42110 .347 -5.3068 20.4288 

Concentrated .90002 3.71026 .968 -7.9068 9.7069 

ROA Diversified Concentrated -7.070392 1.251833E1 .839 -36.78455 22.64377 

Block Holding -19.588336 1.445040E1 .368 -53.88857 14.71190 

Concentrated Diversified 7.070392 1.251833E1 .839 -22.64377 36.78455 

Block Holding -12.517943 9.890006 .417 -35.99338 10.95750 

Block Holding Diversified 19.588336 1.445040E1 .368 -14.71190 53.88857 

Concentrated 12.517943 9.890006 .417 -10.95750 35.99338 

ROE Diversified Concentrated .837369 5.946743 .989 -13.27813 14.95287 

Block Holding -6.275343 6.864561 .632 -22.56943 10.01874 

Concentrated Diversified -.837369 5.946743 .989 -14.95287 13.27813 

Block Holding -7.112712 4.698177 .288 -18.26455 4.03913 

Block Holding Diversified 6.275343 6.864561 .632 -10.01874 22.56943 

Concentrated 7.112712 4.698177 .288 -4.03913 18.26455 

PAT Diversified Concentrated 668.63707 9.43094E2 .759 -1569.9402 2907.2144 


Concentrated Diversified -668.63707 9.43094E2 .759 -2907.2144 1569.9402 


Block Holding Diversified 865.61900 1.08865E3 .707 -1718.4595 3449.6975 

Concentrated 1534.25607 7.45084E2 .103 -234.3144 3302.8266 


Abstract 

Corporate Social Responsibility: Ethics and Challenges In India 

Ms. Vandana Gupta, Assistant professor, 

Department of Management, Kasturi Ram College of Higher Education Narela, Delhi. 

Affiliated by Guru Gobind Singh Indraprastha University Delhi. 

Mail id- vandanakrche@gmail.com 

Dr.Vikrant Agarwal, Associate Professor, 

Department of Management, Kasturi Ram College of Higher Education Narela, Delhi. 

Affiliated by Guru Gobind Singh Indraprastha University Delhi. 

Mail.id- vikrantagarwal001@gmail.com 

Corporate Social Responsibility (CSR) is the responsibility of the corporate entity towards the society 

in consideration of the support given and sacrifices made by the society. The corporations exploit the 

natural resources of the country, cause incidental damage to environment and inconvenience to the 

people of the project area. Therefore, they have a responsibility towards the society to share a part of 

their profit. In India companies like TATA and Birla are practicing the Corporate Social Responsibility 

(CSR) for decades, long before CSR become a popular basis. CSR is in a very much budding stage. A 

lack of understanding, inadequately trained personnel, coverage, policy etc. further adds to the reach 

and effectiveness of CSR programs. Large no. of companies are undertaking these activities 

superficially and promoting/ highlighting the activities in Media. This article focuses on the finding & 

reviewing of the issues and challenges faced by CSR activities in India. 

Keywords: CSR, Corporate Social Responsibility, Societal Marketing, Central Public Sector 

Enterprises, incidental damage, Sustainable development. 

INTRODUCTION 

The concept of Corporate Social Responsibility (CSR) has been developing since the early 1970s. 

There is no single universally accepted definition of CSR, though there are some definitions given by 

certain authorities. CSR is the continuing commitment by business to behave ethically and contribute 

to economic development while improving the quality of life of the workforce and their families as 

well as of the local community and society at large. CSR is a term describing a company’s obligation 

to be accountable to all of its stakeholders in all its operations and activities. Socially responsible 

companies consider the full scope of their impact on communities and the environment when making 

decisions, balancing the needs of stakeholders with their need to make profit. CSR is a concept 

whereby organizations serve the interests of society by taking responsibility for the impact of their 

activities on customers, employees, shareholders, communities and the environment in all aspects of 

their operations. In simple terms CSR may be described as the responsibility of a corporation towards 

the society in consideration of the support given and the sacrifices made by the society. It is also 

important to bear in mind that there are two separate drivers for CSR. One relates to public policy. 

Because the impacts of the business sector are so large, and with a potential to be either positive or 

negative, it is natural that governments and wider society take a close interest in what business does. 

This means that the expectations on businesses are rising; governments will be looking for ways to 

increase the positive contribution of business. The second driver is the business driver. Here, CSR 

considerations can be seen as both costs (e.g., of introducing new approaches) or benefits (e.g., of 

improving brand value, or introducing products that meet sustainability demands). The remainder of 

this guide addresses the second of these drivers. Since businesses play a pivotal role both in job and 

wealth creation in society and in the efficient use of natural capital, CSR is a central management 


concern. It positions companies to both proactively manage risks and take advantage of opportunities, 

especially with respect to their corporate reputation and the broad engagement of stakeholders. The 

latter can include shareholders, employees, customers, communities, suppliers, governments, nongovernmental 

organizations, international organizations and others affected by a company’s activities. 

Above all, CSR is about sensitivity to context—both societal and environmental—and related 

performance. It is about moving beyond declared intentions to effective and observable actions and 

measurable societal impacts. Performance reporting is all part of transparent, accountable—and, hence, 

credible—corporate behavior. There is considerable potential for problems if stakeholders perceive 

that a firm is engaging in a public relations exercise and cannot demonstrate concrete actions that lead 

to real social and environmental benefits. 

Objectives: 

The paper is based on followings objectives: 

1) To study the concept of CSR and its legal position in India. 

2) To study the challenges for CSR in India. 

3) To study the factors influencing of using CSR in India. 

4) To study the companies using CSR in India. 

Methodology of the Paper: 

The study is based on secondary data. Secondary data had been and writings of various authors in the 

stream of industry, academician, and research. The Journals and books have been referred were 

described in the bibliography. 

IMPLEMENTING CORPORATE SOCIAL RESPONSIBILITY 

There is no “one-size-fits-all” method for pursuing a corporate social responsibility (CSR) approach. 

Each firm has unique characteristics and circumstances that will affect how it views its operational 

context and its defining social responsibilities. Each will vary in its awareness of CSR issues and how 

much work it has already done towards implementing a CSR approach. That said, there is considerable 

value in proceeding with CSR implementation in a systematic way—in harmony with the firm’s 

mission, and sensitive to its business culture, environment and risk profile, and operating conditions. 

Many firms are already engaged in customer, employee, community and environmental activities that 

can be excellent starting points for firm-wide CSR approaches. CSR can be phased in by focusing 

carefully on priorities in accordance with resource or time constraints. Alternatively, more 

comprehensive and systematic approaches can be pursued when resources and overall priorities permit 

or require. The bottom line is that CSR needs to be integrated into the firm’s core decision making, 

strategy, management processes and activities, be it incrementally or comprehensively. 

LEGAL POSITION RELATING TO CORPORATE SOCIAL RESPONSIBILITY IN INDIA 

In India CSR is in a very much budding stage and there is no such specific Act, Rule or Regulation 

relating to CSR However, there are voluntary guidelines issued by the Ministry of Corporate Affairs 

and guidelines issued by Ministry of Public Enterprises and Ministry of Heavy Industries of the 

Government of India. 

A. Voluntary Guidelines by Ministry of Corporate Affairs 

The Fundamental Principle of guidelines says, “Each business entity should formulate a CSR policy to 

guide its strategic planning and provide a roadmap for its CSR initiatives, which should be an integral 

part of overall business policy and aligned with its business goals. The policy should be framed with 


the participation of various level executives and should be approved by the Board.” The Guidelines 

provide certain core elements of CSR Policy, namely – 

• Care for all Stakeholders, 

• Ethical functioning, 

• Respect for Workers' Rights and Welfare, 

• Respect for Human Rights, 

• Respect for Environment and 

• Activities for Social and Inclusive Development 

Further the Guidelines provides for the implementation guidance for business and Industrial entities: 

1. The CSR policy of the business entity should provide for an implementation strategy; 

2. Companies should allocate specific amount in their budgets for CSR activities and 

3. The companies should disseminate information on CSR policy, activities and progress in a 

structured manner to all their stakeholders and the public at large through their websites, annual 

reports, and other communication media. 

B. Guideline for Corporate Social Responsibility for Central Public Sector Enterprises (CPSEs) 

by Ministry of Public Enterprises and Ministry of Heavy Industries 

This guideline on Corporate Social Responsibility (CSR) was issued by Ministry of Public Enterprises 

on 9th April 2010 The Salient Features of Guideline: 

1. Planning of CSR Action Plan: The planning for Corporate Social Responsibility should start 

with the identification of the activities to be undertaken. Company specific Corporate Social 

Responsibility strategies should be developed that mandate the design of Corporate Social 

Responsibility Action Plan, with a shift from the casual approach to the project based 

accountability approach. Each of these plans should clearly specify requirements relating to 

baseline survey; activities to be undertaken, budgets allocated, time-lines prescribed, 

responsibilities and authorities defined and major results expected. 

2. Implementation of CSR Action Plan: CSR initiatives of Central Public Sector Enterprises 

(CPSEs) should consider the following parameters for identification/selection of 

schemes/projects: 

a) The time-frame and periodic milestones should be finalized at the outset; 

b) CSR activities should help in building a positive image of the company in the public 

perception; 

c) CSR projects may be closely linked with the principles of sustainable development, ensure 

gender sensitivity, skill enhancement, entrepreneurship development and employment 

generation by co-creating value with local institutions/people; 

d) Public-Private Partnership between the Government and the Central Public Sector Enterprise 

could also be encouraged to leverage the strengths of the latter in Disaster management; 

e) CSR is to be implemented by Special Agencies and generally NOT by staff of the CPSE 

concerned and 

f) Activities related to Sustainable Development will form a significant element of the total 

initiatives of CSR. 

3. National CSR Hub: The Department Of Public Enterprises, in conjunction with Standing 

Conference of Public Enterprises (SCOPE) and the CPSEs will create a National CSR Hub, 

which will undertake/facilitate the activities like Nation-wide compilation, documentation, and 

creation of database; Advocacy; Research; Conferences ,Seminars, Workshops - both national 

and international etc. 


4. Monitoring 

• Monitoring of the CSR projects is very crucial and needs to be a periodic activity of the 

Enterprise. 

• The Boards of CPSEs should discuss the implementation of CSR activities in their Board 

meetings. 

• CSR projects should also be evaluated by an independent external agency. 

C. Amendment in Companies Act 

The Companies Bill 2009, which is expected to be brought before India Parliament for consideration in 

the forthcoming Budget session, stipulates companies to earmark 2% of their annual profits for taking 

up CSR activities. 

Factors influences companies using CSR 

Many companies think that corporate social responsibility is a peripheral issue for their business and 

customer satisfaction more important for them. They imagine that customer satisfaction is now only 

about price and service, but they fail to point out on important changes that are taking place worldwide 

that could blow the business out of the water. The change is named as social responsibility which is an 

opportunity for the business. Some of the drivers pushing business towards CSR include: 

The Shrinking Role of Government 

In the past, governments have relied on legislation and regulation to deliver social and environmental 

objectives in the business sector. Shrinking government resources, coupled with a distrust of 

regulations, has led to the exploration of voluntary and non-regulatory initiatives instead. 

Demands for Greater Disclosure 

There is a growing demand for corporate disclosure from stakeholders, including customers, suppliers, 

employees, communities, investors, and activist organizations. 

Increased Customer Interest 

There is evidence that the ethical conduct of companies exerts a growing influence on the purchasing 

decisions of customers. In a recent survey, more than one in five consumers reported having either 

rewarded or punished companies based on their perceived social performance. 

Growing Investor Pressure 

Investors are changing the way they assess companies' performance, and are making decisions based 

on criteria that include ethical concerns. The Social Investment Forum reports that in the US in 1999, 

there was more than $2 trillion worth of assets invested in portfolios that used screens linked to the 

environment and social responsibility 

Competitive Labour Markets 

Employees are increasingly looking beyond paychecks and benefits, and seeking out employers whose 

Philosophies and operating practices match their own principles. In order to hire and retain skilled 

employees, companies are being forced to improve working conditions. 


Supplier Relations 

As stakeholders are becoming increasingly interested in business affairs, many companies are taking 

steps to ensure that their partners conduct themselves in a socially responsible manner. Some are 

introducing codes of conduct for their suppliers, to ensure that other companies' policies or practices 

do not tarnish their reputation. 

Positive outcomes of using CSR policy 

The concept of corporate social responsibility is now firmly rooted on the global business agenda. But 

in order to move from theory to concrete action, many obstacles need to be overcome. A key challenge 

facing business is the need for more reliable indicators of progress in the field of CSR, along with the 

dissemination of CSR strategies. Transparency and dialogue can help to make a business appear more 

trustworthy, and push up the standards of other organizations at the same time. Some of the positive 

outcomes that can arise when businesses adopt a policy of social responsibility include: 

1) Company Benefits 

Improved financial performance; 

Lower operating costs; 

Enhanced brand image and reputation; 

Increased sales and customer loyalty; 

Greater productivity and quality; 

More ability to attract and retain employees; 

Reduced regulatory oversight; 

Access to capital; 

Workforce diversity; 

Product safety and decreased liability. 

2) Benefits to the Community and the General Public 

Charitable contributions; 

Employee volunteer programs; 

Corporate involvement in community education, employment and homelessness programs; 

Product safety and quality. 

3) Environmental Benefits 

Greater material recyclability; 

Better product durability and functionality; 

Greater use of renewable resources; 

Integration of environmental management tools into business plans, including life-cycle assessment 

and costing, environmental management standards, and eco-labeling. 

Challenges in INDIA 

In India, over time, the expectations of the public has grown enormously with demands focusing on 

poverty alleviation, tackling unemployment, fighting inequality or forcing companies to take 

affirmative action. The historical driver of CSR has been philanthropy or a sense of ethics. After the 

Second World War, a variety of national and international regulations arose through bodies such as the 

International Labor Organization (ILO) emphasizing the need for an active social policy for 

transnational companies (TNC’s). This additional driver, international institutions, has relevance for 


India through the work of the ILO, the OECD, Socially Responsible Investment (SRI), the SA8000 

Social Accountability scheme and through the work of the UN Commission on Human Rights which 

tackled the human rights responsibilities of TNC’s. In India, some public sector companies can spend 

up to 5% of their profits on CSR activities. Pressure groups have been quite successful in inducing 

companies to fund CSR schemes, even to the point of using kidnapping as a tactic! Forms of CSR 

differ according to the country or region. In Europe, for example, notions of CSR probably developed 

out of the Church and a sense of ethics. In India, CSR has evolved to encompass employees, 

customers, stakeholders and notions of sustainable development or corporate citizenship. In 

transnational companies, the approach to CSR typically emerges from one of three elements including 

a decentralized strategy (which might examine human rights), a centralized strategy (which would be 

company-wide) or a globally integrated strategy (which would include Coca Cola or oil companies - 

where local actions can impinge globally).challenges for using CSR in front of companies as follows: 

Lack of Community Participation in CSR Activities: There is a lack of interest of the local 

community in participating and contributing to CSR activities of companies. This is largely 

attributable to the fact that there exists little or no knowledge about CSR within the local communities 

as no serious efforts have been made to spread awareness about CSR and instill confidence in the local 

communities about such initiatives. The situation is further aggravated by a lack of communication 

between the company and the community at the grassroots. 

Need to Build Local Capacities: There is a need for capacity building of the local non-governmental 

organizations as there is serious dearth of trained and efficient organizations that can effectively 

contribute to the ongoing CSR activities initiated by companies. This seriously compromises scaling 

up of CSR initiatives and subsequently limits the scope of such activities. 

Issues of Transparency: Lack of transparency is one of the key issues brought forth by the survey. 

There is an expression by the companies that there exists lack of transparency on the part of the local 

implementing agencies as they do not make adequate efforts to disclose information on their programs, 

audit issues, impact assessment and utilization of funds. This reported lack of transparency negatively 

impacts the process of trust building between companies and local communities, which is a key to the 

success of any CSR initiative at the local level. 

