Mind the gap: Boosting a climate of entrepreneurship

In this year’s union budget finance minister Arun Jaitley may have sprung a surprise by focusing the government’s entrepreneurship agenda on the bottom of the pyramid. But perhaps that’s what the country really needs

N S Ramnath

[Photograph - Koyambedu Market - Tea Stall by Sistak under Creative Commons]

Bengaluru can often feel like a different country. Elsewhere, university campuses might be on fire, debating the freedom of speech and the meaning of freedom; water supply to entire neighborhoods might be cut off by angry mobs; thousands might be stranded due to once-in-a-century floods. But, in Bengaluru’s coffee shops and meeting rooms, pubs and board rooms, the conversations usually hover around business models, go-to-market strategies, traction and valuation. Sure, there are pain points, but nothing that can’t be solved by clever technology and a scalable model.

So, it’s no wonder that in the hours after Arun Jaitley presented his third budget—a budget that made no excuse about what its priorities were (“We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor and the vulnerable”)—there was a feeling among this crowd that something was amiss. After all, this government was supposed to be startup friendly, and just a month back in Delhi, Prime Minister Narendra Modi had left them excited about the future.

In the budget presented on Monday, the finance minister made his stand clear about the direction the government wants to take. It would look for entrepreneurship not just in the technology startup hubs—Bengaluru, Mumbai/Pune and NCR. It would look at smaller towns and villages, and at manufacturing, social and informal sectors. There are no unicorns, startups valued at more than a billion dollars, there. Economic activities—consumption, demand, investments, entrepreneurship and jobs—are thinly distributed, and by many measures, inefficient. Some of the measures that the government announced have the potential to correct that. And tech startups need not feel left out either.

While India counts eight unicorns, six of them are domiciled outside India. At least three out of five tech startups raising money prefer to register abroad, because it’s easier there. It takes longer to start a company here. For Mad Street Den, an artificial intelligence-focused tech startup, it took three months to register. In general it takes 30-60 days to start up. In the US, it takes four, and in Singapore, two. It’s difficult to shut one down too. Ganesh Rengaswamy, co-founder and partner at Quona Capital, said he has been trying to close a company for the last 22 months, in vain. The Economic Survey used the term Chakravyuh to describe the scenario: even if you have the ability to enter, it’s almost impossible to exit.

While both the startup action plan and the budget talks about making it easy to do business, there is some way to go. Digitisation might work by bringing in transparency to the process. “We can all take a page out of the Nordic / Scandinavian governments that are tirelessly working towards using Design to make governance transparent here,” says Ashwini Asokan, CEO and co-founder of Mad Street Den.

If the current process is frustrating for the tech companies, it’s worse for manufacturing firms, which have to get more clearances, and cross more bureaucratic hurdles. Getting funded is difficult. While venture capital (VC) firms have started looking at non-tech investments, it’s nowhere close to the demand for capital. Mahendra Mehta, managing director, Parle Global Technologies (a maker of pharma machines), asks, “Why VCs? Even traditional banks that are meant to help us grow are not interested in companies like us. Funding is tough to come by. But if a tech startup is willing to pitch anything, even at a conceptual level, they get funding. Those of us in the industry have just come to accept it. We don’t know what else to do.” Tech startup founders struggling to get funding might raise their eyebrows, but there is no denying that VCs have a preference for tech companies because they can scale up faster, and there are benchmarks abroad. That’s a reason why they also attract foreign capital.

Foreign funds—from a national perspective—come with two dangers, says Baba Prasad, CEO of Vivekin Group and author of Nimble: How Intelligences Can Create Agile Companies and Wise Leaders. It’s not stable, with the risk of money getting pulled out during tough times. And it often comes with an agenda that’s influenced “by imaginations and demands of a non-Indian market,” he says. Prasad suggests the creation of a Fund in India programme that includes providing incentives for India-based funds, and encouraging corporate VC funds such as those of Bharti Airtel, Reliance and the Fortune Group.

