Inventory Intermediation II: Crafts

The first part of this column (Inventory Intermediation I: Horticulture, Greater Kashmir, 27th November 2025), discussed how financial mechanisms can monetize inventory, and provide liquidity in the horticultural sector. A similar form of specialized financial intermediation tailored to another inventory-heavy sector, artisanal crafts, is required to revitalise it by managing cash flows and generating growth capital.

Artisanal economies like that of the Valley are characterized by small-scale, craft production which face unique challenges such as seasonal demand, batch production, and limited resources. There is an intrinsic production process reason for the excessive level of inventory as a feature of the economy: handicrafts businesses often operate as a hybrid of manufacturing, where production creates inventory.

A high level of inventory is not management inefficiency, but a feature of the handicraft businesses. Production being limited by artisan capacity and skill specialization makes inventory creation critical with seasonal stockpiling an established business practice. Also, excess inventories in crafts do not run the risks of obsolescence though there is an element of fashion trends that is a potential risk.

The high inventory levels, in an artisanal economy like Kashmir are a constraint to growth by immobilizing capital, disrupting cash flows, imposing opportunity costs, and perpetuating market inefficiencies. Relaxing this through better financial intermediation, unlocks growth, as evidenced by successful interventions in regions like Latin America’s craft businesses. There is need for targeted policies to enhance liquidity and market integration in these sectors.

These challenges faced by the handicraft sector and the larger artisanal economy of the valley need to be addressed drawing from supply chain innovations, digital tools, and decentralised/partnership models. These strategies should aim to minimize excess stock, which ties up capital, reduce waste, and improve cash flow while preserving the handmade essence.

Inventories especially matter for handicrafts because these businesses produce in small batches with variable raw material costs. A balanced ratio prevents overproduction (wasted artisan time) or underproduction (unemployed artisans).

Normally, an inventory to turnover ratio of 5 to 8 is considered the benchmark for handicrafts. What it means is that inventory turns over 5–8 times/year, in the case of artisan crafts. A lower ratio is generally better, as it means inventory is turning over quickly without excess stock tying up cash.

In Kashmir, while no definitive estimates are available, anecdotally the inventory to the state income seems to be around 15 to 25 per cent which is double the national level. Globally, most growth economies operate with an inventory to GDP ratio of 6 to 8 per cent. The impact of a low level of inventories, especially finished goods inventory, is that it releases capital for growth.

To illustrate J&K’s handicrafts sector efficiency, consider 2023-24 and 2024-25 data. In 2023-24, the sector achieved peak performance with estimated sales of Rs. 1,394 crores. Of this, Rs. 1,162 crores were exports and the remaining Rs 200 odd crores, 20 percent being domestic sales. For the same year production was estimated to be at Rs. 2,370 crores, which is 1.7 times sales.

With a carry forward inventory of around Rs. 400 crores, based on unsold stock estimates of the previous year, the inventory to sales ratio was 0.98 or 98 per cent, covering about 12 months of sales -- a very high level for an export-driven sector. In contrast, 2024-25 saw a slump due to global conflicts, while the production continued at the previous year’s level, sales dropped to an estimated Rs. 880 crores resulting in an inventory spike to Rs 1,500 crore. This pushed the inventory-sales ratio to over 100 per cent signalling distress from excess stock.

The inventory to production ratio of 60 per cent confirms the stockpiling. These shifts highlight 2023-24’s robust demand versus 2024-25’s vulnerability to external shocks, underscoring the need for domestic market boosts and inventory management to ensure growth with stability.

Globally, OECD has estimated, handicraft economies, run with excess inventory that often locks 40-60 per cent of capital in unsold goods, which stifles growth. Given the high inventory to state income ratio, more than two-thirds of the capital is locked in unsold goods. For a capital scarce economy, this is hara-kiri. More so, when there are financial instruments convert this “dead stock” into liquidity via asset-based lending, allowing reinvestment in production or marketing. These are especially vital for informal artisans with limited collateral. It boosts cash flow by one third for these micro and small and medium craft enterprises.

Ideally, Kashmir should explore the route of Fintech platforms and go digital. There has been a revolution in inventory-specific microcredit for artisans across the globe. Technology has played a huge enabler. Through peer-to-peer lending, global lenders contribute as little as $25 via a financial portal.

Some of these new age lending platforms, like Kiva, also partner with broader grouping like the Artisan Alliance. Such collaborations have been able to unlock capital tied in inventory and boosting handicraft economies in more than a dozen countries. The peer-lending model not only enhances access to capital, preserving cultural traditions, and business growth, such platforms and instruments release up to 50 per cent of blocked capital, enabling growth in $ 750 billion global handicraft market. The share of the Valley in this is just 0.12 per cent. Apples, on the other hand, have a share of 2.5 per cent.

Even overall financings of crafts need a complete rethink. There is need for leverage technology to create innovative financing models suited for the artisanal segment. Craft financing refers to funding mechanisms designed for artisan and handmade businesses, which often face unique challenges like irregular cash flows, seasonal demand, lack of collateral, and the need to preserve ethical production values.

A revenue-based financing model stands out as the most innovative craft financing model. It aligns repayments directly with a business’s revenue, enabling flexible growth without diluting ownership or requiring assets as security. This model provides upfront capital in exchange for a fixed percentage of future gross revenue (typically 5-10 per cent), repaid until a predetermined multiple (e.g., 1.5x the principal) is reached.

This structure is particularly transformative for craft businesses because of the inbuilt cash flow alignment: crafts often involve long production cycles and seasonal peaks. Unlike fixed instalment loans that can bankrupt businesses during off seasons, the revenue-based financing scales payments up with revenue growth and down during lulls, reducing default risk. This model has gained traction post-2020 supply chain disruptions, with projections showing it could unlock $10-20 billion in capital for creative sectors by 2030.

Locally, for the Valley economy, an Artisan Fund, an impact investment fund which invests in artisan businesses in urban clusters and rural communities can be a good option. Especially with the global diaspora of Kashmiris, the NRKs, who can contribute to the preservation of their homeland heritage, ethical practices and skills regeneration. The fund can provide capital to help these businesses create sustainable livelihoods for local artisans, with key themes including sustainability, women’s empowerment, and climate change.

The author is a Contributing Editor of Greater Kashmir.