Non-availability of Well Organized Non-governmental Organizations: It is also reported that there 

is non-availability of well organized nongovernmental organizations in remote and rural areas that can 

assess and identify real needs of the community and work along with companies to ensure successful 

implementation of CSR activities. This also builds the case for investing in local communities by way 

of building their capacities to undertake development projects at local levels. 

Visibility Factor: The role of media in highlighting good cases of successful CSR initiatives is 

welcomed as it spreads good stories and sensitizes the local population about various ongoing CSR 

initiatives of companies. This apparent influence of gaining visibility and branding exercise often leads 

many nongovernmental organizations to involve themselves in event-based programs; in the process, 

they often miss out on meaningful grassroots interventions. 

Narrow Perception towards CSR Initiatives: Non-governmental organizations and Government 

agencies usually possess a narrow outlook towards the CSR initiatives of companies, often defining 

CSR initiatives more donor-driven than local in approach. As a result, they find it hard to decide 

whether they should participate in such activities at all in medium and long run. 

Non-availability of Clear CSR Guidelines: There are no clear cut statutory guidelines or policy 

directives to give a definitive direction to CSR initiatives of companies. It is found that the scale of 


CSR initiatives of companies should depend upon their business size and profile. In other words, the 

bigger the company, the bigger is its CSR program. 

Lack of Consensus on Implementing CSR Issues: There is a lack of consensus amongst local 

agencies regarding CSR projects. This lack of consensus often results in duplication of activities by 

corporate houses in areas of their intervention. This results in a competitive spirit between local 

implementing agencies rather than building collaborative approaches on issues. This factor limits 

company’s abilities to undertake impact assessment of their initiatives from time to time. 

CORPORATE SOCIAL RESPONSIBILITY IN INDIA 

India has a large public sector with several huge corporations and companies operating in various 

sectors like petroleum, heavy industries, aviation, mining, steel, equipment manufacturing and 

shipping. The Indian public sector has had a long tradition of corporate social responsibility and the 

initiatives of corporations like the Oil and Natural Gas Corporation Ltd. (ONGC), Steel Authority of 

India Ltd (SAIL) and Gas Authority of India Ltd. (GAIL) have played an important role in the 

development of several backward regions of the country. Indian Airlines and Bharat Heavy Electronics 

Ltd (BHEL) have been widely acclaimed for their disaster management efforts. The National Mineral 

Development Corporation Ltd. (NMDC) has contributed a lot in building infrastructure like school 

buildings, roads, Anganwadi buildings and also providing ambulance and medical facilities in and 

around its operational area. Although CPSEs have started giving attention towards their social 

responsibility, the private sector has to go a long way in coming up to the expectations in the area of 

social responsibility. 

Indian companies following CSR 

Steel Authority of India Limited (SAIL): SAIL is the largest steel maker of India and amongst the 

top public sector enterprises in terms of turnover with the prestigious status of ‘Maharatna’. With this 

comes the responsibility of being a catalyst for positive change. Apart from the business of 

manufacturing steel, the objective of the company is to conduct business in ways that produce social, 

environmental and economic benefits to the communities in which it operates. One of SAIL’s Core 

Values – Concern for People – also reflects the company’s commitment towards society at large, 

which it endeavors to fulfill through wide-ranging and diversified initiatives and activities under 

Corporate Social Responsibility (CSR).For SAIL, CSR was an integral part of its operations ever since 

the establishment of its production units in remote locations of the country since the early 1950s. 

Tata Steel: Tata Steel’s CSR initiatives have been recognized with many awards. Since 2006, the 

company has showcased an exceptional track record of receiving this coveted award initiated by the 

CII-ITC Centre of Excellence for Sustainable Development. Recently the Company has received the 

CNBC Asia’s Corporate Social Responsibility Award at CNBC-TV 18 India Business Leader Awards 

(IBLA) and the corporate social responsibility award at the seventh edition of NDTV Profit Business 

Leadership Awards. In addition to this, Tata Steel has been recognized by other prestigious awards like 

Safety and Health Excellence Recognition Award 2010 by the World Steel Association, was adjudged 

as the winner in ‘Corporate Social Responsibility’ at the Procurement Leaders Forum- 2011 and 

honored with the ‘Rashtriya Khel Protsahan Puruskar’ for the second consecutive year in 2010. Other 

esteemed awards include the CSR Excellence Award 2010 by ASSOCHAM, National CSR Committee 

and CSR Organizing Committee; the Business world-FICCI-SEDF Corporate Social Responsibility 

Award 2009; the Best Corporate Social Responsibility Practice Award at the 6th Social and Corporate 

Governance Awards 2010 by the Bombay Stock Exchange. 

Dabur: Dabur’s CSR initiatives are driven through Sustainable Development Society or SUNDESH, 

an outcome of the vision of Dabur India Ltd founder Dr. S.K Burman. Sustainable Development 


Society (SUNDESH) is sworn to the mission of ensuring overall socio-economic development of the 

rural & urban poor on a sustainable basis, through different participatory and need-based initiatives. It 

aims to reach out to the weaker and more vulnerable sections. 

CONCLUSION 

There is a need to promote a drive in Government Companies towards greater accountability on 

Corporate Social Responsibility (CSR). In order to attain the social objectives, there is a need for 

framing a CSR Policy in every company, as given under voluntary guidelines by Ministry of Corporate 

Affairs, for prioritization of activities for social spending and allocation of separate funds for this 

purpose. Moreover, to have an impact of the CSR spending and utilization of allocated budget, there 

should be a system of periodical monitoring and reporting to the Board of Directors as given in 

guidelines by Ministry of Heavy Industries and The Companies Bill 2009, which is expected to be 

brought before Parliament for consideration in the forthcoming Budget session. CSR is regarded as an 

important business issue of Indian companies irrespective of size, sector, and business goal. Therefore, 

CSR activity has to play a positive impact not only on development of community but also on their 

business Promotions. 

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Bhopal, India. 


A Study on impact of urbanization on Agriculture and Urban sprawl - Special 

reference to Chidambaram Town 

Dr. G. Vedanthadesikan 

Sr.Assistant Professor, Centre for Rural Development, 

(On deputation to Rural Development Wing, Directorate of Distance Education, Annamalai 

University, Annamalai Nagar 608 002 

U. Mathivanan 

Assistant Professor, Economics Wing, Directorate of Distance Education, Annamalai University, 

Annamalai Nagar 608 002 

Introduction 

Urbanization happens because of the increase in the extent and density of urban areas. The 

density of population in urban areas increases because of the migration of people from less 

industrialized regions to more industrialized areas. 

Causes of urbanization 

Urbanization usually occurs when people move from villages to cities to settle, in hope of a 

higher standard of living. This usually takes place in developing countries. In rural areas, people 

become victims of unpredictable weather conditions such as drought and floods, which can 

adversely affect their livelihood. Consequently many farmers move to cities in search of a better 

life. This can be seen in Karnataka as well where farmers from Raichur, Gulbarga districts which 

are drought-stricken areas, migrate to Bangalore to escape poverty. Cities in contrast, offer 

opportunities of high living and are known to be places where wealth and money are centralized. 

Most industries and educational institutions are located in cities whereas there are limited 

opportunities within rural areas. This further contributes to migration to cities. But in the context 

of towns due to urbanization the adjacent agricultural areas are affected and the urban sprawl 

further deteriorated the town and the villages. 

Selection of the study area and the samples 

For the purpose of this study Chidambaram Town is divided into three circles. The first 

circle comprises four sannathi streets and four car streets. Second circle comprises the areas next 

to the car streets but before the extension areas. The third circle comprises the extension areas. 

From the four sides of the extension area 98 agricultural respondents were selected randomly who 

are affected by the urbanization. 

Now, the third circle (extension area) in the study area was previously the agricultural 

fields. Normally, the extension of human settlements affects the agricultural activities. 

For the past 15 to 20 years, the human settlements rapidly replaced the agriculture in all the 

four fields of the study area. The data of climate change at cuddalore district, particularly 

Chidambaram taluk is entirely different one. This taluk faced heavy flood and storm and or heavy 

drought. 

Authentic information from meteorological department pointed out that for the past ten 

years, this taluk received the rainfall not only during the monsoon and also during winter, 

particularly at the end of December and January. For example, during October and November 


2011, this district received surplus rainfall, that made the farmers much happy to continue their 

farming activities. Unfortunately, at the end of December 2011, the coastal areas of cuddalore, 

particularly Chidambaram taluk is totally affected by the famous cyclone ‘Thane’. The farmers 

were supposed to harvest the paddy during the second week of January 2012. But the thane 

cyclone destroyed the crops completely that left the farmers in lurch. 

It is a well known fact that farmers are unable to get even the production cost or at least the 

75% of the investment. 

Hence, to the impact of urbanization on agriculture, it is divided to collect the information 

from the agricultural people from the study area. Fortunately, 98 respondents are available in the 

study area, which have been already selected as a sample from the three circles. 

First of all a particular question is raised that are you continuing the agricultural activities 

followed by the questions why you are not continuing the agricultural activities. The responses are 

tabulated as follows: 

Table 1 Classification of agricultural respondents on the basis of farm size 

Sl.No. Area Farm size Total 

Small Medium Marginal Large farmers 

farmers farmers farmers 

1. First circle 11 

(32.35) 

12 

(35.29) 

5 

(14.71) 

6 

(17.65) 

34 

(100.00) 

2. Second circle 12 

(33.33) 

15 

(41.67) 

4 

(11.12) 

5 

(13.88) 

36 

(100.00) 

3. Third circle 15 

(53.58) 

9 

(32.14) 

2 

(7.14) 

2 

(7.14) 

28 

(100.00) 

Total 38 

(38.78) 

36 

(32.65) 

11 

(12.24) 

13 

(16.33) 

98 

(100) 

Source: computed 

Figures in parenthesis denotes percentage 

Out of 98 respondents belong to agricultural as an occupation, 38 (38.78%) respondents are 

the small farmers, in which the respondents are in the third circle followed by 12 in second circle 

and 11 in the first circle. 32 (32.65%) respondents are the medium farmers in which 14 of them are 

in the second circle. 16 are the large farmers and 12 are the marginal farmers, in which maximum 

respondents living in the first circle. 

Table 2 Do you continue the farming activities 

Sl. NO Area Yes No Total 


(35.29) 

22 

(64.71) 

34 

(100.00) 

2. Second circle 10 

(27.78) 

26 

(72.22) 

36 

(100.00) 


(21.43) 

22 

(78.57) 

28 

(100.00) 

Total 28 

(28.57) 

7 

(71.43) 

98 

(100.00) 




Out of 98 respondents belong to agricultural group, 70 (71.43%) respondents stated that 

they did not continue the farming activities. Since, these 70 respondents come under small and 

medium farmers’ category. The 28 respondents are coming under marginal and large farmer’s 

category. 

Table 3 Reasons for not continuing the farming activities 

Sl.No. Reason Farm size 

Small farmers 

N= 31 

Medium 

farmers 

N=25 

Marginal 

farmers 

N=6 

Large 

farmers 

N=8 

1. Inclement monsoon 31 22 6 8 

2. Surrounding field are 

31 20 6 3 

converted into plots 

3. Plots reduced the water 31 23 6 6 

column 

4. Stagnation of water due 26 22 6 6 

to plots 

5. Forced by the real estate 31 20 2 2 

people 

6. Construction of bypass 28 22 5 4 

roads 

7. Unable to take up the 

31 23 4 6 

agricultural implements 

8. Water channels are 

31 25 5 6 

disturbed or closed 

9. Higher value of land 31 25 6 8 



No doubt that urbanization made an impact on agriculture. Due to urbanization when 

compared with others, small farmers are more affected more in number. To find out this 9 reasons 

have been given to the respondents. This is the multi-response reasons. 

In the case of small farmers, except two reasons, i.e., stagnation of water due to plots and 

construction bypass, all the 31 respondents stated that the remaining other 7 are the reasons for 

urbanization. Even for the remaining two out of 31, 26 and 28 stated these two should also be in 

the reasons. Since, 5 and 3 small farmers did not have the problems of stagnation of water due to 

plots and construction of bypass respectively. Here, the main reason for not continuing the farming 

activities are the fields of small farmers are surrounded by the plots forced by the real estate people 

to sell and water shortage or non-availability of water made them to continue the farming 

activities. 

Moreover, they felt that instead of continuing the farming activities, it is better to sell the 

land at the higher price and the income could be deposited that fetches regular income instead of 

loss. 

In the case of medium farmers also all the 23 respondents felt that due to urbanization 

process water channels are either blocked or closed and the value of land is increased. Except few 

almost 95% of the medium farmers strongly felt the factors are the main reasons for destructing the 

agricultural activities. 


In the case of marginal farmers and large farmers almost all of them strongly agreed that 

the stated nine reasons are the cause of destruction of agriculture by means of urbanization. 

Further, it is important to note that since, some of the respondents are keeping their lands 

uncultivated; it led to lost to them. Out of 31 respondents from the small farmers category and 25 

from medium farmers category 14 and 11 respectively sold out their lands for the best price. 

To keep their social status and prestige the marginal and large farmers are keeping their 

land. Another point to be noted is, since, they have to good health status, and they are expecting 

that further urbanization may increase the value of the land. 

Urban sprawl is also analyzed here. Urban sprawl means increase in spatial scale or 

increase in peripheral area of towns. But urban sprawl has its own drawbacks. 

They are: 

i. The town and its infrastructure may not be adequately planned. 

ii. Traffic is high with increased time needed for community. 

iii. Essential services are not reachable within time. 

iv. City administration becomes extremely difficult. 

To verify the above, four points have been converted into statements and opinion of the 

respondents has been collected on the basis of five point scale. 

Table 4 Opinion of the respondents on urban sprawl 

Sl. No. Area Town and its infra-structure is not adequately planned Total 

Agree Strongly agree Disagree Strongly No comment 

disagree 


85 

6 

4 

- 100 

(5.00) (85.00) (6.00) (4.00) 

2. Second 10 90 

- - - 100 

circle (10.00) (90.00) 


- 19 

77 

- 100 

(4.00) 

(19.00) (77.00) 

Total 19 

(20.00) 

175 

(57.67) 

25 

(19.00) 

81 

(3.33) 

- 300 

(100) 

Table 4 continued…. 

Sl. No. Area Traffic is high with increased time needed for commuting Total 


disagree 

1. First circle 18 82 

- - - 100 

(18.00) (82.00) 

2. Second 15 50 

30 

5 

- 100 

circle (15.00) (50.00) (30.00) (5.00) 

3. Third circle - - 20 

80 

- 100 

(20.00) (80.00) 

Total 33 

(20.00) 

132 

(57.67) 

50 

(19.00) 

85 

(3.33) 

- 300 

(100) 



Sl. No. Area Essential services not reached in time Total 


disagree 


- 10 

88 

- 100 

(2.00) 

(10.00) (88.00) 

2. Second 15 28 

16 

41 

- 100 

circle (15.00) (28.00) (16.00) (41.00) 

3. Third circle 29 41 

16 

14 

- 100 

(29.00) (41.00) (16.00) (14.00) 

Total 46 

(20.00) 

69 

(57.67) 

42 

(42.00) 

143 

(3.33) 

- 300 

(100) 


Sl. No. Area Town administration become extremely difficult Total 

Agree Strongly 

agree 

Disagree Strongly 

disagree 

No 

comment 

1. First circle 10 80 

5 

5 

- 100 

(10.00) (80.00) (5.00) (5.00) 

2. Second 15 75 

6 

4 

- 100 

circle (15.00) (75.00) (6.00) (4.00) 

3. Third circle 11 81 

3 

5 

- 100 

(11.00) (81.00) (3.00) (5.00) 

Total 36 

(20.00) 

236 

(57.67) 

14 

(19.00) 

14 

(3.33) 

- 300 

(100) 



With regard to town and its insufficient planned infrastructure, 175 (58.33%) respondents 

from first and second circle strongly agreed this one and 19 (6.33%) of the first and second circle 

agreed this statement. Only 10 respondents from the first circle disagreed this statement. The 

reasons for agreement are due to the absence of order in the settlements and unauthorized 

encroachments. 