“No one understands an Indian entrepreneur better than another Indian entrepreneur. The Indian corporate entity as a VC is still an unknown phenomenon. Even if this trend can be encouraged by giving tax sops, it would serve the purpose,” says Navroz Mahudawala, founder and managing director, Candle Advisors. “There are a plethora of Indian companies generating more than Rs 100 crore net profit every year. A 2-5% of that number being pooled into the startup ecosystem can do wonders.”

Equity is just one part of the problem. Ganesh Rengaswamy points out that one of the main reasons why small and medium enterprises (SMEs) fails is lack of working capital. “If one inquires with a typical SME entrepreneur,” Mahudawala says, “the common pain point is lack of bank finance. We will not be able to develop the manufacturing SME ecosystem until we don’t get this right. There needs to be a separate range of financial products available for SMEs.”

SMEs might account for only 17% of GDP, but they employ close to 40% of India’s workforce. Close to half of SMEs are based in rural areas, and could turn out to be the biggest employer of semi skilled labour, and those who are moving from agriculture to industry. (In agriculture, the productivity is even worse.) The budget has a proposal that the government would pay Employee Pension Scheme contribution of 8.33% for all new employees enrolling in EPFO for three years as an incentive to create jobs. However, with a provision of Rs 1,000 crore, this is estimated to translate to just about 500,000 jobs—a fraction of the 10 crore jobs in five years that BJP promised during its election campaign.

The organised sector can only go so far in generating employment. If we are thinking of providing jobs to 100 million people, the only way to achieve that is to create more entrepreneurs, says Madan Padaki, who heads Head Held High, which is focused on training rural youth. There are signs that the government recognizes that. For example, the present budget talks about entrepreneurship training in 2,200 colleges, 300 schools, 500 government ITIs and 50 vocational training centres through massive open online courses. However, it’s not clear how helpful listening to video lectures would be to achieve that end.

One of the more creative—if tougher—ways to create entrepreneurs is through a pilot Padaki is working on along with Saras D Sarasvathy, who teaches ethics and entrepreneurship at Darden School of Business, University of Virginia. The pilot, to be launched at two places in Karnataka, is based on the principle that the best way to learn entrepreneurship is by doing it. At the core of the project is a set of five colleges, where about 10 teachers will get orientation in entrepreneurship, and students will help in nominating 500 entrepreneurs, defined broadly as anyone who provides employment to at least one other person through an economic activity. The team would then finalise 100 of them—they could be tea stall owners, small restaurant owners, shops—to coach them on entrepreneurial thinking. They would also help them to eventually facilitate getting loans from banks, expand their businesses and employ more people. The idea is to encourage entrepreneurial thinking, and create local success stories. Besides jobs, it could have a ripple effect, and create even more entrepreneurs.

To call a tea stall owner an entrepreneur might sound a bit of a stretch for someone in a swanky office funded by VC money. Yet, if India is to create new job opportunities for the millions who will enter the job market in the coming years, it’s safer to bet on these micro enterprises, than on Chinese style mega factories. Calling them entrepreneurs at the bottom of the pyramid, will bring about the mindset change that CK Prahlad brought about among the corporate executives by calling the poor, consumers at the bottom of the pyramid. These initiatives will help in such entrepreneurial revolution. “If we are to create 10,000 such entrepreneurs in each district, we would have created some 5 million entrepreneurs. If each of them employ two to three people, then that 10 to 15 million jobs,” says Padaki.

The underlying principles and tools behind this pilot—motivation, support and funding—are not too different from programmes such as challenge grants, which prod entrepreneurs to find solutions for a problem that needs to be solved. Sharad Sharma, former CEO of Yahoo Labs in India, an angel investor and co-founder of iSpirit foundation, points out to Biotechnology Industry Research Assistance Council (Birac), a funding arm of the department of biotechnology. Birac had partnered with Bill Gates Foundation to launch Grand Challenges India to co-fund projects that “aim to harness Indian innovation and research, and direct scientific discovery to develop affordable, sustainable solutions that improve health in India and around the world”. Biotech is widely considered to be a model for how government can help create an ecosystem, and Birac had a huge role to play in it. It has funded over 300 companies and 150 startups, helped in developing 30 products and even more IPs. Sharma sees Birac as an example of what a government agency can achieve—help launch companies, create jobs, and develop products that can have a huge impact.