Whereas in the third circle 81 (27%) and 25 (8.33%) respondents respectively disagreed the 

statement since, they are in the extension area and their settlement and the common infra-structure 

is well-planned. 

Regarding the increase of traffic, out of 30 respondents 132(44%) and 33 (11%) 

respondents strongly agreed the statement. They are from first two circles in which 100 

respondents are from the first circle itself. Whereas 35 from second circle and 100 from third circle 

disagreed the statement since there is no traffic congestion in their area. 

In the case of essential services normally the first two circles, (on the basis of the distance) 

get benefited, whereas the outskirts do not get the same. From the table, it is inferred that the same 

thing is happened. 

In the context of extreme difficulty in town administration, out of 300 respondents, 236 

(78.67%) opined that the administration is facing much difficulty to and maintain and run the 

show. Because, when urbanization extends, it is very difficult to the administration to provide the 

basic needs and infrastructural facilities. 


Findings 

From the above analysis it is found that the urbanization affected the agricultural activities 

in the study area considerably and the urban sprawl affected the urbanized area of the study area. 

Policy suggestions 

1. Regulation of agricultural filed is needed. 

2. Conversion of agricultural land into residential area should be stopped by a government 

order. 

3. Farmers are to be provided all infrastructural facilities to continue farming instead of 

selling 

4. Avoiding further construction of houses particularly apartments in the first two circles. 

5. A well planned construction having all the facilities in the third circle is needed 

References 

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Interdependence , Working Paper, 196, Overseas Development Institute, London. 

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An Analysis of Interdependence , in Kundu, A.and Sharma, A. N.(eds), Informal Sector in India, Institute 

of Human Development, New Delhi 

Kundu, A. and Gupta, S.( 2000) Declining population mobility, Liberalisation and growing Regional 

Imbalances -- The Indian Case in Kundu, A. (ed ) , Inequality, Mobility and urbanization, Indian Council 

of social Science Research, Manak Publications, New Delhi 

Moonis Raza and Kundu A.(1978) : Some aspects of Disfunctional Characteristics of Urbanisation. Socio- 

Economic Development Problems in South and South East Asia, Popular Prakashan, Bombay. 

Mukherji, Shekhar (1993) Poverty Induced Migration and Urban Involution in India : Cause and 

Consequences, International Institute for population Sciences. Pp 1-91. 

Mukherji, Shekhar (1995), Poverty Induced Migration and Urban Involution in ESCAPCountries, Paper 

presented at UN-ESCAP, Expert Group Meeting on Poverty and Population in ESCAP Region, Bangkok, 

Sept 1995.pp 1-45 

Mukherji, Shekhar (2001), Linkage between Migration , Urbanisation and Regional disparities in India : 

Required Planning Strategies. IIPS Research Monograph, Bombay, pp. 1-226. 

Nayak, P. R. (1962): "The Challenge of Urban Growth to Indian Local Government" in Turner (ed.) India's 

Urban Future, University of California Press, Berkley. 

Pathak, P and Mehta, D. (1995) Recent Trend in Urbanisation and Rural-Urban Migration in India : Some 

Explanations and Projections , Urban India, vol.15, No.1, pp.1-17. 

Premi, M. K. (1991): "India’s Urban Scene and Its Future Implications", Demography India, 20(1) 

Registrar General (1991) Census of India , Emerging Trends of Urbanisation in India, Occasional paper No. 

1 of 1993, Registrar General, New Delhi 

Registrar General, 2001: Census of India, 2001, India, 2A, Mansingh Road, New Delhi 110011, 25 th July, 

2001 

Sen, A. and Ghosh, J. (1993): Trends in Rural Employment and Poverty Employment Linkage, ILO-ARTEP 

Working Paper, New Delhi 

Sovani, N. V. (1966): Urbanisation and Urban India, Asia Publishing House, Bombay 

United Nations (1993) World Urbanisation Prospects- The 1992 Revision ,United Nations. 


Barriers to Innovation Adoption: A study on SMEs operating in the knitwear 

cluster of Tirupur District 

Abstract 

Dr. (Mrs.) S. Poornima, Associate Professor, 

Department of Business Management, PSGR Krishnammal College for Women, Peelamedu, 

Coimbatore, India. E mail: sripournima@gmail.com. 

Mrs. Savitha Nair, Assistant Professor, 

RVS Institute of Management Studies and Research, Sulur, Coimbatore, India. 

E mail: savipradhi@yahoo.com 

Innovation plays a crucial role in the economic development of nations. With increasing competition 

and paced information dissemination, the survival and success of enterprises indisputably depend on 

their ability to innovate. Facilitators of innovation have been largely researched in developed 

economies, whereas research on SMEs in emerging economies, especially with reference to barriers to 

innovation, has been largely neglected. Though it has been empirically proved that innovativeness will 

help organizations to enhance upon their performance, not all firms engage in innovative activities. 

SMEs are found to have lower propensity to engage in innovation on account of several barriers 

related to cost, market, technology, regulation etc. The present study investigates the barriers faced by 

the SMEs in the knitwear cluster of Tirupur, in their efforts to adopt different types of innovative 

practices in their organizations. The results throw light on the issues faced by the firms in the cluster 

and suggest the efforts that can be taken to mitigate the impact of such barriers, thereby promoting 

innovative practices essential to face the international business challenges. 

Key words: Innovation, Barriers, SMEs, Knitwear Cluster 

1. Introduction 

Innovations have acquired a key role in the growth and competition strategies of firms today. The 

concept has received much attention over the past six decades from the industry as well as the 

academia. Innovation plays a crucial role in the economic development of nations. It is regarded as an 

essential tool to stimulate growth and enable firms to master the competition brought out by the forces 

of globalization and thereby drive organizational success (Tiwari, Buse, & Herstatt, 2007). There are 

empirical evidences indicating that implementing innovations improve organizational performance 

(Sawang, Unsworth, & Sorbello, 2007). In a business setting, innovation is considered to be central in 

creating strategic changes, through which a firm can develop positive outcomes in the form of 

improved business performance and competitive advantage. Innovation also means anticipating the 

needs of the market, offering additional quality or services, organizing efficiently, mastering details 

and keeping costs under control (Zhang, Lim, & Cao, 2004). A firm’s innovation strategy has to be 

multidimensional, ensuring the coordinated efforts of all the departments and functions involved. The 

dynamics of innovation is however complex as the decision to adopt innovations is surrounded by 

several factors that may either facilitate or create constraints for successful innovation adoption. This 

can be especially true for the Small and Medium enterprises (SMEs) operating in the Knitwear cluster 

of Tirupur competing in the international hosiery market with tough competitors from across the 

world. For these SMEs, constant innovative practices and their successful diffusion down their 

organizations have become imperative to face the stiffened international competition. 


2. Innovation: Meaning and Dimensions 

Organizational innovation is a vast multi-disciplinary area of research. Many authors have 

regarded innovation as a key factor for a company to survive and grow on a long term. While most 

researchers agree upon the definition of innovation, the research is fragmented from different 

perspectives with efforts being made towards a cumulative body of research and a general theory 

(Read, 2000). The concept of innovation is multidimensional. In general, innovation research can be 

approached from the perspectives of an individual, an organization, and a nation, focusing on personal 

traits, innovation management, and a nation’s source of competitiveness, respectively (Yeh-Yun & Yiching, 

2007). According to Rogers (1998), “innovation is an idea, practice or object that is perceived 

as new by an individual or other unit of adoption”. According to Cooper (2003), “innovation refers to 

alteration of what is established by the introduction of new elements or forms”. In the context of 

SMEs, innovation can be treated as any change that adds value to the organization. This value need not 

be only financial, but may also represent product quality, employee satisfaction, customer satisfaction 

or other less tangible measures (O'Leary, 2005). 

Existing literature classifies organizational innovation into different classes. Innovations can 

be either technological (product, service, process) or administrative (organizational structure, 

administrative process or programmes) (Damanpour & Gopalakrishnan, 2001). OSLO manual suggests 

that innovations adopted in an organization can be classified as Technological (product, process), 

marketing or organizational (OECD, 2010). Technological innovations are those that occur in the 

operating component and affect the technical system of an organization. It can be the adoption of a 

new idea pertaining to a new product or service, or the introduction of new elements in an 

organization’s production process or service operations. These innovations may be radical or 

incremental in nature. While marketing innovations involve new marketing methodologies to attract 

potential and existing customers, organizational or administrative innovations refer to new or 

improved working systems and methods in the organization to improve overall operational efficiency. 

3. Barriers to Innovations 

Though it has been proven by experience and through research, that innovation adoption can 

lead to better firm performance and competitive advantage, not all firms undertake innovations. A 

number of studies show that firm differences in barriers to innovation were related to cost, institutional 

constraints, human resources, organizational culture, flow of information and Government policy 

(Baldwin & Lin, 2002). In most of the studies relating to barriers of innovation, cost involved had been 

identified as the major barrier. High innovation costs have a negative and significant influence on the 

innovation propensity (Shiang & Nagaraj, 2009). 

According to the Canadian Survey of Innovation and Advanced Technology (SIAT), apart from the 

cost related problems, impediments that arise from government policy, labour market imperfections, 

internal organization problems and imperfections in the market for information were identified to be 

barriers for advanced technology adoption (Baldwin & Rafiquzzaman, 1996). Regulatory 

environments impose unwarranted burdens on SMEs through high and regressive compliance costs, 

lack of transparency in the application of rules and legislation, inefficient bankruptcy laws and 

procedures, lack of clarity and lucidity in product standards in world markets, unfair or non-transparent 

competition policy and ineffective anti-corruption measures (OECD, 2010). SMEs, even in 

industrialized countries, are expected to face relatively more barriers to innovation than large firms due 

to inadequate internal resources and expertise (Hadjimanolis, 1999). 

The decision to innovate often takes place under great uncertainty (Rosenberg, 2004). The 

barriers internal to an SME, that may hamper its internationalization can be limited information on 

foreign markets, supply chain and technology partners; lack of time and resources for international 

engagement; lack of qualified personnel and knowledge to access markets; shortage of capital to 


finance innovations and promote exports and deal with slow supply chain payment schedules and lack 

of sufficient product and service quality to meet customer requirements (OECD, 2010). 

4. The Knitwear Cluster of Tirupur 

Since 1870, Tirupur has evolved as an important centre of international textile business. Today, 

due to its constant performance excellence, it is the principal garment clusters in India, providing 

employment to more than 3 lakh people directly and indirectly. This dollar city accounts for almost 

90% of India’s cotton knitwear exports, worth an estimated US$ 1 billion thus contributing 

significantly to the foreign exchange earnings of the country (SMERA, 2011). Tirupur knitwear 

industry has a number of units all along its value chain starting from spinning, knitting, wet 

processing, printing, garment manufacturing and exports. In addition, there are ancillary units 

supplying buttons, laces, embroidery, cones and yarn etc. The main stakeholders are exporters (700 

approx.) and domestic manufacturers (1700 approx.) supported by allied manufacturers and suppliers. 

Staying innovative is especially important for the firms in this cluster as they are competing in the 

international market which has tough competitors from other Asian countries. For these firms, 

innovation is an essential precondition for their success as well as survival and hence any kind of 

barrier limiting innovations will have larger consequence on their business. 

Table 1: Number of Production Units in Tirupur (Industry Estimates) 

Operations 

Number of Units 

Knitting Units 1500 

Dyeing and Bleaching 700 

Fabric Printing 500 

Garment making 2500 

Embroidery 250 

Other ancillary units 500 

Compacting and Calendaring 300 

Total 6250 

Source: www.tiruppur.tn.nic.in/textile.html 

5. Objectives and scope of the study 

The primary objective of the study is to identify the major barriers that affect the innovativeness of 

SMEs in the knitwear cluster of Tirupur. The study further explores the impact of such barriers on the 

innovativeness of these firms. For addressing these objectives, the following hypothesis has been 

formulated to be empirically tested through regression. 

H 1 : Barriers to innovation as perceived by the entrepreneurs will have a negative impact on firms’ 

propensity to adopt innovations 

6. Methodology of the study 

The study is designed to describe the characteristics of the variables of interest and to further test the 

hypotheses framed to explain the nature of relationship between the variables. The researcher 

conducted an empirical study to collect and analyze data from the SMEs of the knitwear Industry of 

Tirupur. The population for the purpose of the study comprised of 6250 SMEs in the cluster, of which 

384 constituted the sample. Stratified random sampling technique was adopted to ensure enough 

representations from all the six major segments of knitwear manufacturing such as knitting, wet 

processing, garmenting, printing/embroidery, compacting and others. A pre-tested questionnaire was 

administered on the entire sample to collect the required data. The primary data collected were sorted, 

filtered and tabulated for further analysis. Descriptive statistical analysis was conducted to measure the 


data appropriately. Inferences were drawn based upon the regression analyses performed to test the 

relationships between the variables. 

7. Data Analysis and Findings 

Barriers to innovation adoption have been identified from literature (BIS, 2009) and validated by 

consulting the experts in the industry as well as academics. Initially, 12 variables of barriers were 

identified. The barriers were categorized into internal and external barriers. The variables measuring 

internal barriers were: lack of funds within business; lack of qualified personnel; lack of information 

on technology; lack of information on markets; lack of collaboration with universities/ labs; and no 

need due to prior innovations. The variables measuring external barriers were: lack of finance from 

outside; market domination by established businesses; uncertain demand for innovative products; no 

need because of no demand for innovations; excessive government regulation in industry; and lack of 

government incentives for innovation. Reliability and factor analysis were performed using SPSS. 

Insignificant variables as well as those which showed cross loading were removed during data 

purification. Based upon the results of EFA and reliability tests, 5 variables of barriers were dropped 

(Cronbach's Alpha= 0.642 after variables were dropped). The responses on barriers were collected and 

measured using Likert’s five point scale. The technological (product and process related), 

administrative and marketing innovations were measured using Likert’s five point scale. Technological 

innovations initially had 9 variables. To improve the reliability, 1 variable namely ‘eliminating non 

value adding activities’ was dropped (Cronbach's Alpha =.899 after the variable was dropped). 

Marketing innovations were measured by 3 variables (Cronbach's Alpha= .826) and administrative 

innovations were measured by 6 variables (Cronbach's Alpha= .917) respectively. 

The results show that majority of the respondents are engaged in the garmenting function of knitwear 

manufacturing (34.9 %). There are adequate responses from all the segments meaning that the results 

on barriers and innovativeness will depict an overall picture of the entire population under the study. 

Table 2: Respondents’ Business Profile 

Segment of Knitwear Value Chain Frequency Percentage 

Knitting 78 20.3 

Wet-Processing 41 10.7 

Compacting 37 9.6 

Garmenting 134 34.9 

Printing/Embroidery 58 15.1 

Others 36 9.4 

Total 384 100.0 

Source: Primary data 

An analysis of respondents’ perception on the barriers to innovation adoption revealed that 

majority of the respondents has felt the presence of internal as well as external barriers affecting their 

businesses. The internal barriers are felt more in comparison with the external barriers. Among the 

internal barriers, lack of information on technology is felt to be the prominent barrier, followed by lack 

of qualified personnel and lack of information on markets. Among the external barriers, majority feel 

that market is sometimes dominated by established businesses. 


Table 3: Respondents’ Perception on Barriers to Innovation Adoption (Responses in %) 

Barriers to Innovation Adoption Never Rarely Sometimes Often Always Mean 

Statistics 

Lack of internal funds 5.5 31.5 33.6 23.7 5.7 3.05 

Lack of qualified personnel 5.2 17.4 28.4 37.2 11.7 3.33 

Lack of information on 3.4 9.9 29.4 47.7 9.6 3.50 

technology 

Internal Lack of information on 6.5 13.8 40.4 26.8 12.5 3.25 

markets 

No need due to prior 17.2 25.8 40.6 12.2 4.2 2.52 

innovations 

Market dominated by .5 29.7 49.0 15.1 5.7 2.96 

established businesses 

External Uncertain demand for 6.0 17.4 43.2 26.3 7.0 2.14 

innovative products 


Among the various forms of technological innovations, majority of the respondents often have 

introduced new/improved products/designs (52.9 %), invested in new and advance machineries (34.6 

%) and took efforts to improve quality and processes. Majority are constantly improving upon the 

quality of their products (50.3 %). Majority of the respondents often try out innovative administrative 

practices and offer training to their employees (43.2 %). Marketing related innovations are also often 

pursued by majority of the respondents. On the technological frontier, innovations to improve quality 

and processes are prominent. 

Table 4: Innovation Adoption by the respondents (Responses in %) 

Innovation adoption Never Rarely Sometimes Often Always Mean 

Statistics 

Technical New/improved 

- 14.6 20.6 52.9 12.0 3.62 

products/designs 

Investment in advanced 6.8 17.2 18.2 34.6 23.2 3.50 

machineries 

Novelty in 

3.4 12.0 30.2 35.4 19.0 3.55 

products/designs 

Fund allocation .5 14.1 44.8 20.3 20.3 3.46 

Improved quality 1.1 6.1 15.9 26.6 50.3 4.20 

Cost reduction 3.4 9.9 19.3 40.6 26.8 3.78 

Process improvement .8 4.2 16.9 40.1 38 4.10 

Variable cost reduction .8 8.3 37.2 37.2 16.4 3.60 

Administrative New administrative 3.4 2.1 28.4 48.7 17.4 3.75 

Practices 

Improved QMS - 9.1 18.0 39.6 33.3 3.97 

Improved HRMS 1.2 7.1 22.2 37.2 32.3 3.94 

Improved Information on .5 3.2 28.1 39.8 28.4 3.93 

Technology 

Renewed org. structure 3.6 2.1 22.6 45.1 26.6 3.95 

Providing training 3.4 3.4 24.0 43.2 26.0 3.85 

Marketing Improved packaging/ 4.2 2.6 23.2 35.2 34.9 3.94 

appearance etc, 

Improved marketing - 13.8 19.0 44.8 22.4 3.76 

techniques 

Renewed pricing 1.1 5.7 27.8 49.5 15.9 3.76 

mechanism 



The regression analyses as shown in the table 5 reveals that there is significant inverse 

relationship between the barriers to innovation and the extent of innovations adoption by the firms. 

The regression coefficients calculated support the hypothesis set for the study. Among the internal and 

external barriers of innovation, the internal barriers seem to have more negative impact on the 

innovativeness of the firms (B= - 0.395). The results of the study show that internal barriers have 

higher negative impact on technological innovation adoption (B= -0.444) followed by administrative 

innovations (B= - 0.374). The external barriers related to innovations also have higher negative impact 

on the adoption of technological innovations (B= - 0.398) followed by the adoption of administrative 

innovations (B= - 0.324). 

Table 5: Regression results of barriers to innovation adoption 

Relationship among variables B t R 2 

Barriers Innovation adoption -0.456 -12.485 0.208 

Internal Barriers Innovation adoption -0.395 -9.710 0.156 

Internal Barriers Tech. Innovation adoption -0.444 -11.665 0.197 

Internal Barriers Admn. Innovation adoption -0.374 -6.707 0.140 

Internal Barriers Mktg. Innovation adoption -0.319 -8.159 0.102 

External Barriers Innovation adoption -0.377 -10.216 0.142 

External Barriers Tech. Innovation adoption -0.398 -7.927 0.158 

External Barriers Admn. Innovation adoption -0.324 -6.206 0.104 

External Barriers Mktg. Innovation adoption -0.191 -4.276 0.036 


8. Conclusion 

The results show that all the variables identified as barriers to innovation present a negative 

signal, due to which they can be considered as significant restraining factors that influence innovative 

activities and consequently, decrease the firms’ propensity for innovation. The relationships are also 

found to be significant meaning that as the barriers increase, innovativeness decline and vice versa. In 

the light of these findings, it is worth mentioning that supportive government policies should be 

designed and implemented. Suitable monetary schemes and incentives for innovation adoption and 

diffusion can be considered to be the need of the hour. Increase in the collaboration with universities 

and other research centres can help these firms a long way to innovate according to the needs of the 

time. The literature suggests that firms facing barriers to innovation, especially SME, tend to use 

network relationships to overcome these barriers (Biemans, 1992). Promotion and support for open 

innovation networks is vital as such networks promote access to information and enhance cooperation 

between firms and other partners for innovation. 

9. References 

1] Baldwin, J., & Lin, Z. (2002). Impediments to Advanced Technology Adoption for Canadian 

Manufacturers. Research Policy , 31, 1-18. 

2] Baldwin, J., D. Sabourin and M. Rafiquzzaman. 1996. Benefits and Problems Associated with 

Technology Adoption in Canadian Manufacturing, Catalogue 88-514, Ottawa: Statistics Canada 

3] Biemans, W. (1992). Managing Innovation within Networks. London: Rout-ledge. 

4] BIS. (2009). UK Innovation Survey. London: BIS. 

5] Cooper, L. P. (2003). A research agenda to reduce risk in new product development through 

knowledge management: a practitioner perspective. Journal of Engineering and Technology 

Management , 20 (1-2), 117-140. 

6] Damanpour, F., & Gopalakrishnan, S. (2001). Dynamics of the adoption of product and process 

innovations in organizations. Journal of Management Studies , 38 (1), 45-65. 


7] Hadjimanolis, A. (1999). Barriers to innovation for SMEs in a small less developed 

country(Cyprus). Technovation , 561-570. 

8] OECD. (2010). Innovative SMEs and Entrepreneurship for Job Creation and Growth. SMEs and 

Entrepreneurship: Lessons from the Global Crisis and the Way Forward to Job Creation and Growth 

(pp. 1-15). Paris: BOLOGNA +10. 

9] O'Leary, O. (2005). A tool for innovation management with small-medium enterprises. National 

University of Ireland, galway 

10] Read, A. (2000). Determinants of successful organizational innovation: A review of current 

research. Journal of Management Practice , 3 (1), 95-119. 

11] Rogers, M. (1998). The definition and measurement of innovation. Melbourne Institute of Applied 

Ecconomic and Social Research. 

12] Rosenberg, N. (2004). Innovation and Economic Growth. OECD . 

13] Sawang, S., Unsworth, K., & Sorbello, T. (2007). An exploratory study of innovation effectiveness 

measurement in Australian and Thai SMEs. International Journal of Organizational Behaviour , 12 (1), 

110-125. 

14] Shiang, L. E., & Nagaraj, S. (2009, October 23). Obstacles to innovation: Evidence form 

Malaysian manufacturing firms. Retrieved December 26, 2011, from http://mpra.ub.unimuenchen.de/18077/1/MPRA_paper_18077.pdf 

15] SMERA. (2011). SMEs in the Textile Industry. D & B. 

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tiruppur.tn.nic.in/textile.html 

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R&D Mitigate Their Effects? First European Conference on Knowledge for Growth: Role and 

Dynamics of Corporate R&D (CONCORD 2007). Spain. 

18] Yeh-Yun, C. L., & Yi-ching, C. M. (2007). Does innovation lead to performance? An empirical 

study of SMEs in Taiwan. Taiwan Management Research News , 30 (2), 115-132. 

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conceptual model. Industrial management & Data Systems , 104 (3), 252-261. 


Role of Self-help Group in Socio-economic development of India 

Dr.A.Sundaram, Associate Professor, 

Dept. of Economics, Govt Saiha College, Affiliated to Mizoram University, 

Saiha, Mizoram, North East India 

Abstract: 

The main aim of this paper is to examine the Role of Self-help Group in Socio-economic 

development of India.Mostly Secondary data is used for this analysis. It analyses the Need of the Study 

and the present status of poverty and Self-employment in India, the concept of SGSY and Self-Help 

Group, role and accomplishments of SGSY and Self-Help Group, review and redesigning the SGSY 

and the Self-Help Group, failure of the SGSY program, suggestions, future directions. 

The SHG method is used by the government, NGOs and others worldwide. Thousands of the 

poor and the marginalized population in India are building their lives, their families and their society 

through Self help groups. Self-help Groups have been playing considerable role in training of 

Swarozgaris, infrastructure development, marketing and technology support, communication level of 

members, self confidence among members, change in family violence, frequency of interaction with 

outsiders, change in the saving pattern of SHG members, change in the cumulative saving pattern of 

SHGmembers per month, involvement in politics, achieving social harmony, achieving social justice, 

involvement in community action, sustainable quality and accountability, equity within SHGs,defaults 

and recoveries, and sustainability -financial value. 

Inspite of the concerted efforts taken by SGSY, it is clear that the failure of the programme is 

seen. But of course there are lot of advantages as well as disadvantages. Now MoRD has been taking a 

lot of initiatives to revamp the programme. 

Keywords: Poor, Self-Help Group, achieving Social Justice, Sustainable quality, Equity, 

Empowerment 

1. Introduction: 

The main aim of this paper is to examine the Role of Self-help Group in Socio-economic 

development of India. It analyses the Need of the Study and the present status of poverty and Selfemployment 

in India, the concept of SGSY and Self-Help Group, role and accomplishments of SGSY 

and Self-Help Group, review and redesigning the SGSY and the Self-Help Group, failure of the SGSY 

program, suggestions, future directions and conclusion. 

There are three main stages in the development of self-help groups: The formation stage, the 

stabilisation stage, and the economically productive and self-sufficient stage. 

There are two main types of self-help groups, the state sponsored ones, and the ones sponsored 

by the central government. The central government’s major project is the Swarnjayanti Gram 

Swarozgar Yojana (SGSY). 

In the last ten years, there has been a paradigm shift in respect of development. The society and 

the nation are moving towards realization of the ideal of rights-based development. Right to education 

has been realised though not fully operationalised. Right to work is a functioning entitlement; right to 

food is in the offing; right to livelihood and right to social security are not far away. 


2. Need of the Study and the present status of Poverty and Self-employment in India: 

Alleviation of poverty remains a major challenge before the Government. Acceleration of 

economic growth, with a focus on sectors, which are employment-intensive, facilitates the removal of 

poverty in the long run. 

According to the 2011 Census of India has a population of 1.21 billion people as of 2011. The 

figures provided by Population Census of India shows that the country represents 17.31% of the world 

population. The latest poverty estimates by the Planning Commission show that poverty in India has 

declined by 7.4 per cent. 

According to the latest data, 29.8 per cent or 360 million Indians were poor in 2009-10 as 

compared to 37.2 per cent or 400 million in 2004-05. However, the decline is based on a poverty line 

calculated at Rs.22.43 per person per day in rural areas, and Rs.28.65 per person per day in urban 

areas, which is lower than the earlier Rs.32 a day mark. 

The all-India Head Count Rate has declined by 7.3 percentage points from 37.2% in 2004-05 to 

29.8% in 2009-10, with rural poverty declining by 8.0 percentage points from 41.8% to 33.8% and 

urban poverty declining by 4.8 percentage points from 25.7% to 20.9%. 

In rural areas, Scheduled Tribes exhibit the highest level of poverty (47.4%), followed by 

Scheduled Castes (SCs), (42.3%), and Other Backward Castes (OBC), 31.9%), against 33.8% for all 

classes. In urban areas, SCs have HCR of 34.1% followed by STs (30.4%) and OBC (24.3%) against 

20.9% for all classes. 

Nearly 50% of agricultural labourers and 40% of other labourers are below the poverty line in 

rural areas, whereas in urban areas, the poverty ratio for casual labourers is 47.1%. Monthly per capita 

incomes of Rs 859.60 in urban regions and Rs 672.80 in rustic regions, respectively, have been 

determined as the novel poverty line. 

Planning Commission deputy chairman Montek Singh Ahluwalia stated, "I firmly believe that 

when the final numbers of poverty till 2011-2012 come out in 2013-14, the actual decline in poverty 

would be much larger than 1.46 per cent per annum as 2009 was a drought year." 

The unemployment rate in India was last reported at 9.4 percent in 2009/10 fiscal year. 

Historically, from 1983 until 2010, India Unemployment Rate averaged 8.11Percent reaching an all 

time high of 9.4 Percent in December of 2009 and a record low of 5.9 Percent in December of 1994. 

The unemployment rate can be defined as the number of people actively looking for a job as a 

percentage of the labour force. 

While India’s unemployment rate has dropped from 8.2% in 2004-05 to 6.6% in 2009-10, the 

number of jobless is still huge in absolute terms. The country added some 11.7 million people to the 

workforce between 2004-05 and 2009-10, and the labour pool, based on the 2009-10 national sample 

survey, is estimated at 428.9 million. 

Over half the country's workforce is self-employed and women receive less pay than men for 

similar jobs, latest government data shows. While 51% of the country's total workforce is selfemployed, 

only 15.5% are regular wagers or salaried employees and 33.5% casual labourers, 

according to a survey by the National Sample Survey Office (NSSO) 

The proportion of the self employed (vulnerable workers) has declined significantly in the 

development process. The proportion of self employment in the total employment is as low as 8% and 


10% for women and men respectively in developed regions and as high as 64% and 57% for women 

and men in developing regions. 

In India the overwhelming proportion of workers is in the self employment category. About 

64% of the rural and 46% of the urban workforce is engaged in self-employment. 

In India 20.51% of the workforce are living below the poverty level. The proportion is highest 

(31.9%) among casual labour and second highest (17.17%) among the self employed. However, in 

terms of absolute number, the self employment category has the highest number of poor – 45.28 

million, followed by casual labour – 41.45 million. 

The only way to lower the risk that the rural poor face would be to reduce their vulnerability 

through the use of microfinance to engage positively in capacity building. The strategies used for 

capacity building through microfinance can be divided into Ex Ante, that is, measures that are 

implemented before a disaster hits, and Ex Post, which refers to measures that are implemented to deal 

with a disaster after it has taken place (Duggal, Ananth et al. 2002). 

Some ex ante strategies include the diversification of income, the building up of assets in the 

form of cash, houses, livestock and land, and investments in education, health care and social 

networks. Some ex post strategies in dealing with disasters are cutting down on consumption, the 

mobilisation of labour, the liquidation of personal assets, and the obtaining of loans from informal and 

formal institutions. 

3. The concept of SGSY and Self-Help Group: 

For a multi-pronged and concerted attack on the poverty, the Government of India launched an 

integrated program for self-employment of the rural poor, with effect from 1 April 1999, known as 

Swarnjayanti Gram Swarozgar Yojana (SGSY). The scheme is an amalgamation of six earlier 

programs, viz. (1) Integrated Rural Development Program (IRDP), (2) Training of Rural Youth for 

Self-Employment (TRYSEM), (3) Supply of Improved Tools for Rural Artisans (SITRA), (4) Ganga 

Kalyan Yojana (GKY), (5) Million Wells Scheme (MWS) and (6) Development of Women and 

Children in Rural Areas (DWCRA). 

The objective of the scheme is to bring the assisted poor families above the poverty line by 

organizing them into Self Help Groups (SHGs) through the process of social mobilization, training and 

capacity building and provision of income generating assets through a mix of bank credit and 

government subsidy. 

SGSY is a credit based self employment program basically aimed at below poverty line (BPL) 

families. The objective of the program is to bring the assisted families (Swarozgaris) above the poverty 

line by ensuring appreciable sustainable levels of income over a period of time. For this purpose, the 

rural poor are organized into self-help groups through a process of social mobilization, training and 

capacity building and provision of income-generating assets (Tankha, Ajay, et al. 2008). 

It is a central scheme with cost sharing on the basis of 75:25 by central and state governments. 

For the north-eastern states the ratio is 90:10. It is being implemented by DRDA through Block 

Development Offices. Banks, other financial institutions, Panchayats Raj Institutions, NGOs and 

Technical Institutions in the district are being involved in the process of planning, implementation and 

monitoring of the scheme. 

NGO’s help is being sought in the formation and nurturing of the Self Help Groups (SHGs) as 

well as in the monitoring of the progress of the Swarozgaris. The assisted families may be individually 


addressed or in groups. Emphasis is on the group approach. The Scheme aims at establishing a large 

number of micro enterprises in the rural areas. 