Mohandas Pai, former chief financial officer and HR head at Infosys, and chairman of Aarin Capital, says there is a potential to create one lakh of these new age startups in the next 10 years. Their value would exceed $500 million and they would provide 3.5 million high-quality jobs.

Arun Maira, former chairman, BCG India, and member, Planning Commission, is among those who are not too impressed with the valuation game. Look at the social enterprises, he says. “They measure their success not by valuation, but by impact.”

So by placing the accent on value over valuation, inclusion over narrowly focussing on tech startups, rurban (rural growth clusters) over urban, finance minister Arun Jaitley may have signalled his intent. But it'll take much more than just intent for India's entrepreneurial ecosystem to develop firm roots.


Stoking entrepreneurship

Make in India 

Aim: Make India an attractive destination for manufacturing. 

Key feature: Cut down red tape.

Standup India 

Aim: Promote entrepreneurship among women and Dalits.  

Key feature: Access to finance. 

Digital India

Aim: Drive India to knowledge economy 

Key feature: Online services

Micro Units Development Refinance Agency (MUDRA) 

Aim: Help small businesses
Key feature: Access to finance

India Aspiration Fund  

Aim: Help startup ecosystem  

Key feature: Fund VCs 

Startup Action Plan 

Aim: Help startup and innovation ecosystem 

Key feature: Addresses regulatory and financial challenges

A budgetary push for entrepreneurship

Tax incentives for Make in India              

  • New manufacturing firms can opt to be taxed at 25% plus surcharge and cess, provided they do not claim profit-linked or investment-linked deductions.
  • 100% profit deductions in three out of the first five years for startups set up between April 1, 2016 and March 2019 (but will still be liable for MAT)
  • Investors in unlisted companies will be eligible for long-term capital gains treatment in two years instead of three.
  • Changes in customs and excise duty rates on certain inputs; will reduce costs in key areas of the Make in India drive such as IT hardware, capital goods, defence production, textiles, etc.

Making available a skilled workforce

  • A new Digital Literacy Mission Scheme for rural India to cover around 6 crore additional households within the next three years.
  • One crore youth to be trained under the Pradhan Mantri Kaushal Vikas Yojana over the next three years.
  • Rs 1,700 crore for setting up 1,500 multi skill training institutes.
  • Entrepreneurship education and training through massive open online courses.

Boosting research and innovation

  • A special patents regime with 10% tax on income from worldwide exploitation of patents developed and registered in India.

Boosting entrepreneurship at the bottom of the pyramid

  • Rs 500 crore for Dalit and women entrepreneurs under Stand Up India scheme.
  • Creation of a National Scheduled Caste and Scheduled Tribe Hub in the ministry of small and medium enterprises, in partnership with industry associations.
  • A target of Rs 1,80,000 crore for 2016-17 for development and refinance of micro units under the Pradhan Mantri Mudra Yojana.

A level playing field for the large swathe of small retailers

  • Small retailers to be given the option to keep their shops open on all seven days.

[An abridged version of this article appeared first in Mint]

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About the author

N S Ramnath
N S Ramnath

Journalist, Author

NS Ramnath has been writing about business from 2002, first for The Economic Times, and then for Forbes India. He took a break from journalism in 2014 as a Tow Knight Entrepreneurial Journalism Fellow at City University of New York to study business models in media, one of the many industries being disrupted by technology. Now, he devours information on exponential technology, and its impact on individuals, businesses and society. His stories in Founding Fuel revolve around this theme. He is also associated with HowIndiaLives.com, a public data start up. He has degrees in economics and finance from Sri Sathya Sai Institute of Higher Learning.

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