The concept of a self-help group in India refers to a form of an accumulating saving and credit 

association (ASCA), promoted by government agencies, NGOs or banks. These groups manage and 

lend their accumulated savings and externally leveraged funds to their members (Tankha 2002). 

However, the self-help group typically needs about 10 to 12 years to fully develop, in order to 

realise substantial benefits. Most of the groups surveyed have only been in existence for about six 

years and are just coming into the stage of stabilisation. 

4. Role and Accomplishments: 

The progress of the program since inception assisted in formation of 35.7 lakh SHGs; assisted 

1.24 Cr. Swarozgaris in establishing their own micro-enterprises. The Government of India released 

Rs.11, 486 Cr under the program; bank credit mobilization is Rs.19, 017; Total subsidy provided is 

Rs.9, 318 Cr. The program helped many participants in improving their economic conditions. It 

provided new market infrastructure and new marketing channels for the rural poor. The program 

developed many interesting development models (successful stories). 

Another good accomplishment of the program is that it has adopted the SHG strategy. The 

number of assisted SHG/ group Swarozgaris has increased from 35,000 in 1999 – 00 to 1.15 million in 

2007 – 08. At the same time the number of assisted individual Swarozgar has declined from 586 

thousand in 1999 – 00 to 254 thousand in 2007 – 08. 

The National Bank for Agriculture & Rural Development (Nabard) will create a Rs.15 billion 

fund to cater to women's Self-Help Groups in economically weaker districts in the country, 

According to the Chaitanya and Chalana study, it is an excellent program. If the scheme is 

implemented properly, there will be no need for another scheme (Chaitanya and Chalana (undated). 

Even though Self-help Groups have been playing considerable role in training of Swarozgaris, 

infrastructure development, marketing and technology support, communication level of members, self 

confidence among sample members, change in family violence, frequency of interaction with 

outsiders, change in the saving pattern of SHG members, change in the cumulative saving pattern of 

SHGmembers per month, involvement in politics, achieving social harmony, achieving social justice, 

involvement in community action, sustainable quality and accountability, equity within SHGs,defaults 

and recoveries, and sustainability - financial value, it is not so satisfactory up to the mark in achieving 

and fulfilling the objectives of the Scheme. 

5. Review and Redesigning the SGSY and the Self-Help Group: 

However the program has never taken off. It has progressed at snail pace from the inception. It 

has been chronically encountering numerous problems in the implementation. The success rate is 

modest at best and successful cases are few and far way in terms of space and time. Given the 

importance of poverty alleviation, the Government of India has been extending all kinds of support to 

the program. 

To overcome the challenges and to build on the positive gains, the MoRD got the program 

evaluated, experimented and got different aspects of the program studied through noted institutions 

like RBI, NIRD, BIRD, NIBM, NIPFP, etc and experts (e.g. Prof.Radhakrishna committee). The 


MoRD has been constantly reviewing and improving the program based on the findings and 

recommendations of different studies, experiments and experts’ advice. 

Recently the Ministry of Rural Development (MoRD) has undertaken a comprehensive review 

and redesigning of the Swarnjayanti Gram Swarozgar Yojana (SGSY) program to make it the flagship 

program for the alleviation of rural poverty by 2015. In the budget 2009 – 10, the Government 

announced renaming the program as National Rural Livelihood Mission (NRLM) and also mentioned 

to cover 50% of all rural households by organizing them in SHGs. 

The National Network Enabling Self Help Movement (NN-ABLE) feels that designing the 

NRLM should be based on a thorough analysis of SGSY experience gained over the last decade. As 

SGSY is closely intertwined with SHGs in general and SHG-bank linkage in particular, the 

performance of one will definitely have a large impact on the other. NNABLE, with a vision of a 

‘vibrant SHG movement in India’, has been studying rather closely the SGSY program. 

That National Rural Livelihood Mission (NRLM) plans to connect at least one woman from 

each poor household with a SHG to empower and promote economic wellbeing. "Presently, there are 

three crore women who are members of SHGs and we plan to raise it to seven crore in the next five 

years,". 

6. Failure of the SGSY program: 

Though it was considered as a wonderful program by many stakeholders, the program failed on 

many counts. Only an indicative list of failures is provided as follows: 

a. Challenge of take off: 

The program supported promotion of 292 thousand SHGs in the first year, i.e. 1999 – 00.The 

number remains around this level in all subsequent years with wide fluctuations from year to year. 

Similarly, 214 thousand groups passed Grade – I, in the second year of the program, i.e. 2000 – 01. It 

remains around this level in all subsequent years. 

Though there is significant growth in the number of groups that passed Grade – II, groups 

which have taken up economic activities are less. In total only 685 thousand groups have taken up 

economic activities. It is a little over one-fifth of groups promoted in the scheme. 

b. Funds allocation and utilization: 

The allocation of funds for the SGSY scheme by both central and states’ governments was 

Rs.1, 472 cr. in 1999 – 00, the first year of the program. In the subsequent 7 years, the allocation 

remained below that of the first year. It was nearly half of the first year allocation in 2001 – 02 and 

2002 – 03. 

The total amount allocated for the program during 10 years is Rs.14, 467 cr. It is less than half 

of the budgetary allocation of Rs.30, 100 cr. for NREG in just one year, i.e. 2009 – 10. The principal 

reason for stagnation in funds allocation is non-cooperation of banks. The allocated meagre amounts 

were not fully utilized even in one year during the last 10 years program period. 

Total utilization is 74% of funds made available. However, the utilization ratios are increasing 

over the years. It has increased from 49% in 1999 – 00 to 86% in 2003 – 04. It remains well over 80% 

in the subsequent years. 


Though there is provision for utilizing of 10% of allocated funds for training and another 20% 

for development of critical infrastructure, utilization of funds in these two activities is quite less and 

relatively more funds were used for providing subsidies and grants to SHGs and individual 

Swarozgaris. As a result the program is often known as subsidy oriented program. 

c. Credit mobilization: 

Mobilizing bank credit is a major challenge of the program, due to which the governments at 

centre and states could not increase the allocations over the years. In total, the target of credit 

mobilization is Rs.29, 831 cr. But little over half of that amount was mobilized during the last 10 year. 

However, the proportion of actual mobilization to target is increasing over the years. It is a healthy 

sign. 

Because of lower than targeted mobilization of bank credit and allocation of a relatively higher 

proportion of funds for subsidy, the ratio of credit to subsidy was about two during the period and did 

not vary much from year to year. Thus, the credit-subsidy ratio remained much below the target ratio 

of 3:1 (GoI, 2009). It also resulted in less than planned investment per Swarozgar. 

d. Challenge to target the real poor and vulnerable sections: 

A comprehensive study by BIRD, 2007 on coverage of SCs/ STs in SGSY, which covered 

10,848 Swarozgaris and non-Swarozgaris (control sample), pointed out exclusion of SCs and STs in 

the following ways and for the following reasons. 

Physical exclusion – by not being accepted as group members, Financial exclusion by denial of 

their due share either by group leaders or by implementing bank or block officials, Exclusion because 

they are already covered under some state government sponsored programs (often implemented by 

state (ST/ SC corporations) and in many cases are already defaulters of bank loans (BIRD, 2007). 

About 60% of the non-Swarozgaris (control sample) were found to be sure about their 

inclusion in the BPL list (BIRD, 2007). A more dismal picture is provided by a MoRD (2007) briefing, 

which shows that SGSY covers only 1% of the relevant household population, and only 33% of its 

beneficiaries are drawn from the poorest quintile, whereas as many as 14% are from the richest and 

26% are from the two richest quintiles. 

Further, the total benefits are even more inequitably distributed with the richest quintile 

receiving as much as 50% as compared to 8% for the poorest (as quoted in Tankha, et al. 2008). 

The annual report of MoRD 2002 – 03, reported that in most of the areas, especially in Bihar 

and Uttar Pradesh, influential persons in villages were found to own a group (as quoted in GoI, 2009). 

e. Low survival rate of promoted micro-enterprises: 

Many assisted Swarozgaris are either reluctant to create or acquire the planned assets or were 

disposing them immediately after acquiring. According to BIRD’s study “in northern states, the 

success rate in terms of whether units exists or not in case of units financed to group Swarozgaris 

turned out to be even worse than that in case of individual Swarozgaris as only 17.7% units were found 

to be existing in case of group Swarozgaris as against the 31.11% units intact in case of individual 

Swarozgaris. 

The results indicate just opposite pattern to what most of us believe/ perceive that group 

approach of financing is better than the individual financing. However, in case of southern states, 


76.6% units were found to be existing at the time of field visits which shows the better care by the 

government department as far as monitoring of units is concerned” (BIRD, 2007). 

The present author observed that in Andhra Pradesh some groups manipulated acquiring of 

assets/ livestock. According to the group members, they sent their buffaloes to their relatives'/ friends' 

houses a day before the proposed transaction. The next day they acted as if purchasing (their own) 

livestock from their relative/ friend in front of the officials. The Government of AP noticed these kinds 

of problems long ago and converted capital subsidy into interest subsidy in 2004. Now one hardly 

hears words like SGSY, subsidy and revolving fund among SHGs in rural areas of Andhra Pradesh. 

One can only hear the words ‘Pavala Vaddi’ or ‘3% interest loans’. In other states, many 

studies reported that groups’ focus is on subsidy. They dispose the capital/ livestock immediately, 

repay the bank loan and distribute the subsidy amount (see e.g. APMAS, 2008; Tankha, et al, 2008; 

BIRD, 2007). 

f. Low realized incremental income from Income generating activities: 

The program envisaged that Swarozgaris would realize about Rs.2, 000 per month from the 

investment of about Rs.25, 000. Except a few case studies, no major evaluation study reported 

additional income anywhere close to Rs.2, 000 per month. In 2002 – 03, only 43% of the assisted 

Swarozgaris reported an increase in their income (as quoted in GoI, 2009). 

A rigorous study by Pathak and Pant (2006) in Jaunpur district of UP shows that SGSY has not 

contributed significantly to the change in the level of income of the beneficiaries (as quoted in Tankha, 

et al, 2008). 

According to a NIRD (2008) study, even in the better performing State of Andhra Pradesh the 

income gain to a Swarozgar from enterprise activities under SGSY was a mere Rs.1,228 per month (as 

quoted in GoI, 2009). 

BIRD presented an even grimmer picture. According to their study the poor income generation 

in both the cases of individual Swarozgaris (Rs.9, 391) and The group members shared these old 

stories (6 to 7 years old), since then they have repaid their loans and all officials got 

transferred.swarojgaries (Rs.6, 916 in northern states and Rs.11, 089 in southern states) per member 

per annum suggests for serious thinking about implementation of the program in its present format. 

Certain success stories, here and there should not be read as final outcome of the program and 

at the best, these can be documented and evaluated so that the reasons for success can be internalized 

into the future policy guidelines. The program also breaks the great myth that ‘group approach of 

lending’ is always better than the individual approach of financing (BIRD, 2007). Needless to say, that 

the above figures are only of surviving units. If failed units were also included, the average 

incremental income would be around a few hundred rupees or less. 

It may be recalled that about 50% of the Swarozgaris have taken up dairy. About another 

quarter has taken up other livestock rearing, including poultry and other primary activities. It is 

surprising to note that Indian villagers need training in activities like livestock rearing, the primitive 

and primary occupation in the country. 


7. Suggestions: 

a. Suggestions for designing the NRLM: 

As three-fourths of households in the country are either poor or vulnerable, NRLM may cover 

all willing rural households, irrespective their BPL or APL status, in the SHG program for effective 

financial inclusion. 

It may be divided into two sub-programs, viz. Financial Inclusion and Livelihood promotion. 

Two programs may be implemented sequentially. The first five years may be totally focusing 

on promotion and strengthening of SHG institutions and later focus may be on setting up of small and 

medium enterprises under SHG federations. 

b. Suggestions to promote Financial Inclusion: 

1. SHG banking may be allowed to function as core banking activity without any outside interference 

like target fixing, interest cap, loan size, etc. 

2. The Government may promote quality SHGs through village/ cluster level; sub-district/ block level 

and district level federations. 

3. Wherever banks are not accessible or not responsive, federations may be prepared to take up 

financial intermediation 

4. Promoting agencies play a crucial role in developing quality institutions. Promoting agencies may 

be given adequate financial and capacity building resources and timeframe. Available evidence 

indicate that investment of about Rs.15,000 per SHG for 8 to 10 years is required to promote quality 

SHGs with strong federations and effective livelihood opportunities. 

5. Promoting agencies should have a clear role transformation strategy and should implement the same 

in letter and spirit 

6. NRLM may work on sensitization and orientation to bankers about the commercial value of SHG 

banking. 

7. NRLM may understand the banks’ concerns such as quality of groups, political interference in 

functioning of federations, wrong signals like loan waivers, etc and address them. 

8. NRLM may provide interest subsidy as given in AP. 

c. Suggestions for promotion of small and medium enterprises: 

To obtain desirable employment transformation and to take full advantage of booming 

secondary and tertiary sectors, NRLM may focus on manufacturing and service sectors. The small and 

medium enterprises may be promoted to village/ cluster; sub-district/ block and district level SHG 

federations. 

1. The potential units could be agro-processing units; milk processing units; common service providing 

units; cold storages; rural warehouses; market yards to organize weekly markets; etc 

2. Appropriate institutions like ‘commodity cooperatives’ and ‘producer companies’ may be promoted 

under SHG federations to take up small and medium enterprises as per the pattern of the borrowing 

from the SHGs. 

3. The federations could be assisted to have state of the art units by hiring professional consultancy 

firms, who can provide these units on turnkey basis. 

4. NRLM may provide investment and working capital to the federations to set up these units 

5. If banks are non-responsive, the apex financial institutions like state finance corporations/ SIDBI/ 

NABARD could be accessed. 

6. Acquired units could be pledged as security to the banks and financial institutions. 

7. These units would result in development of entrepreneurship in federations, provide a large number 

of regular employment opportunities to the members and boost the rural economies. 

8.SHG concept should target the holistic development of women members. The ministry may bring out 

publications pertaining to different aspects of SHG and its development / empowerment. 

9.It is felt that efficiency and effectiveness of SHG should be regularly monitored by a qualified and 

designated body to give corrective input wherever necessary as well as encourage the deserving ones. 


10.Timely release of adequate loans and the eligible subsidy is important.SHG member education and 

awareness on the high poverty regions should be viewed as long term investment in human capital 

development. 

All stakeholders should invest their time for capacity building, handholding and development 

support. 

d. Implementation machinery: 

Implementation mechanism may follow the design of the program. It may be kept in mind that 

a proper role transformation strategy and implementation of the same in letter and spirit is essential for 

the development of people’s institutions. 

8. Future directions: 

To overcome the above described problems and make the program more effective the MoRD 

got the program studied by many important institutions and experts. It also took up wider consultations 

to revamp the program. Based on the inputs received, the MoRD is planning to redesign the program. 

Main features of the proposed re-designing of SGSY (extracts from MoRD, 2009) 

a. Demand Driven Strategy: 

More flexibility to the States for formulating their own poverty elimination plans and allocation 

of funds on the basis of the action plans. 

b. Universalizing of SHGs: 

To ensure that all the poor in the country become a part of the social mobilization process. 

c. Setting up of People’s Institutions: 

Success of a Program like SGSY can be ensured only through peoples’ participation. 

Therefore, states should federate the SHGs at various levels. 

d. Setting up of Dedicated Implementation Structure: 

It is proposed to have a dedicated professional institutional structure from Sub-district level up 

to national level with suitable linkages with the existing network of DRDAs. 

e. Special focus on training & capacity building: 

with dedicated staff/ cells at the State, district and sub-district levels to ensure comprehensive 

training of SHGs and all other stakeholders. 

f. Setting up of one Rural Self Employment Training Institute (RSETI): 

In each district of the country for skill development training. States need to identify land for 

setting up these Institutes. 

g. Massive up-scaling of special projects for skill development and placement. 

h. Subsidy: Continuation 

of capital subsidy at enhanced rates and introduction of Interest Subsidy. 

i. Greater Emphasis on Infrastructure and Marketing through involvement of the Private 

Sector and adoption of the PPP model. 

j. Convergence for technical & other inputs with programs of different ministries in order to 

achieve synergies. 

k. Improved evaluation and monitoring: 

For ensuring complete transparency and accountability in the implementation of SGSY 

through social auditing of the scheme and third party evaluations. A national MIS for SGSY will 

also be put in place for better and continuous evaluation and monitoring. 

l. DRDA (ADMN.) – Major issues on one hand DRDAs are over burdened with a multiplicity 

of schemes and on the other hand more than 40% of posts in DRDAs are vacant. 

m. Lack of professionals and specialists from different fields in DRDAs. 

n. The question is whether the DRDA should be an implementing body or an overseeing body for 

various Rural Development Programs. 


o. Restructuring of the DRDA Administration scheme: 

The broad structure of DRDAs will consist of core wings like administration, Finance, 

Monitoring, Training etc. with subject specialists in each wing. 

p. Implementation of the programs will be through dedicated machineries of the respective 

programs. 

q. The cost of the implementation structure would be met out of program funds by earmarking a 

certain percentage of the allocation for the programs. 

9. Conclusion: 

From the above analysis we can conclude that inspite of the concerted efforts taken by SGSY, 

it is clear that the failure of the programme is seen. But of course there are lot of advantages as well as 

disadvantages. Now MoRD has been taking a lot of initiatives to revamp the programme. Let us hope 

that better solutions coming up to implement the programme in effective and efficient ways and means 

in the near future. 

10. References: 

1. Anonymous, 2005, Quick evaluation of beneficiary oriented (Sc/St) Programme of 

SGRY; Annual Report. Ministry of Rural Development, Government of India, KrishiBhavan, 

New Delhi. 

2. Arunkumar, T.D., 2004, Profile of SHGs and their contribution for livestock 

development in Karnataka. M.Sc. (Agri.) Thesis, Univ. Agric. Sci., Dharwad. 

3. E.A Prameswara Gupta ,Syed Rabmahulla and S.L.shankar “Impact of microfinance: A 

critical analysis “ southern Economist, volume 48, No.18,January-15.2010,page No.29 

4. Geeta Manmohan, Monika Tushir, Sumita chadha. (2008), „Rural Banking and Micro 

finance” Southern Economist, Vol: 47, No.2. 

5. Hari, S. and Kumawat, R.C., 2006, Impact of Swarnjayanti Gram Swarozgar Yojana 

(SGSY) in Jhunijhuna (Rajasthan). Rural India, 69(8-9): 164-168. 

6. K.Rajendren, “microfinance millennium development Goats and poverty Eradication- A 

study in Vellore District “TamilNadu Journal & co-operation, volume.10, No-1, November 1- 

2009. 

7. M.P seach and analytical report, “empowerment & women through Microfinance-a 

study of kerpada district”, monthly public union surveys-volume,liv 

648.No.12,September,2009,Page No 9. 

8. Surender and Manoj Kumar., (2010), “SHGs and their Impact on Employment 

Generation”, Southern Economist, Vol: 48, No.23. 

9. Y.S.P Thorat,” Microfinance in India Sectorial issues and challenges”, National Bank 

Reveview, volume.21, No.1, January-march, 2005. 


Standard of living of Rural Fisher Folk in southern coastal districts of Tamil Nadu 

ABSTRACT 

R. Karthikeyan, Ph.D., Research Scholar, 

Dr. S. Ramesh Kumar, Associate Professor and Head, 

Dr. G. Padma Parvathy & G.Subbulakshmi, Research Department of Commerce, 

V.O.C College, Tuticorin, India. 

The aim of the present study is to examine the standard of living of rural fisher folk. Home and 

fishing field interviews of 926 randomly selected fisher folk representing all southern coastal districts 

of Tamil Nadu. Majority of the fisher folk resided in tiled house get medical treatment in private 

hospital. Most of the fisher folk do not have toilet facility in their house. The study also found that the 

educated respondents use scientific methods of fishing. All respondents consume essential food 

equally irrespective of their household sizes. Education and awareness programme is necessary to the 

fisher folk in using scientific method of fishing. 

Key words: Standard of living, Rural Fisher folk. 

INTRODUCTION 

Housing condition of fisher folk is generally not a satisfactory indicator of poverty, substandard 

housing is very common in the rural coastal belt, and majority of the fisher live in huts. They 

lack ownership of land and title deeds. Lack of availability amenities such as water, latrines, electricity 

the indicators of wealth and social status are average among the rural households (Dayananda, 2004). 

Fisher folk along the coastal area are social economically backward, and lack various basic amenities 

like education, drinking water, food. Thus their standard of living is not up to the expected level 

(Oladoja and Adeokun, 2009). Fisher folk along the rural coastal areas in Chennai dwell closest to the 

sea in thatched huts that are easily washed away by sea. Majority of the people do not even own a 

land, they live a poor quality of life. Their housing condition is very poor (Asha Krishna Kumar, 

2010). Bay of Bengal Programme (1982) reported that nearly 60 per cent of the families go without 

any meal on some days. The major reason is low income due to low or no catch. As for food 

consumption vegetables, meat and milk are consumed occasionally, fish at least half the year. The 

children are born and brought up in remote fishing communities with limited or no access to education. 

Over 80% of children are illiterate in fisher folk community, while adult illiteracy is estimated at 60% 

(Lungu and Husken, 2010). 

2. MATERIALS AND METHODS 

2.1 SAMPLE SIZE 

The quantitative data for the study was collected from 926 fisher folk randomly selected from 

all southern coastal districts of Tuticorin, Tirunelveli, Kanyakumari and Ramnad in Tamil Nadu. In 

the field work, the data were collected through a well structured questionnaire through personal 

interview mode at the residence of fisher folk and fisher folk in the sea shore after obtaining consent 

from them. 

2.2 RESEARCH DESIGN 

The survey analyses the standard of living of rural fisher folk during the period of January 2010 

to January 2013 as a part of Doctoral research work. The questionnaire was divided into four sections 


(1) Measurement of standard of living (2) Consumption of essential food (3) Medical treatment during 

sickness (4) Fishing methods. 

2.3 PILOT STUDY 

The questionnaire was pre-tested by collecting data from 90 respondents in rural coastal 

villages from November 2010 to January 2011. The questionnaire was revised and restructured based 

on the results of the pilot study. Some additional questions were added after evaluating the 

questionnaires in the pilot study. 

2.4 DATA ANALYSIS 

The collected data were analysed by using a statistical package of SPSS 17.0. Scores for each 

category were calculated by assigning correct responses. Percentage analysis of standard of living is 

calculated and presented in tabular form. F test was used to analyse the consumption of essential food 

in different household size of fisher folk at 5% level of significance. Cross tabulation and chi square 

test have been used to find out the association between education level of fisher folk and their fishing 

methods among different age groups. 

3. RESULTS AND DISCUSSION 

Table -1 Standard of Living of Fisher Folk 

Available Non-available Total 

Electric Power Respondents 822 104 926 

Percentage (88.8%) (11.2%) (100%) 

Telephone Respondents 566 360 926 

Percentage (61.1%) (38.9%) (100%) 

Bike Respondents 155 771 926 

Percentage (16.7%) (83.3%) (100%) 

Tri cycle Respondents 32 894 926 

Percentage (3.5%) (96.5%) (100%) 

Television Respondents 747 179 926 

Percentage (80.7%) (19.3%) (100%) 

Mixie Respondents 542 384 926 

Percentage (58.5%) (41.5%) (100%) 

Grinder Respondents 393 533 926 

Percentage (42.4%) (57.6%) (100%) 

Fridge Respondents 208 718 926 

Percentage (22.5%) (77.5%) (100%) 

Washing Machine Respondents 69 857 926 

Percentage (7.5%) (92.5%) (100%) 

Inverter Respondents 17 909 926 

Percentage (1.8%) (98.2%) (100%) 

Air Conditioner Respondents 26 900 926 

Percentage (2.8%) (97.2%) (100%) 

Toilet facility Respondents 522 404 926 

Percentage (56.4%) (43.6%) (100%) 

Four wheeler Respondents 10 916 926 

Percentage (1.1%) (98.9%) (100%) 

Source: Primary Data 


Table 1 denotes the infrastructure facilities available in fisher folk’s house. Most of the fisher 

folk (88.8%) have electric power in their house. About, 80% of the fisher folk have television. 

Further, it is inferred that 58.5% of the fisher folk have mixie. Only 1.1% and 1.8% of the fisher folk 

have four wheeler and inverter respectively in their house. Further, majority of the fisher folk do not 

have washing machine in their house. Finally, it is inferred that 2.8% of the fisher folk have air 

conditioner in their house. It is concluded that majority of the fisher folk have electric facility in their 

house and followed by television. Very few fisher folk have four wheeler, Air conditioner and inverter 

in their house. 

DIFFERENT HOUSEHOLD SIZE AND CONSUMPTION OF ESSENTIAL FOOD 

The families’ dietary patterns showed quantitative and qualitative variations over the year, 

depending on the fishing seasons. 75% of the families spent Rs. 10 to Rs. 20 a day on food; while the 

daily income ranged from Rs. 10 to Rs. 30. Fish was the animal protein consumed almost every day by 

most families. Milk, meat and fruit were eaten rarely (BOBP, 1997). 

Table – 2: Household Size and Consumption of Essential Food 

Null Hypothesis: The household size of the respondents does not influence the consumption of 

essential food. 

N X F value P value 

Vegetables Upto 3 153 2.42 1.080 

4 – 6 582 2.46 1.082 .188 .829* 

Above 6 191 2.40 1.031 

Total 926 2.44 1.071 

Fruits Upto 3 153 2.41 1.029 

4 – 6 582 2.58 1.105 2.708 .067* 

Above 6 191 2.69 1.176 

Total 926 2.57 1.110 

Meat Upto 3 153 2.85 1.056 

4 – 6 582 2.81 1.001 1.841 .159* 

Above 6 191 2.97 1.088 

Total 926 2.85 1.029 

Fish Upto 3 153 1.19 .571 

4 – 6 582 1.16 .521 .342 .710* 

Above 6 191 1.14 .558 

Total 926 1.16 .537 

Milk Upto 3 153 1.44 .952 

4 – 6 582 1.51 1.022 1.021 .361* 

Above 6 191 1.60 1.128 

Total 926 1.52 1.034 

Quality products Upto 3 153 2.04 1.272 

4 – 6 582 2.18 1.394 .956 .385* 

Above 6 191 2.25 1.514 

Total 926 2.17 1.400 

*Significant at 5% level 

Table 2 shows the relationship between consumption of essential food and household size of 

fisher folk. It indicates that there is no significant relationship in consuming vegetables, fruits, meat, 

fish, milk and using quality products among different household sizes of fisher folk. Hence, it is 


concluded that the consumption of essential food not influence in the household size of fisher folk. 

Fisher folk consume essential food irrespective of their household size. 

POSSESSION OF HOUSE AND MEDICAL TREATMENT 

The housing condition of the fisher folk is poor. Density of population is the highest in areas of 

fisher folk. The housing conditions have marginally improved for the fisher folk since 1980s. The 

number of households living in huts declined from 48% in 1980 to 27% in1990. Majority of them 

lives in huts made of mud, only few of them reside in houses made of cement and bricks (Kerala 

Development Report, 2008). 

Table – 3 Types of Residential House and Availability of Medical Treatment 

Treatment during sickness 

Types of House 

Hut Tiles Terrace Total 

Non-Professionals Respondents 6 13 5 24 

Treatment (25.0%) (54.2%) (20.8%) (100.0%) 

Types of House [ 3.8%] [3.1%] [1.4%] [2.6%] 

Municipal Hospital Respondents 0 38 2 40 

Treatment (.0%) (95.0%) (5.0%) (100.0%) 

Types of House [.0%] [9.0%] [.6%] [4.3%] 

Primary Health Centre Respondents 8 7 5 20 

Treatment (40.0%) (35.0%) (25.0%) (100.0%) 

Types of House [5.1%] [1.7%] [1.4%] [2.2%] 

Government Hospital Respondents 83 146 102 331 

Treatment (25.1%) (44.1%) (30.8%) (100.0%) 


Private Hospital Respondents 61 217 230 508 

Treatment (12.0%) (42.7%) (45.3%) (100.0%) 


Through Medical Shops Respondents 0 0 3 3 

Treatment (.0%) (.0%) (100.0%) (100.0%) 

Types of House [.0%] [.0%] [.9%] [.3%] 

Total Respondents 158 421 347 926 

Treatment (17.1%) (45.5%) (37.5%) (100.0%) 



The value within ( ) denotes row percentage 

The value within [ ] denotes column percentage 

Table 3 shows the house types of fisher folk and their medical treatment. More than half of the 

fisher folk (54.9%) get treatment in private hospitals. In it, 45.3% of them reside in terrace house, 

42.7% of the fisher folk in tiled house and the remaining 12.0% of the fisher folk in huts. It is 

followed by 35.7% of the fisher folk prefer government hospital for treatment during their sickness. 

Among them, 44.1% of the fisher folk are in tiled house, 30.8% of the fisher folk are in terrace house 

and the least (25.1%) of them reside in huts. Further, 4.3% of the fisher folk prefer municipal hospital. 

In it, most of the fisher folk (95%) reside in tiled house. About 5% of the fisher folk reside in terrace 

house. Meanwhile 2.6% of the fisher folk prefer Non-professional for treatment. Among them, 54.2% 

of the fisher folk reside in tiled house. It is followed by, 25% of the fisher folk in huts and the 

remaining 20.8% of the fisher folk reside in terrace house. It is concluded that fisher folk resides in 

terrace house prefer private hospital for their treatment. 


FISHING METHODS USED BY DIFFERENT AGE GROUP OF FISHER FOLK 

The traditional fisher folk were undertaking fishing with a primarily subsistence focus with a 

sense of camaraderie and community participation. Through continuous interaction with the ocean and 

fish, the artisanal fisher folk have accumulated trans generationally a treasure of scientific knowledge 

on diverse marine eco-systems and fish behavior. The new modes of fish production and distribution 

have resulted in loss of traditional skills and knowledge systems, and have converted fishing passive 

gear to an active gear technology; a low cost to a high cost technology: and from an eco-friendly to an 

eco-destructive technology (Rajan, 2000). 

Types of 

Fishing 

Method 

Table – 4 Fishing Methods used by Different Age Group of Fisher folk 

Age 

Upto 15 16 - 30 31 - 45 46 - 60 Above 

61 

Total 

Traditional Respondents 1 138 272 172 48 631 

Fishing Method (.2%) (21.9%) (43.1%) (27.3%) (7.6%) (100.0%) 

Age [20.0%] [63.9%] [71.2%] [68.5%] [66.7%] [68.1%] 

Scientific Respondents 4 78 110 79 24 295 

Fishing Method (1.4%) (26.4%) (37.3%) (26.8%) (8.1%) (100.0%) 

Age [80.0%] [36.1%] [28.8%] [31.5%] [33.3%] [31.9%] 

Total Respondents 5 216 382 251 72 926 

Fishing Method (.5%) (23.3%) (41.3%) (27.1%) (7.8%) (100.0%) 

Age [100.0%] [100.0%] [100.0%] [100.0%] [100.0%] [100.0%] 


The value within ( ) denotes row percentage 


Table 4 indicates the type of fishing method followed by different age group of fisher folk in 

rural coastal fishing villages. Majority of the fisher folk (68.1%) follow traditional method for fishing. 

In which, less than half of the respondents (43.1%) are in the age group of 31 to 45 years. 

Subsequently, 27.3% and 21.9% of the respondents are in the age group of 46 to 60 years and 16 to 30 

years respectively. It is followed by, 7.6% of the fisher folk are in the age group of above 61 years and 

0.2% of the respondents are in the age group of below 15 years. Further, 31.9% of the fisher folk 

follow scientific method for fishing. In, it, 37.3% of the fisher folk are in the age group of 31 to 45 

years. It is followed by, 26.8% and 26.4% of the respondents are in the age group of 46 to 60 years 

and 16 to 30 years respectively. 

Table – 5 Association of Fishing Methods and Age Group of Fisher folk 

Null Hypothesis: The age of the fisher folk do not influence the fishing methods. 

Value df P value 

Pearson Chi-Square 8.877 a 4 .064* 

Likelihood Ratio 8.444 4 .077 

Linear-by-Linear Association 1.019 1 .313 

N of Valid Cases 926 


This table explains the relationship between age group of fisher folk and their fishing methods. 

As the acceptance of null hypothesis, there is no association between age group and fishing methods. 


It is clear from the analysis that age group do not influence the fishing methods. It is concluded that 

different age group of the fisher folk followed different types of fishing methods. 

Education level of Fisher folk and their fishing method 

Education is a main basic amenity which are lacking among the fisher folk in rural coastal 

villages. Young boys above 10 years are engaged in fishing activities, Majority of them do not even 

know to write their name (Dayananda, 2004). 

Table – 6 Education level of Fisher folk and their fishing method 

Educational Level 

Illiterate Primary 

Middle High Higher College Total 

School School Secondary Level 

Respondents 181 219 151 59 11 10 631 

Method (28.7%) (34.7%) (23.9%) (9.4%) (1.7%) (1.6%) (100.0%) 

Education [77.0%] [63.8%] [67.4%] [66.3%] [55.0%] [66.7%] [68.1%] 

Respondents 54 124 73 30 9 5 295 

Method (18.3%) (42.0%) (24.7%) (10.2%) (3.1%) (1.7%) (100.0%) 

Education [23.0%] [36.2%] [32.6%] [33.7%] [45.0%] [33.3%] [31.9%] 

Respondents 235 343 224 89 20 15 926 

Method (25.4%) (37.0%) (24.2%) (9.6%) (2.2%) (1.6%) (100.0%) 

Education [100.0%] [100.0%] [100.0%] [100.0%] [100.0%] [100.0%] [100.0%] 

The value within ( ) denotes row percentage, 


Fishing 

Methods 

Traditional 

Method 

Scientific 

Method 

Total 

Table 6 represents the relationship between the educational level of fisher folk and their fishing 

method. Majority of them (68.1%) followed traditional method of fishing. Among them, 34.7% of the 

respondents have studied up to primary level. It is followed by 28.7% of the respondents are illiterate. 

Consequently, 23.9% and 9.4% of the fisher folk have completed their middle school and higher 

secondary level respectively. The remaining 1.6% of the respondents finished college level education. 

Further, 31.9% of the fisher folk follow scientific method for fishing. In which, 42% of the fisher folk 

completed their primary level education. It is followed by 24.7% of the respondents completed their 

middle school level. About, 23% of the respondents are illiterate. It is concluded that majority of the 

respondents have completed primary level education and use traditional methods in fishing. 

Table – 7 Association of Education and Fishing Methods 

Null Hypothesis: Fishing methods are not influenced by the education of fisher folk 

Value df P value 

Pearson Chi-Square 13.249 a 5 .021* 

Likelihood Ratio 13.616 5 .018 

Linear-by-Linear Association 4.798 1 .028 

N of Valid Cases 926 


This table describes the relationship of educational level of fisher folk and their fishing methods. 

As the rejection of null hypothesis, there is significant relationship between education level and fishing 

methods. It infers that the method of fishing is based on their educational level. The highly educated 

fisher folk used scientific and satellite method in fishing when compared to others. Hence, it is 

concluded that when the level of education increases, the recent methods followed in fishing. 


CONCLUSION 

Most of the fisher folk have electricity facilities followed by Television. They give first 

preference to the consumption of essential food and get treatment in private hospital. The different age 

of the respondents no influence in using scientific method of fishing, while the education of the fisher 

folk determines the method of fishing. The highly educated fisher folk use scientific method of 

fishing. The fisherman should be educated to improve their standard of living and using of recent 

methods in fishing activities. 

REFERENCES 

1. Oladoja, M. A., &Adeokun O. A., (2009). “Analysis of Socio-Economic Constraints of Fisher 

folks on Poverty Alleviation in Lagos State, Nigeria”Agricultural Journal, Vol: 

4(3).pp.130-134. 

2. Reuben, N., Omwega, Richard Abila, &CaroylineLwenya (2000). “Fishing and Poverty Levels 

Around Lake Victoria (Kenya)”, Kenya Marine and Fisheries Research Institute,pp. 193- 199. 

3. Dayananda, L. P. D., (2004). “Enhancing Sustainable Livelihoods In Puttalam Lagoon, Sri 

Lanka”, Poverty, Livelihoods, And Ecosystems 2004. 

4. Asha Krishnakumar, (2010), “Population Density, Housing, and Other Problems Magnified by 

the Tsunami”, Chennai Fisher Folk Poor Socio Condition, 2010, Population Reference Bureau. 

5. Lungu, A., and Hüsken, (2010). “Assessment of access to Health Services and Vulnerabilities 

of Female Fish traders in the Kafue Flats”, Zambia Analysis Report. 

6. Glaesel, H., (2000) State and Local Resistance to the Expansion of two Environmentally 

Harmful Marine Fishing Techniques in Kenya, Society & Natural Resources, 13, 321-338. 

7. Rajan, J., (2000) Fishing Economy of Kerala, Sujlee Publishing House, Chathanoor, Kollam. 


“The Law of Wastage – A Conceptual Thought for Sustainable 

Economic Development” 

Dr.S.Sampath 

Senior Assistant Professor, School of Education 

SASTRA University, Thanjavur – 613 401. Tamilnadu, India. 

drssampath@gmail.com 

V. Vijay Anand 

Assistant Professor, School of Management 

SASTRA University, Thanjavur – 613 401. Tamilnadu, India. 

vijay@mba.sastra.edu 

Abstract: 

Disposal of waste becomes a great head ache to the Administrators, Politicians, Industrialists 

and Environmentalists. It’s all because of lack of planning. If there is a concept in economics to 

understand the nature of wastage and backed with equated pattern of production and consumption; the 

wastage can be largely reduced. The producers will get fair price for their produce and consumers will 

get maximum satisfaction by paying reasonable price for the products constantly. Generally Economic 

laws reflect the most essential and typical features of the operation and development of a given system 

of production and consumption patterns. Every economic law expresses the unity of the qualitative as 

well as quantitative aspect of economic phenomena with price. A new concept has been evolved in 

order to establish a new law in economics that is ‘The Law of Wastage’ and the same has been 

presented in this article. This law has been established with the help of necessities of human being and 

on the basis of consumption patterns of consumers in response to the changes in the price of the 

commodity. Further the law has been proved with the suitable illustration of hypothetical data and 

curves. For this purpose three objectives have been framed and tested with the hypothetical data 

drawn from the vegetable market by observing for a period of six months. 

Preamble: 

Now-a-days, the concept of waste management becomes more challenging for the 

administrators, environmentalists, politicians and industrialists. Perhaps, it is more cumbersome to 

deal with every kind of waste, especially the waste which cannot be recycled and do not fetch any 

residual value. However, if we look into the nature of waste, the man hour lost and financial 

constraints attached to it are largely because of lack of planning. Sometimes, the usable products in 

good quality may not be used for long time and causes either deterioration of quality or not in order of 

usability because of efflux of time. It may be due to change in fashion, new technology, 

modernization etc. 

The laws of Economic are the necessary, stable and recurrent causal relationships and 

interdependences of economic phenomena in the course of the production, distribution and exchange 

of goods and services at various stages of development of human society. Economics laws reflect the 

most essential and typical features of the operation and development of a given system of production 

and consumption patterns. Every economics law expresses the relationship between the qualitative and 

quantitative aspects of economic phenomena with price. The author intends to establish a new 

conceptual thought in economics that is “The Law of Wastage” and has been illustrated with the 

necessities of human beings. This law is established based on the consumption patterns of consumers 

in response to the changes in price of the commodity. 


Objectives: 

The following objectives are framed in order to test the law of economics with the help of the 

hypothetical data that has been tabulated after observing a vegetable market and also intended to find 

the relationship between the prices of the commodity, quality of the commodity with the law of 

wastage. 

i. To establish the Law of Wastage in economics. 

ii. To find the relationship between the price of the commodity and the wastage. 

iii. To find the relationship between the quality of the commodity and the wastage. 

Need and Importance of the Law of Wastage: 

The behaviour pattern of both the shop keepers and the consumers changes in response to the 

price changes for the consumable commodities. Whenever the consumable commodities are sold at 

higher prices; the shop keepers procure lesser quantities of higher priced commodities and deals very 

cautiously. Care is taken by the shop keeper while displaying and arranging in the shelf. The 

salesmen are instructed to handle with care and we cannot find even a bit litter around in the shop. 

While procuring the commodities shop keepers select the items very carefully to ensure sale of all the 

procured commodity items without any wastages. Quality consciousness also increases among the 

vendors while procuring the commodities. Packing and packaging differs for the commodities which 

are sold at higher prices. If price of the commodity falls; the behaviour of the shop keepers changes 

and procure large quantities of low priced commodities. We cannot find the exhibiting of commodities 

in order and can easily notice the commodities littered around every corner. Salesmen too may not 

receive any instruction with regard to handling because the commodity price is lesser. While 

procuring larger quantities, perfunctural attention is paid and quality consciousness takes back seat. 

We can notice the peeling of outer layer and cleaning of the commodities (Vegetables) in different 

order as compared to the commodities which are procured and sold at higher price. 

The behaviour of the customer changes in accordance with the price changes. Higher priced 

commodities are bought with care by the customers and will have more quality consciousness. They 

select the best quality one and buy lesser quantities because of higher prices of the commodities. 

Sometimes, they argue with the shop keepers and salesmen with regard to the selection and quality 

aspects. Frequently, they bargain at the shop keepers. At the same time the buyers’ behaviour will 

change when the price of the commodity decreases. They buy larger quantities and the quality 

consciousness will take back seat. While bringing to home, we can find careless attitude among the 

buyers. Since, the commodity price is lesser, buyers wouldn’t mind in shelling out money for buying 

larger quantities. In such circumstances, you can see the shop keepers cheating directly the customers 

by weighing skin, shells, dust, grass, leafs, etc. Shop keepers wouldn’t allow the customers to choose 

the quality one while selling at lesser price. If the customers are particular about the choosing of good 

quality commodities, they have been charged little extra than the usual price of the commodities. All 

gimmicks are followed by the shop keepers and vendors during the fall of price. 

Therefore, it is necessitated to evolve a new conceptual thought in economics ‘The Law of 

Wastage’. This law has been established by observing the market for a period of six months carefully. 

The period was chosen between December 2010 and June 2011 to observe the vegetable market by the 

Researchers because that particular period the entire country witnessed extreme changes in price of 

necessities. Vegetables which are used mostly by all sections of the society were taken into account to 

establish this law. 

The Law of Wastage: 

The Law of Wastage is operated on two important things that are Price and Quality. “When 

the price of the commodity increases the wastage will tend to diminish; when the price of the same 


commodity decreases the wastage will tend to increase” (Author). At the same time “When the price 

of the commodity increases the quality consciousness also increases and no compromise on the quality 

of the products; when the price of the commodity decreases the quality consciousness also diminishes 

and there seems to be compromise on the quality of the products”. According to this law, when price 

of the commodity is higher; the wastage of the same commodity is lower and when price of the 

commodity is lower; the wastage of the same commodity is higher. When quality of the product is 

higher; the price of the same product is higher and when quality of the product is lower; the price of 

the same commodity is lower. The law of wastage operates on the basis of the behaviour of the 

customers in response to the rise and fall in the price of the commodity. 

The law of economics is always operated on the ‘ceteris paribus’ which means “Other things 

being equal” is a very significant qualifying phrase in this law too. Lower wastage at higher prices and 

higher wastage at lower prices for a commodity depends on certain static conditions assumed. 

Factors influencing the wastage: 

i. Over Production: 

Over production of any consumable commodity leads to higher amount of wastage because of 

market operation, storage, handling, transportation, shipping, distribution, selling etc. Whenever there 

is a controllable limit of production; the wastage is also being minimized. 

ii. Universal consumption: 

The goods which has been consumed by everyone and universally used by all sections of the 

society will have higher amount of wastage than the goods which are sparingly used or consumed by 

certain sections of the society. 

iii. Number of Consumers: 

The number of consumers for the commodity also determines the amount of wastage. Larger 

the consumers, the amount of goods sold and distribution at different places will be higher and so is 

the amount of wastage too. 

iv. Number of Middlemen: 

The size of the middlemen channel also determines the amount of wastage. Larger the 

middlemen channel larger will be the wastage and smaller the middlemen channel the smaller will be 

the wastage. 

v. Income Effect: 

People consume more and more goods when they have more income at their disposal and the 

wastage of the commodity will be higher. The people never mind in spending money due to increased 

purchasing power. Whenever the disposal income of the people is less, the spending power will 

diminish and wastage of the commodity also diminishes. People will be more cautious in spending 

money on every product. 

vi. Substitutes: 

If there are no substitutes for the products, wastage will be higher and the product which has 

more number of substitutes will have lesser wastage. 

vii. Quality Attributes: 

The quality of the commodity also determines the amount of wastage for the product. If the 

quality of the commodity is enriched the wastage will be obviously lower as compared to the 

commodity which is of inferior quality. 

viii. Seasonal variations: 

The goods which are directly associated with the seasonal aspects will have strong impact on 

the wastage too. Certain goods are produced through out the year and certain goods are produced 

seasonally. The goods which are produced seasonally will have huge wastage during the season and 

lesser wastage during the off season. Goods which are produced throughout the year will have lesser 

wastage provided the demand for the product is constant and the production is equated to the demand. 

ix. Government Policies: 


Policies of the Government will have direct impact on the wastage of the commodity. If the 

government allows the producers to export the commodity because of over production the wastage will 

be higher; if it is the other way round there will be lesser wastage because of restriction on the exports. 

x. Transshipments: 

Number of transshipments also has a direct bearing on the wastage of the commodities. 

xi. Uses of Commodity: 

If the prices of the commodities are higher, the consumers either go for no-use-principle or uses 

only for necessity with lesser quantity and the wastage will be obviously lower. When prices of the 

commodities are lower, the consumers’ behaviour will be different and they use the commodity for 

various purposes in more quantity with the result the wastage will be obviously higher. 

xii. Packing and Packaging Effect: 

The commodity which has been packed in proper wrapper and sent to various places for 

distribution definitely will have lesser damage as compared to improper or no packing of commodity. 

For instance, during the season, paddy, wheat, rice and grains are transported from one place to other 

places for various reasons; may be to the warehouses or transporting to different places or to the 

distribution points. Observing these activities, we can notice they are mostly transported by trucks and 

tractors either with poor packing or with no packing. Whenever the trucks and tractors move on the 

state highways or highways by carrying grains, paddy, wheat, rice etc; we can find the grains littered 

around on the road everywhere. Like wise on the trucks and tractors also we can accumulate 

reasonable kilograms of pulses and grains which were transported by them. If these things are taken 

care and moved with proper packing and packaging wastage can be minimized. Hence, there is a 

direct impact of packing and packaging on the quantum of wastage. 

Behaviours of the Buyers during the period of price rise: 

The behaviour of the buyers changes totally when the commodity has been sold at higher 

prices. First of all they go for finding alternatives, if alternatives are not available or even nearby the 

suitable one, they go for buying lesser quantity of the commodity. Most probably, they buy either onefourth 

or one-tenth of the usual consumption. The worst affected is middle income and lower income 

groups. They live with only fixed income and the monthly budgeted provisions and necessities. Here, 

the author’s observation is depicted as different cases for the understanding of the reality. For 

instances: 

Case – I: During the period of price rice of Onion in the month of December 2010, all the nonvegetarian 

hotels displayed the board outside their premises that there is no onion omelet which is 

prepared with the help of an egg, green chilly and an onion. At that time per egg cost was only 

Re.1.80 (Rupees one and eighty paisa only), chilly cost hardly anything and an onion cost was Rs.10 

(Rupees ten only) (average cost per onion piece considered) with as usual other ingredients for making 

the omelet. The price of one omelet was in a normal situation in a decent hotel ranging from Rs.5/- to 

Rs.10/-. They could not grace the customers with omelet because the onion cost was higher. 

Case – II: In vegetarian hotels they have avoided making Onion chutney for idly and dosa and 

completely ignored giving salad. They were reluctant to prepare onion dosa and oothappam (Varieties 

of dishes) because of higher prices of the onion. At hotel, sambars are prepared without the onion 

which normally prepared (araithu vita masala crush afresh and mixed with sambar) with dhal, 

coriander seed, black pepper, red chilly etc dry paste or powder mix. 

Case – III: At the social and family gatherings, ceremonies, functions and festivities, people found 

very difficult to spend on this particular vegetable. Mostly they avoided the dishes which has been 

prepared with the onion and concentrated on the dishes which would be prepared without the 

ingredient of onion. Coconuts were used maximum for preparing chutney. Onion chutney was not 

served during the breakfast and supper time in the functions. Those who arranged marriage and other 

family functions found very difficult to spend huge amount of money only for onion. 

Case – IV: Individual homes cleverly avoided onion by making alternative dishes for all the three 

meals at home. Instead of onion sambar, they have gone for araithu vita masala crush afresh and 


mixed with (dhal mixer) sambar and in fact most of the family not made at all. Instead they have gone 

for making sauce (Kuzhambu) which has been made with tamarind, red chilly, coriander mix and dhal 

combinations frequently. Dishes were made without adding onion or used very little because of higher 

prices. 

Behaviours of the Buyers during the period of price decline: 

Buyers’ behaviour changes drastically when the price of the same commodity declines. They 

buy larger quantities that are more than their usual requirements and uses without any hesitation for all 

the dishes. We can find the buyers handling of the commodity with utmost carelessness. The quality 

consciousness also takes back seat because of lower price of the commodity as compared to higher 

priced earlier. They breathe comfortably while purchasing such commodities. At storage room and 

kitchen we can find the commodities littered around with carelessness. 

Case – I: At restaurant, use of onion will be in larger quantity and for all the dishes chef uses more 

than the required quantity. We can find no restriction to the consumers with regard to the onion and 

they have been graced with sufficient quantity of salad and other dishes whenever needed. Likewise, 

there is no restriction on any menu preparation and the owner will be in comfortable position to earn 

earmarked profits. At non-vegetarian hotels, omelet becomes prominent and the consumers enjoy 

with usual prices. In Vegetarian hotels, chef prepares all the dishes as usual with onion. Onion 

Sambar and onion chutney becomes prominent during the breakfast and supper, during the lunch time 

onion sambar is prepared and side dishes gets its charm by adding onion. 

Case – II: At the social and family gatherings, ceremonies, functions etc people use huge quantities of 

onion for making variety of dishes. It never pinches the organizer while purchasing huge quantities for 

the functions. 

Case – III: Individual family also uses more than the required quantities for their consumption. All 

the dishes are made with no hesitation. Alternatives for the onion uses will take back seat at the time 

of lowered prices of the stated commodity. Middle and lower income groups will find no difficulty in 

spending from the budget during the period of price decline. 

We can understand by going through these cases that over usage and consumption leads to 

quantum of wastage and lesser usage leads to either no wastage or lesser wastage. During the period 

of price rise, people are very miserly in buying the commodity; during the period of price decline, 

people are very lenient in buying the commodity. These behaviours will have direct effect on the 

wastages too. 

The Law of Wastage Schedule and a Curve: 

A statement showing how much of a commodity ‘Onion’ is sold in a particular market at 

different prices during the period of six months is given under. It is one of the author’s contributions 

to the technique of wastage theory. A wastage schedule may be an individual schedule or a market 

schedule. The former tells us the quantities of wastage at different prices by an individual and the 

latter tells us quantities of wastage in aggregate at different prices in the particular market. For the 

illustrative purpose, market wastage has been considered. In Tamil Nadu a ‘C’ class city market has 

been observed between the months of December 2010 and June 2011. 


Wastage Schedule 

(Onion) 

Sl.No. Price Per Kg. 

Quantity sold in the Quantity of wastage 

Market (in Kgs.) 

(in Kgs.) 

1. 80.00 1000 10 

2. 60.00 1300 15 

3. 40.00 1800 20 

4. 25.00 2000 25 

5. 15.00 2500 40 

6. 10.00 2800 60 

7. 05.00 3000 100 

In a hypothetical illustration, a vegetable market’s wastage at different price level is shown in 

the above table. At Rs.80/- per kilogram of Onion, the market wastage is only 10 kilograms and at 

Rs.5/- per kilogram the market wastage increases to 100 kilograms. Further, it has been noticed that 

the amount of Onion sold in the market at Rs.80/- per kilogram is only 1000 kilograms while the price 

of the onion decreases to Rs.5/- per kilogram; the quantity sold in the market was 3000 kilogram. 

From the above table, it is evident that when the price of the Onion was higher the quantity of 

onion wastage was only 10 kilograms and when the price of the Onion was lower the quantity of onion 

wastage was 100 kilograms. The wastage may be due to lack of quality consciousness by the 

consumers. When the consumers pay higher prices for the commodity they become more quality 

conscious and chooses the best one. Likewise the traders too will be more conscious in handling and 

procuring higher priced Onion as compared to lower priced season. 

Figure No:1 

Wastage curve with units sold 

P 

r 

i 

c 

e 

& 

W 

a 

s 

t 

a 

g 

e 

N 

Quantity Sold 

Figure No:2 

Wastage Curve 


w 

a 

s 

t 

a 

g 

e 

Quantity Sold 

The above curves depicts that when the onion price was at peak; the quantity sold was lesser 

and when the price starts declining; the quantity sold also increases considerably. Simultaneously the 

wastage curve starts at opposite direction when the quantity sold was lesser at higher prices; the 

wastage was lower, the wastage curve rises slowly and reaches to the maximum when the price of the 

commodity starts declining. 

Establishment of Normal Wastage: 

1. If we analyze the curves of units sold and wastage both intersect at a point which has been 

named as ‘N’. The point has reached in the market when the price of the onion was Rs.25/- 

per kilogram and the units sold were 2000 kilograms where both curves intersect. The 

intersection point suggests that the wastage at this point is considered as normal and beyond 

certain level the wastage becomes abnormal. A commodity should find a reasonable price 

in the market without any adequate wastage with fair quantity of commodity sold. 

2. Normal wastage at this point is only 1.5% which is quite reasonable and acceptable. 

3. Normal wastage will not pinch the traders in any way with this 1.5% of wastage on the 

goods sold. 

4. The individual consumers also won’t mind if the normal wastage is at a minimal level. 

Need for establishing corporate bodies to equate the production and consumption: 

Case – I: 

In Punjab, it has been witnessed many times an over production of potato and the farmers were 

left at dismay because of no takers of their produce. In 2002 and 2011, the potato farmers in Punjab 

threw their produce on the street because they could not get even minimum price. At that time it was 

sold for Re.0.50 paisa per kilogram at the retail outlets. 

Case – II 

The same condition was witnessed in Tamil Nadu with regard to the production of Tomato and 

Mango. Recently, in the month of March 2012 the so called shallot onion fetches very lower price 

because of over production in Tamil Nadu. 

The farmers who are producing such type of commodity may not even fetch their spending per 

hectare. 

Relationship between ‘the law of wastage’ and ‘economic development of a nation’: 


At the end of 2008 the entire world has witnessed the heat of recession and some countries 

have even gone to the depression. Revival from the depression made the political administrators, 

financial authorities, heads of organizations etc most worrisome and cumbersome too. Till now it 

continues and some countries revived and bounced back on the developing trend. These are all 

because of various reasons but one such and foremost reason behind either recession or depression is 

due to lack of foreseeing capacity of the administrators and improper planning of necessities. Here, 

the law of wastage would largely rescue all the countries from the catastrophe when the law has been 

understood in proper sense and implement it with farsighted approach. As the conceived law says 

“When the price of the commodity increases the wastage will tend to diminish; when the price of the 

same commodity decreases the wastage will tend to increase”, which tells us the significance of 

maintaining stable prices for at least the necessary commodities. If we want to maintain the stable 

prices for the necessities the supply should be regular as well as the quantities supplied also in 

accordance with the normal demand. Which means the supply of the commodities must exceed neither 

more nor less than the demand. We can put it in nutshell, ‘the equated demand and supply’. For this 

purpose, the planners should work out on yearly basis by taking into account of the availability of 

resources and possible productions. At any cost, the predetermined and estimated production of the 

commodities should be attained by the country as per the target to meet out the requirements. 

The requirements of each and every commodity should be based on that country’s policy as well as the 

people of that nation’s needs. 

The country’s policy may be only for the people of that nation’s consumption with certain 

precautionary measures of agreeable percentage of reserve for the unforeseen conditions or the 

country’s policy may be apart from the people of that nation’s consumption to export that particular 

commodity at a targeted level provided that the particular commodity can possibly be produced with 

the help of available national resources without affecting the further production capabilities. The 

country is having freedom to restrict its exports whenever the natural calamities disturb the production 

of certain commodities, which does not mean the country needs to maintain uniform EXIM policy 

throughout; the suitable mechanism of export policy may be drawn by taking into account the stock of 

the situation without disturbing the stable and reasonable price of the commodity in the domestic 

market. 

In order to ensure the smooth supply of essential commodities and to guarantee the regular 

production; it is imperative to set up national level exclusive ministry for the necessaries and under 

which a separate department should be created for every commodity by choosing the right persons 

from the stakeholders of the commodity. These departments would be altogether responsible to the 

ministry and works independently with proper planning and inevitably implementing as well as 

executing the works. There should be world wide consensus with regard to how much of what should 

be kept in storage and the amount of each and every essential commodities to avoid escalating prices 

of the commodity by en-cashing the opportunity of a country’s either draught conditions or poor 

production capabilities. The best possibility is to maintain the stock of the essential commodities for 

at least a couple of years which means even when there is no production for a year due to some natural 

calamities or man made disturbances to the country, these stocks will take care of that country’s need. 

Beyond certain level of increasing the storage capacity will tend to cause serious damages to the stored 

commodities. The over stored commodities more than the strategic requirement will either deteriorate 

the quality or completely become useless. Therefore, it is inevitable to plan at every stage and 

constantly watch the conditions of both stored goods and the markets. 

Facilities to be provided by the state for augmenting the economic development: 

The development of a country which comes over night or a day or two will not last long or 

sustainable for a long term. There is no such precedence that a country has got development over a 

short period of time. The development of anything needs at least germination period and constant and 

wholehearted assistance from the constituted body. Here the role of state is the most important to 

march towards the sustainable development. Following are the palpable functions that every state 

must seriously undertake in order to attain the sustainable development. 


‣ The state should provide all sort of support to the identified potential producers of each and 

every essential commodity by effective use of the purposeful census that has been taken by the 

state. 

‣ The requirements of the produce should be made available to them by free of cost for the 

benefit of the entire humanity. 

‣ Transportation facilities should be provided to the producers of essential commodities at free 

of cost both at the time of taking the seeds, plants, fertilizers, pesticide etc to their field and to 

bringing their produce to the government regulated markets. 

‣ The government must ensure that all their produce should be purchased by the government in 

order to augment the uninterrupted supply to the countrymen. 

‣ The government should take necessary steps to procure everything from the producers and 

they should not be allowed to keep the stock at their disposal for any reason. For their needs 

too, they have to buy from the market alone. This sort of arrangement will give proper 

accountability and required processing of the commodities. 

‣ The distribution of commodities from storage point to various markets should also be at free of 

transportation cost and for all these purpose national and state transportation units should be 

teamed up and used legibly. The cost of the commodity may be fixed uniformly by the state 

by adding administrative cost into the procured and processed essential commodities. For 

instance, the well branded as well as graded commodity are sold at the same price through out 

the country. This approach can be extended to all the essential commodities too. 

If the states come forward to ensure all these implementation with coordinated ideal 

programme on essential commodities, the unnecessary price rise would be avoided completely, black 

marketing is easily controlled, middlemen profit is completely avoided, uniform price and regular 

supply of commodities can be ensured, excess produce would be exported at reasonable price and 

lastly there shouldn’t be any hue and cry from the people with regard to enhancement of Dearness 

Allowance on the basis of consumer index etc. 

Suggestions: 

1. After going through the Law of Wastage, the question spark in our mind that if the price of 

the commodity is higher the wastage is at minimal which means we have to have higher 

prices for the commodity? Certainly not, the said law is demanding for the proper planning 

for the production of various necessary commodities at required level of consumption and 

proper distribution of the same throughout the year irrespective of the seasons. Uniform 

and reasonable price of the commodity will keep the check on wastage throughout the year. 

2. The author strongly recommends that in order to control the wastage we need to have a 

perfect statistics about the various commodities with regard to the expected level of 

consumption pattern and possible production. 

3. It is necessary to equate both the production and consumption. We should not allow the 

market to settle down by itself in respect of price of the commodity considering supply and 

demand in all the cases. 

4. We need farsighted approach for the equated production and consumption. Which means 

by keeping in mind the unforeseen conditions and natural disasters; it is necessary to 

produce at least 25% more than the requirements. 

5. By doing so, over production can be completely avoided. 

6. There is an urgent need to set up large number of warehouses where we can store all the 

perishable commodities for our year long needs. 

7. Government must make arrangements for procuring all the produces by the farmers in order 

to regularize the distribution throughout the country. 

8. Transportation for the same can be provided by the competent agencies of the government 

at reasonable rate or at free of cost in order to keep the essential commodities price at 

stable. 


Conclusion: 

9. The inflation can be easily controlled by making a separate corporation for all the 

consumable commodities to ensure regular supply at reasonable price through out the year. 

10. The middlemen huge profits can be controlled easily by making certain arrangements. 

11. The proposed corporation should take care of equating the production and consumption. 

12. Exports and Imports may be easily taken care of. The country which is having potential to 

produce certain commodities need not procure from the other country and can be produced 

by proper planning. At one point, we open our exports and at the same time within few 

months, we revert back because of lack of planning and farsighted approach. 

The author has established all the three stated objectives with the help of hypothetical data and 

illustrations. The Law of wastage is inevitable for every country’s sustainable economic growth and to 

minimize the unnecessary escalation of commodity prices. This unexplored area in economics need to 

be studied thoroughly to avoid unexpected and unwanted economic slow down in any country. If 

necessities are taken care by every state, the economic development can be easily ensured with 

sustainable growth. By setting up of a Separate Corporation for every commodity the permanent head 

ache of inflation can be controlled. 

References: 

1. P.N.Reddy and H.R.Appanniah, ‘Principles of Business Economics’, S.Chand & Co., New Delhi, 

1999. 

2. Ruddar Datt and K.P.M.Sundharam, ‘Indian Economy’, S.Chand & Co., New Delhi, 2007. 

3. S.Sankaran, ‘Indian Economy’, Margham Publications, Chennai, 2007. 

4. S.Sankaran, ‘Macro Economics’, Margham Publications, Chennai, 2007. 

5. Kamarajar Vegetable Market, Thanjavur, Tamil Nadu. (Hypothetical data source November 

2010 – April 2011) 

6. Dr. H.L. Ahuja, Modern Micro Economics (Theory & Applications) S.Chand, 2009. 

7. Abha Mittal, Micro Economics II, S. Chand, 2012. 

8. Campbell McConnell, Stanley Brue, Micro Economics, TATA McGRAW HILL, 2010. 

9. David Colander, Micro Economics, TATA McGRAW HILL, 2010. 

10. Paul Samuelson,William Nordhaus, Micro Economics, TATA McGRAW HILL, 2010. 

11. James Miller, Principles of Micro Economics, .TATA McGRAW HILL, 2010. 

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